Category Archives: Law

Trademarks and We Buy Houses

How much do you value intellectual property your business?

At We Buy Houses, it’s one of our most important assets.  So much so that we’ve recently launched a Trademark and IP Portal to help educate real estate investors, educators, and technology providers about the We Buy Houses intellectual property.

Especially when it comes to Internet activity, there are generally two types of people that seriously violate copyrights, trademarks, and other IP.

The Uninformed

This is the person who just doesn’t know any better.  Prior to starting a business, I was one of these people.  Generally this person just doesn’t know any better and didn’t fully think through what they were doing and why it was wrong.   Here are a few examples of IP violations that this person might engage in:

  • Copying a website design they like and changing the company name to their own
  • Copying blocks of text off of another web site and using it themselves
  • Finding pictures on the Internet and using them in their website without permission/attribution
  • Using another company’s trademarks in marketing because “other people do it”

Most of the time, as soon as this person is made aware they are infringing on another company’s or person’s rights, they are apologetic and quickly fix the issue.

The Conniver

This is someone who knows what they are doing, and think they can get away with it and “beat the system”.  Generally The Conniver will copy a more successful company’s well-known trademarks (i.e. “We Buy Houses” or “Just Do It” or “Starbucks”) intentionally in order to trick consumers into thinking they are somehow associated with the larger company.

Unfortunately, The Conniver often times feels a sense of entitlement, and does not respond to notices or requests to stop infringing.  These people often end up with a lawsuit before realizing the severity of the game they are playing – costing tens of thousands in legal fees before the lesson is learned.

Take Away:  Don’t copy slogans, designs, images, websites, or marketing materials from others!  It will cost you much more than it is worth.

Learn more about Trademarks and Copyrights.

Fortune Magazine – Protect Your Ideas

I recently did an interview with Verne Harnish with Fortune Magazine about how we protect intellectual property at We Buy Houses®.  Here’s my excerpt and the full article below.

 

 

4. Play offense

Jeremy Brandt, whose Dallas real estate investing firm We Buy Houses owns the trademark to its brand, knows he has to stop infringers so he doesn’t lose control of the trademark. He has a team of legal interns track unauthorized uses — and the company’s efforts to stop copycats — in its customer relations management system. Once warned that they’re infringing on a federally protected trademark, some violators ask to license the brand. “This has helped our sales process,” he says.


Here’s full story from Fortune Magazine.

1. You snooze, you lose

Eighty-eight percent of big companies’ value is based on their brands, methodologies, content, training systems, and other innovations, and the same holds true for many smaller players, says attorney Andrew Sherman, a partner at Jones Day and the author of Harvesting Intangible Assets. Unfortunately, he says, many firms are “asleep at the switch” and don’t protect their assets — to their peril. Do an intellectual-property audit with your attorney to prevent rivals from monetizing your ideas.

2. Speed counts

Until 2013, you had to prove you invented something first to own it. Now, under the Leahy-Smith America Invents Act, the first to file for a patent usually wins, says Dallas intellectual-property attorney Russ Schultz. To beat lumbering Goliaths, apply now for provisional patents, which you can write in a week, to get a year’s protection, says Doug Hall, CEO of Cincinnati-area innovation systems company Eureka! Ranch. “To the nimble go all the rewards,” he says.

3. Lock down contracts

Insist that contractors for creative projects like writing software sign an ironclad work-for-hire agreement that says you own the copyright. Otherwise, the law assumes that they own it. Also, have staffers sign employment contracts that assign you ownership of their inventions. Have you forgotten to do this? “Now is the time to get it fixed,” says Sherman — especially if you plan to sell the firm. Prospective buyers will walk if you’re missing this paperwork.

4. Play offense

Jeremy Brandt, whose Dallas real estate investing firm We Buy Houses owns the trademark to its brand, knows he has to stop infringers so he doesn’t lose control of the trademark. He has a team of legal interns track unauthorized uses — and the company’s efforts to stop copycats — in its customer relations management system. Once warned that they’re infringing on a federally protected trademark, some violators ask to license the brand. “This has helped our sales process,” he says.

5. Hire legal veterans

You’ll be better off with seasoned pros in a boutique law firm than with inexperienced associates in a giant firm. “The quality is better and cost is lower if you can work with senior partners who have been doing patent prosecution for a long time,” says Andrew Levi, founder of Dallas digital marketing and analytics firm Blue Calypso. He has used that strategy to obtain and protect five patents, with six pending — vastly increasing the firm’s value.

 

Walking Away from a Foreclosure & Strategic Defaults – 60 Minutes

The other day 60 Minutes ran another report on “Strategic Defaults” as they are called – home owners who are underwater in their mortgage and walk away from their home (causing a foreclosure) even though they have the ability to continue with mortgage payments.

The most interesting thing about the story was a University of Arizona paper entitled “Underwater and Not Walking Away: Shame Fear and the Social Management of the Housing Crisis”  (Typical University title for a paper!)

It’s a fascinating read if you have some time.  We can debate all day long the ethics of home owners walking away from their obligations, but the fact that it’s happening isn’t in dispute – and real estate agents, investors and other professionals should be thinking through the ramifications of it for their business.

Most home owners don’t realize (or maybe don’t care) that there are many alternatives that are much better than a foreclosure – a loan modification or short sale are all much better alternatives to giving up and walking away.

Here is the 60 minutes segment

Short Sale Supervisor Talks to a Real Estate Agent – Recorded Conversation

The Short Sales and Bank Fraud story continues to gain traction. After CNBC aired the story we brought them, dozens of other media outlets, bloggers and authorities have contacted me to discuss this topic.

Here is the story of how this fraud initially came to our attention, along with the evidence to back it up.

Last year, I was contacted by an experienced real estate agent in our network who negotiates many short sales. She had recorded a conversation between her and a supervisor in the loss-mitigation department at a major national lender, who she felt was trying to get her to do something illegal.

Here is the audio of that recording, along with the transcript. The names have been removed at the request of the agent to prevent backlash from the bank.

Listen: Recorded Conversation with Bank Supervisor

AGENT: OK, so the only way to settle with *LENDER* then is to get money from somebody else and pay it prior to – that’s what *LENDER-EMPLOYEE* suggested – pay it prior to close of escrow, outside of…. <unintelligible> Pardon me?

LENDER: That is something you can do.

AGENT: Pay it outside of escrow, off the HUD, prior to close.

LENDER: Right, that’s something you could do.

AGENT: And is that something you guys do regularly or you see people doing?

LENDER: Yes, that happens – we have people that send us money outside if they need approval letters <unintelligible> from the first, and once we receive the additional funds, the approval letter can be sent for what the first actually offered – so it happens.

AGENT: OK and what about the fact that the first says that, no more than you know, a certain percent is to go to the second?

LENDER: OK, if the first… Here’s the thing, if you’re asking what this is about – the first is saying “well here’s what I’m going to allow” and the first is saying “this is what we’re willing to pay out.”  If there’s a contribution, if you don’t want to be able to come up with the additional that we’re asking for – the first has already gave their approval on what they’re doing – what someone just comes up with has nothing to do with the first.

AGENT: Even if on this letter it says that “the second is not to receive any more than a certain amount”?

LENDER: The first can not dictate what we receive. The first is saying what they are only going to allow. That’s the amount that they’re allowing to us. If someone out there – the buyer – or a family member puts more money and says here’s what I want to give for you because here’s the additionally requested funds – that has nothing to do with the first.
You’re not asking the first to come out of their pocket any extra than what they are willing to give. So that that’s not any information that might have to be required on the HUD.
Hold on one second please.  <long pause>

LENDER: So I need to have the information – you’ve had the opportunity to go over this with *LENDER-EMPLOYEE* – did he explain all this to you on how this takes place?

AGENT: Well he does but I’m having a tough time, ******, I’m licensed and everybody else…

LENDER: It’s not illegal; it’s not a hard thing, this thing that has happened. The information that you’ve actually received from us – we’re actually trying to help you get this deal closed. If you choose to go back and tell the first what’s going on – you’re going to kill the deal.
So what actually happens prior to closing has nothing to do with the first. What happens at closing – that is information you can provide to them. If you are able to come up with additional funds not to get this deal closed prior to closing, then that’s fine – that’s irrelevant for the first. If you go ahead and you want to let the first know “well, here’s all the information that I have – here’s what’s going on” you will be the one to actually kill this deal. I’m trying to actually give you a way to go about getting this resolved. If you take our suggestion – you take the information that *LENDER-EMPLOYEE* has given you – you can have this done.
If not, then you know, those guys are going to foreclose on it and it’s a done deal. But it’s not like we’re holding up this process.

AGENT: Well, what about the form that the buyer’s lender puts out that there are – that everybody has to sign that says there are no side deals?  <long pause>
I mean that… How do I get around that?

LENDER: What you need to take care of actually is not going to be a problem. What they submit to us – there is $****** they are giving us – the only thing you have to worry about – I mean it sounds like you’re scared that you’re going to be fined for something because you are doing something you are not supposed to. This is what we do all day.

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place. Nobody’s losing their license and nobody’s going to jail, nobody’s receiving a fine…
So and here’s the thing too, I’ll be really honest with you, if you are uncomfortable about working it, you can probably assign it over to someone else, where they would be able to do this – if it makes you feel that uncomfortable – you should probably just assign it over to someone else. Someone who’s actually been able you know – who’s done this before, who’s more familiar with it.
Not to be disrespectful or rude to you or anything like that, but we deal with this every day all the time, this is not something out of the norm. But if you feel like you are doing something that’s against your morals, please assign it to someone else who’s been able to do deals like this so they can get it done, and you can have a happy buyer and a happy seller.

AGENT: Well, how do I get, I mean what’s the logic or if I could understand – when I’m signing a paper put out by FHA that says there are no side deals – this is a side deal.

LENDER: This is a contribution. <long pause> You guys are able to come up with money in order to get this deal closed.

AGENT: OK

LENDER: OK. So the offer that we have it still stands – you can call *LENDER-EMPLOYEE* back and let him know if, what you’re going to do, and if you guys foreclose, we understand. If you’re not comfortable with this – go ahead and assign it over to someone else.

AGENT: <sigh> OK, well thank you for your time.

LENDER: No Problem

CNBC – Big Banks, Short Sales, Kick Backs and Fraud

This morning CNBC aired the story we brought them regarding short sales, bank fraud and kick-backs to banks.

—————————–

Diana Olick  — CNBC Real Estate Reporter
Big Banks Accused of Short Sale Fraud

Just as regulators, lawmakers and all forms of financial oversight boards are talking about new regulations to guard against mortgage fraud and another mortgage meltdown, there appears to be yet a new mortgage fraud out there today, allegedly perpetuated by agents of, yes, the big banks.

I was first alerted to this by Jeremy Brandt, the CEO of several companies that bring short sale agents, investors and sellers together.

His companies include 1-800-CashOffer, HomeFlux.com and FastHomeOffer.com. Brandt has a huge network of short sale real estate agents, and over the past several months he’s been receiving all kinds of questions and complaints about trouble with second lien holders.

As we all know, during the housing boom, millions of Americans pulled cash out of their homes in the form of home equity loans and lines of credit. They also used “piggy back” loans in order to get even lower interest rates on their primary mortgages. Now, many of the borrowers in trouble, and many who are so far underwater on their loans that they don’t qualify for any refi or modification, are choosing short sales as a way out. (Short sales are when the lender allows the home to be sold for less than the value of the loan). About 12 percent of all home sales by the end of 2009 were short sales, according to the National Association of Realtors.

In order for a short sale with two loans to happen, the second lien holder has to drop the lien.

If they don’t, and there’s no short sale, the home goes to foreclosure and the first lien holder gets the house because second liens are subordinated debt to the primary loan.

In short, the second lien holder gets nothing. In order to get the second lien holder to drop the lien, the first lien holder generally negotiates some partial payment to the second lien holder. The second lien holder doesn’t have to agree, but more and more are doing so.

That’s all legal.

But here’s what’s not legal and what’s apparently happening quite often recently. Since many second lien holders are getting very little, they are now allegedly requesting money on the side from either real estate agents or the buyers in the short sale. When I say “on the side,” I mean in cash, off the HUD settlement statements, so the first lien holder doesn’t see it.

“They are pretty clear and pretty upfront about the fact that if the first lender knows they are getting paid, the first lender will kill the short sale,” says Brandt. “So these second lenders are asking for the payments off the closing documents, off the HUD statement, usually in a cashiers check prior to closing. Once they receive that payment, they will allow the short sale to go through, which according to RESPA laws and the lawyers that we have spoken to on the topic is not legal.”

(RESPA is the Real Estate Settlement Procedures Act, the 2008 law requiring that consumers receive disclosures at various times in the transaction. It outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD. Read more about it here.).

I told RESPA specialist Brian Sullivan over at HUD about all this and he replied, “That’s a red flag!”

Clearly illegal.

Brandt told me he’s heard from at least 200 agents that they’ve had these requests made by representatives of Citi Mortgage, JP Morgan Chase, Bank of America and other large banks.

Most agents wouldn’t go on the record with me, for fear of retribution by the banks with whom they have to work every day. But one agent, Kayte Gentry, of Keller Williams Integrity First Realty, was brave enough to blow the whistle.

“I think it’s wrong, and I think somebody needs to hold them accountable, and every time I lose a house in foreclosure because of this, it hurts my client,” says Gentry matter-of-factly. “Aside from being illegal and a violation of RESPA, it’s immoral and truly it’s just sad for the client that it’s hurting.”

Gentry says she has had the requests made three times and claims she lost one sale because of it.

“The big banks that have recently made this request, specifically payments outside of the closing statement have been Citi Mortgage and JP Morgan Chase.”

JP Morgan Chase simply answered, “No Comment,” when I relayed the charge to their media representative.

Bank of America denied the practice to CNBC in a written statement:

“Bank of America enforces a policy that all disbursements are documented on the settlement statement for short sales. When we are servicing a first mortgage with a second lien held by another investor, if the second lien holder asks for off-HUD payments, we will not approve the transaction (if we have knowledge of it). It is also against Bank of America’s policy to accept off-HUD payments on its second liens.”

Citi ‘s reply was a bit more complicated:

“We work very hard to help distressed homeowners find solutions for their financial challenges. In our attempt to amicably resolve the debt, we will generally negotiate a reduced settlement with the homeowner in order to release a second lien. Unlike some lenders who refuse to reduce the payoffs on second liens, we choose to reduce the payoff amounts in some situations to assist the borrower. We do not provide instructions to settlement agents on how to fill out the settlement statement or any other closing documents, and we certainly do not require settlement agents or any other parties to violate applicable laws.”

“When we confront the lenders and tell them that this request is illegal and a violation of RESPA, they tell us it’s been cleared through legal and they don’t care. Do it anyway,” charges Gentry.

I personally heard a recording of a phone conversation between a short sale real estate agent and a second lien lender, during which the second lien lender clearly asked for cash outside of the settlement and threatened to kill the deal without it.

The real estate agent was rightly concerned and reluctant (the recording was given to me by Brandt who got it from the agent. The agent would provide no information on the lender, for fear of retribution):

AGENT: Well yes, I don’t want to lose my license, go to jail, I mean, I have to sign…

LENDER: You’re not going to lose your license – we have plenty of realtors who do this, who actually understand how this whole process goes – and they realize that OK, if I want to get this done, this will take place.”

I contacted the Treasury Department, HUD, FINCEN (Financial Crimes Enforcement Network) and the Federal Trade Commission, and none of their representatives could tell me of any active investigation into this. The folks at HUD said they’d be very interested to see my story.

Short Sales, Bank Fraud and Off-HUD Payments

We recently uncovered a massive fraud in how some banks are handling short sales…

First, read “What is a Short Sale?” for an overview of the short sale process.

There has been a disturbing trend recently of lenders asking for back-channel, secret deals in order to approve a short sale on a home. These lenders demand that the payments are not disclosed on the HUD statement, intimidate agents and home owners, and even say up front that if the payments are disclosed, they will stop the short sale from proceeding.

The typical scenario is when there are two loans on a property (a “first” and a “second”, sometimes called an 80/20 or 90/10).

In a foreclosure, the lender in first position usually gets the house, and all the other loans are wiped out and get nothing.

On a property with two liens, both lenders must agree to the short sale, and the first lender will typically dictate that the second lender only receive a small amount of money (usually 5% or 10% of remaining loan balance) because the second would lose everything if the house was foreclosed on.

If anything more than a token amount is paid to the second lender, the first lender will generally not agree to a short sale.

Some lenders in second position are now asking sellers, agents, and buyers to make a large, cash payment before closing, that does not appear anywhere on the HUD statement or closing documents in order to approve a short sale. They say this payment must not be on the HUD-1 statement, because if the first lender found out about it they would likely stop the short sale.

These are major lenders encouraging real estate agents and others to commit fraud, and extorting money out of buyers in order to approve the short sale transaction.

This problem is massive, and over the past 45 days I have spoken to over 120 real estate agents and investors around the country who have seen this issue with many different lenders. Most do not want to speak up because they feel that if they say anything negative about these banks, they will be “blackballed” in the industry and will no longer be able to negotiate short sales with banks – thereby destroying their livelihood.

The net effect of all this is that homes are being foreclosed on when there is a ready buyer, agents are put in a position of choosing between their ethics and helping their client, and the housing downturn will be prolonged as more homes are unnecessarily foreclosed on. Banks are behaving in an incredibly unethical (and in some cases illegal) manner, which is the type of activity that helped bring on the housing crisis.

An addition, when buyers pay extra money to buy a home, and it is not disclosed in the closing documents, all future appraisals in the neighborhood are based on artificially low values – further depressing the local housing market.

If you see this happening please speak up! The only way to prevent banks from continuing to engage in this fraud is to publicize it, report it to the authorities, and refuse to engage in unethical, fraudulent or illegal transactions.

What is a Short Sale?

A short sale is the sale of real estate in which the sale proceeds fall short of the balance owed on the property.

It generally occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a loss is better than foreclosure.

Both parties must consent to the short sale process, it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower. It is becoming a common practice as so many home owners owe more than their house is worth.

In a short sale without recourse, the lender does NOT pursue the home owner (borrower) for the forgiven debt.  Otherwise the lender may sue the home seller for the difference between the sales price of the home and the remaining loan balance.

Example Short Sale:

Steve bought a house for $320,000 and financed the property with an 80/20 loan.  He got a loan for 80% ($256,000) from one lender, and a second loan for 20% ($64,000) from another lender in order to 100% finance the property.

A year later Steve has lost his job and can no longer afford his house payments.  He’s 3 payments behind and is headed towards foreclosure.

Steve decides to sell his house and downsize.  Unfortunately, property values have fallen in his area and the real estate market is slow. He receives an offer for $205,000 to buy his home.

Since Steve still owes $320,000 on his house, he must either come up with the difference ($115,000) in order to sell the home, or request his lenders accept a short sale.

Because he is behind in his payments and the lender does not want to foreclose, the first lender (the 80% lien holder) might agree to discount their loan to $202,000 (a $54,000 discount) and the second lender  (the 20% lien holder) might agree to discount their loan to $3,000 (a $61,000 discount).  The second lien holder typically gives a much larger discount because if the first lender forecloses on the property, the second lender gets nothing, while the first lender gets the property.

With both lenders agreeing to discount their loans, the house is sold for $205,000 and foreclosure is avoided.  The home sellers will not receive any funds from the sale, and typically must prove a hardship (lost job, divorce, etc) for the lenders to agree to a short sale.

In general the IRS does not tax forgiven debt from a short sale (contrary to many reports).  See the IRS Home Foreclosure & Debt Cancellation site.

As long as the short sale is without recourse, the lender does not pursue the borrower for the difference between the original loan amount and the discount and the debt is forgiven.

Texas Lease Option Law – HB1823 – Update

There have been a lot of people requesting more information on the lease option law that was passed recently here in Texas.  For the people (like me) that like to understand all the details of everything you can read Bryan Dunklin’s Commentary
and Steve Tiemann’s Commentary.

For the rest of you, here is the net effect. 

Do Not Do Lease Options in Texas.

That is it.  There are a lot of other options available to you to sell property, but if you decide to do a lease with an option on a property and have a disagreement with the tenant – you will likely lose the home and maybe more.  If you lease-option the house with any financing tied to it – you are breaking the law.

Our solution is to sell our properties on owner financing and wrap the mortgage.  The downside of this is that you have to foreclose on the property if you stop getting paid.  The upside is that (1) it is legal and (2) the foreclosure process in Texas is fairly quick.

Real Estate Fraud / Scams

These articles remind me of three things.

1. Make sure you regularly consult your attorney to ensure you are following the law – things change often and you never know when you might inadvertently be doing something illegal. (see HB1823 post).

2. Always double check everything when buying property. There have been a number of times when we were ready to purchase a property and “dug a little deeper” to find inflated comps (prices listed in MLS were not the true selling price), phony appraisals, and inspections that didn’t hold up.  Remember – feel free to trust the seller, but always, always double check what they tell you!

3. DO NOT think that you can commit fraud and get away with it.  “The truth will always find you out”.  No one is above the law and the penalties can be stiff.  I’m sure Bernie Ebbers never thought he’d spend a day in jail.  Given the choice I’m sure he would take his lumps from the street rather then spend time behind bars.

Articles:
Former Chicago Title CEO Pleaded Guilty
NJ Man Charged With Conspiracy in $30M Real Estate Fraud Case
Phony Real Estate Investor Behind Bars
Decatur Man Jailed in Real Estate Fraud Case
Hearing Held in Real Estate Fraud Case

$250,000 Tax Free – Capital Gains Exclusion

How do you make $250,000 – $500,000 and never pay taxes?

The IRS has setup a great way for you to take up to $500,000 in TAX FREE gains on the sale of your personal residence.  If own a property, and live in it for at least 2 years you do not have to pay any taxes on the gain – up to $250,000 if you are single, or $500,000 if married and filing jointly.

You can do this with rental or investment property as well.  As long as you meet the requirements above this applies to any property you own.  You can not use this exclusion if the property is part of a 1031/Starker Exchange.

Helpful Links:

–> IRS Publication 523 – Selling Your Home
–> Motley Fool – Making Home Sale Capital Gains Disappear
–> Forbes.com – The Shelter Shelter
–> Bankrate – Capital Gains Tax Break a Boon for Owners