Arizona Attorney General Kris Mayes announced her office secured a consent judgment against two Tucson, Ariz., real estate companies accused of consumer fraud. Among other things, the companies were alleged to have failed to disclose underlying mortgages on properties they sold to consumers.
The 2021 consumer fraud case involved Deed and Note Traders, 881Home and their manager, David Kinas.
The lawsuit alleged the defendants had a practice of hiding or misrepresenting underlying mortgages for the homes they were selling, trapping consumers in mortgages they had never bargained.
Making matters worse, Kinas and his companies did not always pay those underlying mortgages, and in some cases the mortgage companies even foreclosed on the homes after they had been sold to consumers, according to the lawsuit.
Here’s how it worked. The real estate companies sold homes to consumers through rent-to-own arrangements with owner-provided financing, or seller carryback financing. The companies acted as both the seller and the lender, rather than a bank or other mortgage company.
However, consumers were not given clear title to the homes. Instead, the defendants used wrap-around financing that transferred the title encumbered by its own undisclosed mortgages for loans already owed on the properties. Although wrap-around financing is legal, any other mortgages on a property have to be fully disclosed by a seller.
The settlement requires defendants pay $350,000 in consumer restitution and $25,000 in civil penalties. Kinas and his real estate companies are also permanently prohibited from selling properties with seller carryback financing. If and when they do sell any properties, they must use a licensed real estate agent and an independent escrow agent and provide title insurance as part of the sale.
Consumers who are considering purchasing real estate, particularly through a rent-to-own or other installment-sale arrangement should beware of undisclosed seller carryback and/or wraparound financing and should follow these recommendations:
- Research the company or individual offering the home for sale. Look for news reports, consumer reviews, and any government enforcement or disciplinary action.
- Consider hiring a licensed real estate professional to represent you in purchasing a home, even in rent-to-own scenarios.
- Obtain a title report and property title insurance to ensure that the seller is selling a property with clear title.
- Read all documents and be sure you understand them before signing. If you need help understanding a contract, ask a licensed real estate professional to assist you. Do not rely on any oral statements or assurances made by the seller.
- If you decide to purchase a home with wraparound financing, be sure the underlying mortgage lender is involved. Use an account servicer to ensure your payments are paying the underlying mortgage lender directly, and make sure such protections are in the purchase agreement to buy the property.
Senior Litigation Counsel Jayme Weber and Assistant Attorney General Dylan Jones handled the case. Former Consumer Protection and Advocacy Section attorneys Jennifer Bonham, Kaitlin Hollywood, Rebecca Salisbury, and Kristin Schriner worked on the case as well.