Watch Out for These Foreclosure Scams

One Ohio victim of a foreclosure scam was 86-year-old Sadie Booker, who was trying to make her mortgage payments on her income as a house cleaner, hairdresser and Avon(AVP - Cramer's Take - Stockpickr) representative. When the Cleveland-area resident could no longer meet her payments on her 2003-obtained predatory loan, she sought rescue from a company that proclaimed in a TV advertisement that it helps save homes from foreclosure.

According to July reports from WKYC, the local NBC station, the foreclosure-solutions company charged her $500 upfront, which she paid -- then sent her a letter a week before her home was set to be sold by the sheriff's office, to inform her that they couldn't help her after all. Luckily, a community action group heard her story and stepped in and saved her home. But not everyone can be so lucky.

Whether the foreclosure solutions company Booker originally hired to help her truly couldn't help or whether it was a scam is hard to know. But in Booker's case, the company fit the profile of a scam that real estate experts have seen before.

"There is no agreed-upon definition of what makes a foreclosure rescue a scam," says Jones-Cox, "but a sign that the company might be trying to scam you is that it asks for an upfront fee before they will help."

Other scams might be in the form of a sale or leaseback, she says. The "rescue" involves an investor offering to buy the property and sell it back to the foreclosed owner via a lease/option or similar arrangement. The investor's profit comes in the form of a lower-than-market purchase from the owner followed by an at-market resale to the owner several years later.

"The problem with this program is not that it is in and of itself a scam -- if the buyer and seller both understood the potential outcomes of the arrangement," says Jones-Cox. "The problem is that a seller who is under threat of losing his home is rarely thinking clearly about the fact that both his payment and the amount he owes to buy the property back will be higher, not lower, than what they are currently," says Jones-Cox. "Many sellers cry 'foul' about this deal months later, when they're being evicted for non-payment of rent."

Legitimate Services Grow, Too

The growing number of people entering foreclosure in recent months has also sparked a growing business model for entrepreneurs looking to connect homeowners with certified professionals and legitimate services.

For instance, the Homeleafs.com Web site, set to launch in January, will be a place where homeowners can submit applications to reach a variety of licensed service providers who would be useful to homeowners at risk of foreclosure. Professionals include real estate agents interested in selling properties, investors looking to purchase homes, bankruptcy attorneys and financial institutions and mortgage companies offering refinancing options.