Arizona Lawsuit Against Investors

Arizona Lawsuit Against Investors

By Jeffery S. Watson

On March 7, 2025, a complaint was filed in the Superior Court of Arizona in Maricopa County by the Attorney General of the State of Arizona, Kristin K. Mayes, which laid out allegations regarding “a convoluted scheme by the defendants to strip Arizona homeowners of millions of dollars of equity in their homes.”  The AG then defined “equity stripping schemes” as targeting “homeowners who have significant equity in their homes, but are facing foreclosure by their mortgage lenders,” and “these high-equity homes are worth significantly more than the balance of the mortgage in foreclosure.”

The allegations in the complaint focus on investors engaging in marketing and buying activities designed to “prevent the distressed homeowner from receiving that excess cash by blocking the auction and tricking the homeowner into selling the home far below the fair market value.”

The complaint alleges that since “no rational homeowner would enter into a deal like the ones offered by the equity strippers, …the equity strippers have to trick the homeowners into signing the paperwork, and then they have to rely on lawyers and title companies to help them close these dirty transactions.”

The foregoing will, of course, have to be proven by a preponderance of the evidence in the Arizona court.  As an attorney and real estate investor myself, I want to share some of my takeaways after reading this complaint.

1. Know the laws in your state. First and foremost, if you are an investor dealing with someone in foreclosure, are you aware of a foreclosure protection or rescue statute in the state where the house is located?  Is the homeowner covered by that statute by virtue of the property being either their primary or secondary residence?  If there is a statute that applies, are you in compliance with the statute?  Since approximately half of the states in the nation have these types of statutes on the books, it’s important for you to know the answers to those questions.
2. Always tell the whole truth. Do not make false statements, whether in writing, verbally, or in online postings, such as, “I’m working with your lender.”  Do not do things like leaving notes trying to impersonate a delivery service with a phone number and a message claiming you are trying to deliver important documents, or even worse, making claims that you are a “home advocate” or “hardship specialist” from an organization with a name that appears to be a charitable organization.
3. Put up an adequate amount of earnest money. The purpose of earnest money is to demonstrate that the purchaser is serious, has intent to buy, and has good faith to continue working with the seller to negotiate a full and fair transfer of the property.  Negligible earnest money, like $10, is not legitimate.  Again, it is designed to show that you are a serious purchaser who intends to fully perform on the offer (you have the intent, capacity, and ability to purchase the property on the terms set forth in the contract you are proposing).
4. Review your marketing. Please give serious consideration to the implications made when someone looks at your marketing.  What does your message imply?  It would be prudent to have a disinterested third-party opinion as to the expressions and implications made with your marketing messages.  Are the explicit and implicit marketing messages clearly aligned with your overall business model and the core purpose of your company?
5. How many entities do you really need? I’m not asking this question just because several pages of the Arizona lawsuit were devoted to listing all the entities owned by the two main Defendants, but also from a simple operations standpoint.  The more entities you have, the more complex your world becomes.  Remember, for each entity to be a valid, legal entity and not an alter ego, that entity needs to be properly filed with the appropriate state authorities.  It must also have a written, fully-executed operating agreement, its own taxpayer identification number, and its own separate bank account.  All the revenue allocated to that entity should go into that bank account and then go out of that bank account to wherever it needs to go.
6. Understand the Arizona Attorney General’s interpretation of “equity stripping.” It is buying the home from someone in foreclosure, and they get nothing for their equity in the property.  They receive no cash, no relocation assistance, no promissory note, no payment stream, etc.  That obviously concerns me.  If you are in the business of buying homes from people who are in foreclosure, please make it your consistent business practice to negotiate as to the fair amount of equity they would have in the property should the property either go to foreclosure or go through a sales process.  Take the time to document the costs of foreclosure or selling the property on the market.  Add those costs to the outstanding and growing loan balance and subtract that from what is determined to be the actual fair market value of the property.  This would be their “true equity.”  How then do you plan to compensate the homeowner for that true equity?
7. Take things very slowly when entering into any type of long-term business relationship, partnership, or hiring decision that involves a key position. According to the complaint filed in Arizona, there was rampant infighting and a lack of respect among the three members of the partnership.  One of the members passed away in 2024 while the investigation was underway but before the lawsuit was filed.  This partnership struggled with issues because one or more of the partners were involved in allegations of failing to pay joint expenses, involvement in transactions leading to lawsuits and investigations, substance abuse, sexual misconduct, and defamation.  Even though your partnership may never have these kinds of tragic events occur, it’s important to think about the potential issues you can face in a partnership.  As life goes on, people and circumstances change, and it impacts who they are and how they do business.

8. Make sure what you are teaching others to do is legal and correct! Please do not teach people sneaky side hacks or purported shortcuts.  Real estate investing is a thinking-person’s game that involves time, strategy, and a massive amount of integrity.  Whether we are just sharing or comparing notes with someone at a real estate meetup, or we’re standing on stage in front of a room full of people, we have an obligation to make sure what we are sharing with others is true, accurate, tested, and vetted.

Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio four times via litigation.  Read more of his viewpoints at WatsonInvested.com.