A New Kind of Housing Squeeze
Is the growth of cash back at closing on real estate benign or malignant?CAVEAT EMPTOR, the expression goes. Let the buyer beware. But these days, the seller, the agent and the lender had better be on the lookout, too. There’s a real estate scam that’s growing in popularity: cash back at closing. And in many cases, not only is it shady, it’s illegal.
On the surface, cash back at closing seems like a win-win. The buyer pays more for a property than it’s worth (sometimes a lot more), and the seller agrees to kick back some of the surplus cash to the buyer or one of several third parties. For purchasers, it can seem like a good financial move, allowing them to pay off outstanding debt or use the extra cash for home repairs or renovations. The seller garners more than the asking price. The real estate agent scoops up a bigger commission. The loan officer totes up another successful loan. And the lender stands to earn more interest over the life of a larger loan.
It’s a deal that seems too good to be true . . . and it is. Here’s the catch: The buyer may have been tricked into purchasing more house than he or she can afford. The lender is fooled into making a risky loan. Area property values can become artificially inflated, which makes housing less affordable and increases property taxes. Honest real estate agents lose business to dishonest agents who offer cash-back deals.
The FBI considers real estate fraud one of the fastest-growing white-collar crimes in the United States. From 2003 to 2004, reports of mortgage fraud jumped 146 percent. The FBI estimates the loss to lending institutions to be more than $1 billion a year. And 80 percent of all reported fraud losses involve collaboration or collusion by industry insiders.
These deals can take many forms, says Rachel Dollar, an Orange County attorney and certified mortgage banker who’s a nationally recognized expert in mortgage fraud, “from the real estate agent encouraging the seller to raise the price of the home to wrap in the buyer’s closing costs as an ‘incentive,’ to builders who offer a Mercedes in the garage of every new home, to condo projects with sellers offering to escrow a year’s payments——or just handing the buyer $300,000 when the sale closes. Any time the details of a transaction are manipulated and hidden from the lender in order to facilitate the lender’s acceptance of the transaction,” Dollar asserts, “fraud is probably involved. Even if it’s structured as a ‘side deal,’ if the lender is not informed——in writing——of the true nature of the transaction, the transaction is illegal.”
And anyone who goes along with the scheme——the buyer, seller, appraiser, loan officer or anyone else who provides a false statement——becomes an accomplice, subject to prosecution. Mortgage fraud is a federal crime, punishable by up to 30 years in prison and a $1 million fine.
Tom Pool, spokesman for the California Department of Real Estate, says it’s “up to the Realtor to know that the deal looks wrong, and up to the lender to file a complaint.”
Michael Copley, a real estate agent with Coldwell Banker in Pacific Beach, recently experienced just this type of deal. He had “a buyer acting as the real estate agent as well as the loan broker, who seemed to be trying to cut out a lot of people,” says Copley. “We were already in escrow, and he asked to raise the purchase price $100,000, and he wanted cash back——‘for repairs,’ he said. When we told him we needed the lender to know, he refused and forged the signature of the underwriter. He was putting a lot of people at risk.
“The week we were supposed to close, he took off for Mexico. We were able to get out of that escrow. But he’s still operating as a loan broker. It’s my fiduciary duty to protect my clients. But it’s scary for people who act on their own behalf; they can get in a lot of trouble.”
OTHER LOCAL AGENTS have had similar experiences. Steve Cairncross, broker and agent at RE/Max Coastal Properties in Pacific Beach, has seen a “rush” of these cash-back deals recently. “These guys,” he says, “often operating as a team, look for a property that’s been on the market a long time. The seller is motivated, and has no problem giving the cash back. On one $1.25 million property, they asked for $250,000 back.”
According to owner/broker Joyce Doherty of ERA Coastal Properties in Solana Beach, “the only legitimate cash-back deals say right on the contract what monies will be credited back to the buyer and why. My advice always is ‘Read before you sign.’ ”
For many years, California has been on the top 10 list for mortgage fraud. Shelley Ehrman, director of product marketing and product management for Base Point Analytics in Carlsbad, says her company has been working overtime, even before the sub-prime mortgage implosion. State, local and national statistics are scarce, but Base Point’s research shows that “if a nonprime mortgage application originates in California, it’s more than twice as likely as the U.S. average to contain mortgage fraud,” says Ehrman. Her company, founded in 2004, has developed Fraudmark, an analytic model that can predict the likelihood of mortgage fraud by rank, ordering various characteristics in the loan application. And they find that “in the majority of cases, there’s some kind of complicity involved,” she says.
So what’s a concerned consumer to do? Caveat everyone: Be on the alert. Here are some helpful hints for avoiding fraudulent deals.
Tips for Avoiding Real Estate Fraud
• Be wary of unsolicited contacts, high-pressure sales techniques and people who play on your emotions.
• Don’t sign anything you don’t understand; consult a real estate attorney.
• Never sign a document containing blanks.
• Check references and licensing of all real estate and mortgage industry professionals.
• Check tax assessments and recent comparable sales in the area to verify the value of the property.
• Review the title history of the home to determine if it has been sold multiple times within a short period. If so, it could mean that the property has been “flipped” and the value has been falsely inflated, either by the seller or appraiser.
• Be suspicious if the buyer offers significantly more than the asking price, on condition that the seller kick back all or some of the extra cash.
• Be skeptical if the buyer or buyer’s agent claims that the extra money will be used for home repairs or renovations or paid to a contracting company who’ll handle the repairs/renovations.
• Be on your guard if neither the buyer nor the buyer’s agent has ever seen the property.
• Be cautious if the buyer wants to use a different title company than the one the seller’s agent has chosen.
• Be aware of cost or loan terms at closing that are not what you agreed to.
• Don’t let anyone persuade you to make a false statement, such as overstating your income, the source of your down payment or the nature and length of your employment.
• Conduct all business at the real estate professional’s office or a bank.
Call the Mortgage Fraud Hotline at 877-488-6245 or visit flippingfrenzy.com and mortgagefraudblog.com.