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Avoid Mortgage Fraud: Don’t Let Your Buyers Request Land You in Trouble

by Ken Corsini on September 19, 2012 · 3 comments

  
mortgage fraud

It still amazes me how many people think it’s okay to skirt the “rules” when it comes to selling real estate. I am in the process of selling a property I bought and rehabbed over the last few months. Most of my properties are sold directly to investors as turn-key rentals, but this particular one was at a higher price point and made more sense as a retail sale.  As such, I am having the pleasure of working with retail buyers, lowball offers, FHA loans, financing contingencies, etc.

This week I got a fairly serious offer from a potential retail buyer. While the house is completely renovated, this particular couple wanted me to spend close to $10,000 dollars making custom changes to suit their tastes. Having seen financing fall through many times (especially FHA borrowers), I was not interested in making the requested upgrades prior to closing. At hearing this, the buyer called my agent directly and asked if we could just close the loan and cut them a check directly for $10,000 so that they could do the upgrades themselves.  While this may sound well and good, it’s mortgage fraud!  It never ceases to amaze me how nonchalant people can be about manipulating mortgage rules. Perhaps this is because many people don’t realize the above scenario is a felony that can carry a significant prison sentence.

For some, the notion that the seller doesn’t have the freedom to do what he or she wants with the proceeds from the sale seems absurd. As a seller, isn’t it my prerogative to do what I want with the money I receive from the sale of my property? Simply put; no, not when my actions contribute to the misrepresentation of the overall real estate transaction.

Don’t Be An Unwilling Participant in Mortgage Fraud

The Financial Crimes Enforcement Network has this to say; “Fraud for property generally involves material misrepresentation or omission of information with the intent to deceive or mislead a lender into extending credit that would likely not be offered if the true facts were known.”  As was the case with the offer I received from a potential buyer, there was no intention of disclosing this arrangement with the lender.  From the lender’s perspective, money is lent based on the assumption that the property is being sold for a certain price (and value) and that the borrower is contributing a certain down payment. If money is somehow returned to the buyer without the knowledge of the lender, this then negates the true nature of the down payment requirement.

As a seller, it is important that you do not unknowingly become complicit in this type of fraudulent transaction. In this day and age, banks and government agencies are watching for this kind of behavior like hawks. It is never a good idea to allow money to exchange hands that is not fully disclosed on contracts and settlement statements. While I am sure many buyers ask the question without really understanding the potential consequences, it is important as investors that we remain vigilant in upholding the law and avoid potential legal problems as a result of our uninformed complicity.

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{ 3 comments… read them below or add one }

Dale Osborn September 19, 2012 at 7:44 am

I have been considering getting back into the SFR market as prices continue to drop on the REO properties. I would be looking to fix them up and sell to an end user. Without your article here, I might have gotten myself into trouble. Thanks for pointing this out, especially before I get into the market. Knowing this ahead of time will cause me to keep a sharper eye on any Buyer offers.

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Karen Rittenhouse September 19, 2012 at 9:17 am

Such a fabulous and important article.

Thanks, Ken, for this post.

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Jeff Brown September 19, 2012 at 9:29 am

Hey Ken — Though it generally doesn’t involve participation by the seller, one of the most widespread mortgage frauds being committed with casual disdain, is buyers/borrowers tellin’ lenders they’re buying a ‘second home’, not an investment. This allows them to get significantly more attractive interest and other loan terms.

When interest rates climb, and they will, lenders will be combing their portfolios for relatively low interest loans they can call. The biggest group will likely be loans taken ‘subject to’ without their consent. The second home fraud seems to be another easy target.

Great stuff, as usual, Ken. You’ve probably saved more folks than you realize.

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