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