I this illegal to do with my condos?

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

Sorry, we would use that money to go into a joint venture together. He has cash and I have the concentration of condos in this complex to make it work. We would pay the taxes but the creation of the "new money" from the inflated prices would off set that.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

8y

That pretty much is the definition of mortgage fraud.....non arms length transaction, straw purchase, etc. I don’t care how you want to try and justify or rationalize it, it is what it is. Besides, the lender won’t necessarily be so blind.

@Chris Mason may can give you more specifics.

34 Reply

Chris SvendsenPro Member

Front Royal, VA · Member since 2016 · 306 posts · 240 votes

8y

Sounds like the ultimate plan of how to not be trusted in the community and all around dirty. Mail us a letter from jail to let us know how it worked out.

28 Reply

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

It seems like that but isnt a straw man purchase based on inflating the price of a property then borrowing against that specific property? If you create a comp on property A then use that comp to borrow against property B then it seems legal. Its the same thing we all do in the market. We use comps to refi out cash all the time on our properties. Theres no law against buying something for more than its market value.

Its a gray line I suspect but not outright illegal. The self dealing seems to be out of play because there really isnt a rule that says a close relationship cant buy something from you. I can sell my mom my condo for whatever I ant to if she will pay. Its making sure she doesn't then do something with that specific condo that becomes an issue. Not what I do with another entirely different condo she has no ties to.

To me it seems like the ethical edge we all straddle when assigning contracts and double closing when we dont actually have our own money.

Phil G.

Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes

8y

Ethically challenged, much?

11 Reply

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

Phil, thats why I'm asking. Is this illegal or not?? If it is then I'm trying to find out why. Not if it feels weird or not. Some people think the no money down stuff we do here is illegal but its not. I want to go beyond eye of the beholder into law. Is this legal or not? By the book legal or not.

Wayne Brooks

Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes

8y

Okay, you convinced me, I’ve changed my mind.....it’s absolutely perfectly fine to do this....don’t ask any further, just go do it......let us know how it turns out in a couple of years.

6 Reply

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

Thank you Wayne you sound like the attorney that told me my first double close was illegal and refused to do it. He just said he felt it was wrong and wouldn't do it. I'm trying to get advice from this community. People who have legal and professional experience in doing unconventional strategies with real estate. I'm asking for experienced advice on why this is illegal beyond saying buzz word like self dealing and ethically challenged. I really dont want to be confrontational, just educational.

2 Reply

Doug Wiggins

Catonsville, MD · Member since 2016 · 2 posts · 13 votes

8y

Thomas - This is an intriguing scenario you've brought up and I see the value in putting it out for discussion. I’m glad you asked the question. At first, my thoughts were that your idea was pretty smart and should work. But after further reflection, I think what you're talking about doing might cross the ethical line into fraudulent territory. I just read something on the Freddie Mac page that refers to illegal flipping techniques. I know you’re not talking about quick flipping, but the fact that you would be making cash available to yourself that, under normal (non-fraudulent) circumstances, wouldn’t be available tells me your plan would not work in the long run. Please read the Freddie Mac article and let us know if you see any parallels in logic against carrying out your plan.

6 Reply

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

Thanks Doug, a very interesting posting. After reading that I can see where if I gave the money I made on selling the first two condos back to my uncle it could be construed as illegal. But if I kept the money and contributed it to a joint venture together using that money then it might skirt the issue. On the other hand the website it doesnt seem to address anything tied to then leveraging my remaining condos based on the new higher comps created by selling the first 2 condos. In starting this thread I really wanted to get down to the idea of creating new equity out of thin air using this technique.

Charlie MacPherson

China, ME · Member since 2014 · 3k+ posts · 4k+ votes

8y

@Thomas D. if I understand correctly, you and your uncle are going to form a conspiracy to falsely inflate the value of your properties for the purpose of taking loans from a bank in amounts larger that would be allowed if not for the artificial inflation.

Did I get that right?

If so, that sounds exactly like mortgage fraud (a felony) and conspiracy to commit mortgage fraud.

The easy way to test the ethics of a situation is to put yourself in the other party’s position. That should make it pretty clear, right?

As far as legalities, I’m not a lawyer but I think you would be in very hot water. Felony charges are no joke.

The good thing about this post is that you have not disclosed your last name.

21 Reply

Nina Hayden

Rental Property Investor · Dallas, Austin · Member since 2018 · 246 posts · 213 votes

8y

This reminds me of all the unethical straw buyers and all sorts of crap I witnessed back in 2006.

3 Reply

Nina Hayden

Rental Property Investor · Dallas, Austin · Member since 2018 · 246 posts · 213 votes

8y

@Charlie MacPherson I knew a ring of people that did this because they got a friend of mine to be part of it. She completely fell for it. She never admitted to me, but the writing was on the wall with all the activities that came with it. She’s in Thailand and to never return to the US. I wonder why. I lost all respect for her and cut ties with her.

4 Reply

Phil G.

Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes

8y

18 USC 1344 - Bank Fraud

Whoever knowingly executes, or attempts to execute, a scheme or artifice—

(1) to defraud a financial institution; or

(2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;

shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

11 Reply

Doug Wiggins

Catonsville, MD · Member since 2016 · 2 posts · 13 votes

8y

Thomas, I get your goal of wanting to be creative to increase your equity, however, all the responses point to your method as being potentially problematic. Typically, if someone intends to do something they know is unethical or illegal, they are highly unlikely to advertise it in an open forum as you have here, so I believe you put this out here for discussion because you really didn’t know if it was unethical or illegal (maybe suspected) and were searching for an answer.That’s a good thing and it’s something others can learn from. I, for one, appreciate seeing all of the responses.

7 Reply

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

yeah ive never done anything illegal before I was more inclined to approach this idea as “making a market.” It may unnatural in its creation but I was interested in the idea. I wonder if I created the artificial price and waited for another non associated condo to close at the new higher price if it would clear the smell test? Maybe if i never even borrowed against my other condos and just created a new ceiling and sold years later if this would work. Interesting idea. But I would be sure not to do anything illegal.

Bryan Devitt

Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes

8y

It's mortgage fraud. There is no tricky way around it. Putting the money into a joint venture means the money still goes to the same person, just a different way. You *can* do it, but at some point you're going to get caught with your pants down and you will not only be fined a ridiculous amount of money, you will have a felony on your record and possibly be sent to prison. If you do it enough and get rich enough, you'll stay out of prison, but I don't think you can hit that mark quick enough.

3 Reply

Account Closed

Member since 2018 · 4 posts · 15 votes

8y

Oh my my ... real estate investing can be fun and profitable played straight or you can live the crime life committing fraud waiting to get caught. The fact that you are considering this nonsense is disappointing as it suggests that your business judgment is below water.

13 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

8y

Originally posted by @Thomas D.:

Reposting this in a bigger forum for feedback:

I own 7 condos in a complex close to a local college. They were all bought for under 100k and are worth 150k now. My uncle who invests in property says I should post 2 of my 7 for sale on the MLS for 275k each. He will buy them at the inflated price for cash creating 2 new comps for my remaining 5 condos. I would give hime back the 275K he paid me and we would then go to the bank and leverage the remaining 5 and refi to pull out cash based on the higher comps and take that newly created money and the original 275k x2 money and go do this all over again at another condo complex. We have a complex locally where condos are in the 50k range. I would buy 4-8 of these new condos over time then wait a year and repeat the process. He comes in and buys 2 for an inflated value of 150k each and we borrow against my remaining condos based on the new higher comps.

If they all can be borrowed against and cash flow at these higher prices why wouldn't I do this? He jokes that we should call this a condo crush. Does this sound illegal?

Probably against a few really good rules....

.... In spite of that, it's also standard operating procedure for many builders. Have Cousin Earl's LLC buy the first one all cash for an inflated price, basically do anything humanly possible to get the first batch sold for as much as possible in nominal sticker price. Once you run out of Cousin Earls, start giving away GIANT upgrade type incentives just to get that nominal sticker price as high as possible. It's called "setting the comps." The price difference between the first and last batch of homes sold in a development will be waaaay greater than overall appreciation in that same time period, because they keep on doing this all the way through to that last sucker buying that last home for vastly more than the first home in the development would today sell for. If you ever wonder why builders don't budge on price, but will budge all over the place on credits, 'free' upgrades, etc etc etc, that's why.

One advantage builders have that you do not have is the pocket lender ordering an appraisal with the pocket appraisal management company. Nothing is in writing, but this AMC knows what will ensure future business from that pocket lender - hit value, no matter what. This is why the builder's will give you $5k or $10k in credits to work with the preferred lender -- if someone is selling a house for $40k more than it's worth, they can afford to cut you a $10k check to make sure it goes smoothly. If you've only got 5 units to sell, you don't have the volume that would get you such a sweetheart arrangement.

I can be blatant about describing this because I've never been a builder's in-house pocket lender, so no one can point at a past transaction of mine and allege funny business. :P The second big paragraph above is mostly gleaned from just lurking in online discussion forums frequented by appraisers.

13 Reply

Scot Howat

Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes

8y

That is 100% fraud. DO NOT DO THAT

2 Reply

Scot Howat

Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes

8y

You're artificially inflating the value of your property. As a mortgage underwriter we were always on the lookout for that sort of thing.

It's illegal. There's plenty of other ways to make money.

3 Reply

Matt K.

Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes

8y

If they were worth that much then why would you need your uncle to "inflate" the prices?

If they aren't worth your uncle's inflated price, why would a bank lend on that....

Hunter Fitch

Mesa, AZ · Member since 2015 · 74 posts · 47 votes

8y

@Thomas D. Besides the fact that it’s mortgage fraud, what happens if other units sell low or foreclose right around the time you are attempting your refi? It’s so risky 😂

Account Closed

Rental Property Investor · Las Vegas, NV · Member since 2018 · 133 posts · 171 votes

8y

If you list this type of a scheme on the MLS then you are going to have to go through a broker and sign a listing agreement, are you not? I can't imagine any legit broker is going to want to risk their license and possible jail time helping to facilitate fraud.

If I were you I would forget about this and look for legit ways to make money, like you apparently were smart enough to do when you bought the condos in the first place.