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?

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.

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.

@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.

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.

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.

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

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.

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. http://www.freddiemac.com/singlefamily/preventfraud/flipping.html

I this illegal to do with my condos?

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

The legal way to do it would be to trick those condos out like nobody's business, write ad copy screaming "MUST-SEE ONCE-IN-A-LIFETIME-OPPORTUNITY LA-DOLCE-VITA-CAN-BE-YOURS FOR ONLY $275,000!!!" and wait for the right imbeciles to come along to start talking to your real estate agent about enhancing their lifestyles.

Imbeciles will come, Thomas.

3 Reply

Max T.

Investor · Philadelphia, PA · Member since 2015 · 3k+ posts · 3k+ votes

8y

I would never want to owe more than the asset is worth. Just sayin.

4 Reply

Michael Gansberg

Investor · New York City, NY · Member since 2015 · 388 posts · 563 votes

8y

@Thomas D. - I doubt this scheme would work. Appraisers would just look at those purchases as outliers, made by a foolish investor who'd been taken for a ride. The purchases wouldn't be arm's length. And after you gave the apartments back to your uncle for free- he will have effectively stolen two apartments from you.

You've made a 50% gain on your condos. Stick to your knitting.

1 Reply

Chris Purcell

Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes

8y

@Thomas D.

It’s 10000% fraud

1 Reply

Thom MacFarlane

Lender · San Diego, CA · Member since 2012 · 54 posts · 34 votes

8y

Condo appraisals require comparable properties outside of your project. If you're saying that valuation is $150,000, even if you do sell two condos to your uncle for $275,000, you're not going to have the comps to support the $275,000 for your other 5. any comps in nearby projects sell for more than $150,000?

Also If any one entity owns greater than 10% of a project (50 unit project) based on your 5 retained, you're still not getting a Fannie or Freddie loan.

Fannie & Freddie want 50%+ owner occupancy, solid HOA reserves. Hard money loan is your source but go bad........ ..

3 Reply

John Woodrich

Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes

8y

If you sell them you will have to pay closing costs and you will have a tax liability. These 2 sales will probably eat $50-$60k from your investment pool, could be more depending on how much depreciation you have taken.

Also - I would be surprised whether your 2 over inflated comps would dupe an appraiser. Not sure how big your building is but they will also be comparing it with other sales in your building and sales from other buildings with similar amenities. Sure, when it comes in low you can dispute it with your two comps but I don't think your bank will accept something so far off.

If you can get past ethical considerations I think this will ultimately cost you money and it won't work.

1 Reply

Thomas D.

OP

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

8y

This has been very very helpful. Hey you cant get anywhere unless you make a few suggestions and try some new techniques. Clearly this method isnt a very wise choice. Thanks all.

3 Reply

Rob Duke

Real Estate Agent · Pacific Palisades, CA · Member since 2018 · 43 posts · 14 votes

8y

In this scenario you are attempting to artificially inflate the value of something by colluding with a family member.

The conclusion I leave to you.

0 Reply

Karen MargraveBusiness Member

Moderator

Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

8y

One word for his kind of deal @Thomas D..... FRAUD

1 Reply

Chris Youssi

Rental Property Investor · Caledonia, IL · Member since 2015 · 290 posts · 213 votes

8y

Chris Mason " .... In spite of that, it's also standard operating procedure for many builders".

I resent the generalization of your above quote and find it incredibly offensive and arrogant with no proof other than stereotyping "many builders". Not only is it absurd it is no worse than the original post suggesting that standard operating procedure is builders selling homes for $275,000 when in reality they are only worth $150,000- you need to walk your comment back . I have building / developing since 2000 and know of no one in our market that has this as their standard operating procedure. Not everyone is in the California market on here and not suspect to some of the descriptions in your post.Why would Bigger Pockets have you as a moderator is beyond me. An expert you are not sir not by any means or you would have chosen your words with more wisdom. Shame on you!

Enough to make me question why am I even on here if these types of irresponsible posts are allowed from a "moderator".

1 Reply

Sarah Lorenz

Specialist · Ann Arbor, MI · Member since 2016 · 356 posts · 191 votes

8y

Your uncle’s name isn’t Paul Manafort, is it?

4 Reply

Marian Smith

Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes

8y

@Thomas D. Same premise as pump and dump in stocks. I am having a hard time believing how anyone can say a condo is “worth 150k” and then ask if faking a couple sales to create the illusion that the true market price is 275k is unethical....not obvious? Really? Where did the extra 125k come from? Rehabbing all the bathrooms and kitchens with trendy weathered wood and farmhouse style finishes? Nope, just duping a buyer into paying too much by faking a couple of sales so the property has fake comps. Blinded by greed or faulty moral compass?

2 Reply

John D.

Rental Property Investor · La Quinta, CA · Member since 2014 · 1k+ posts · 779 votes

8y

@Chris Youssi There are many builders where selling the first few homes at prices that are inflated compared to the market to date, to an insider is a standard practice. There are of course many more builders where it is not. I saw a bit of this in North / South Carolina areas before last crash, and they were not shy about it. This doesn't mean the statement represents you.

1 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

@John D.

@Chris Youssi

Setting the comps is quite likely happening here in western Pennsylvania, too. I know of an flipping outfit that turned a $5000 REO into a $127,000 sale. The flip was around the corner and up the street from a property of mine. They then pulled the same game on a $25,500 REO and sold it for $150,000. As luck would have it, this was also around the corner and down the street from another property of mine.

Oh sure, great business sense, great opportunity, great good luck, more power to them!

I know that everyone in this game has all kinds of stories, but I have addresses, names, recorded dates of sale and amounts. I also have deed records for the eight other properties in the area that the same outfit owns within the same square mile. Nobody ever promised me when I got into it that the business of real estate was bursting at the seams with deeply moral actors who had clean hands and pure hearts.

2 Reply

Tyler Stewart

Vancouver, WA · Member since 2018 · 1 post · 4 votes

8y

@Thomas D. Ignoring the enormous pile of ethical/legal problems with attempting this, you would have to get lucky enough to get the worst appraisers ever to pull off the refinance. You can’t just break the value range for an area and expect no one to ask questions. Not to mention that we live in a world of massive data collection for real estate, your “comps” would be easily red flagged by collateral underwriter programs processing your appraisal. I’m an appraiser myself, and if I was asked to appraise this refinance, I would probably(depending on market area) easily recognize what is going on and would do my best to see you held accountable for attempted mortgage fraud. This **** is not a victimless crime.

4 Reply

Rochelle G.

Rental Property Investor · Lake Orion, MI · Member since 2018 · 22 posts · 27 votes

8y

@Thomas D. I’m all for being innovative and coming up with new strategies to meet goals, but this is ridiculous. I understand you weren’t trying to be confrontational, but posting proof of conspiracy to commit mortgage fraud wasn‘t the best decision for an investor. Nor was it wise to consult a forum of individuals who dedicate their time toward obtaining properties they deem valuable and asking if it was alright to lie about how much your condos are worth. That’s the equivalent of going up to a banker and asking if it’s okay to deposit $100 if half of it is counterfeit.

7 Reply

Matthew McNeil

Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes

8y

I understand that you've asked what you believe to be an honest question, but the fact you've asked it sheds light on a gray area you're wandering around in looking for a plumb-line by which you can measure whether something is ethical or not, and you’ve come up empty. When you find yourself in that landscape, its best to back away and pursue those things that can't be questioned regarding what might be considered as an ethical violation.

Anyone who thinks about posting something with the title, "Is this ethical?" or “Is this Illegal?” shouldn't post it.

3 Reply

Sam Shueh

Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes

8y

Condos prices are very predicable. Any outliers will be red-flagged. When the appraiser hired by the bank spots the borrower is also a buyer that is red flag 2. He can not use these values. This is a fraud. The old name is called Uncle Bob sale.

1 Reply

Rob Wilcox

Atlanta, GA · Member since 2017 · 63 posts · 12 votes

8y

@Thomas D. Interesting, though thIs does cannot be legal. The idea of artificially inflating prices, to increase leverage, even if covered by cash flow, seems very risky.

0 Reply

Linda S.

Investor · Richmond, VA · Member since 2016 · 1k+ posts · 2k+ votes

8y

@Thomas D.,

I can't wait to see your episode on Dateline NBC or 20/20 about mortgage fraud!

Think about it this way, why $275K-- why not $5M each.. that'd be a $5M comp?! you don't think a bank will say... yea... it's not worth but $100K, and that person was just a sucker.

100% no-- do not do this.

2 Reply

John Clark

Member since 2018 · 1k+ posts · 1k+ votes

8y

It's illegal. The sales would not be bona fide. Try it and you're looking at hard time in the big house.. End of discussion.

1 Reply

Ryan MahoneyPro Member

Rental Property Investor · Hastings, NE · Member since 2018 · 57 posts · 53 votes

8y

@Thomas D. I don't fault you for asking a question. Sometimes it is simply out of curiosity and a desire to understand the industry better. I hope that was the case here.

The scenario you describe would definitely be unethical. Illegal? - my guess would be yes. Even if it was legal you run several risks. 1) You would permanently damage your reputation in an industry where reputation is vital to get deals. 2) You risk major tax implications related to large capital gains. 3) Comps are not solely based on on the units you want them to be based on. 4) Even if this hypothetical plan worked exactly as you laid out you would be extremely over leveraged and underwater on the other units as you pulled out falsely inflated equity. My guess is your business would be bankrupt in a short period of time, your credit would be wrecked, and your reputation ruined.

This seems like a get rich quick fantasy. You own a number of condos that have appreciated in value. Look to take the slow and steady path towards creating a profitable and more importantly - a sustainable business.

Best of luck moving forward.

2 Reply

Account Closed

Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes

8y

Not illegal to over-pay for property. Illegal to conspire to commit mortgage fraud.

2 Reply

Peter Sanchez

Real Estate Investor · Washington, DC · Member since 2014 · 236 posts · 328 votes

8y

If you want to go down this path and not end up in jail, then why don't you sell your property to your uncle for $275k, then...when he asks for his money back, tell him to go to hell. That's a much simpler way to get your hands on the money and not commit fraud and end up in prison. Your Thanksgiving dinners might be awkward for the first few years, but you've got a bunch of money and you're not a felon. Win/Win (for you, not your uncle, obviously).

5 Reply

Gretchen P.

Rental Property Investor · Littleton, CO · Member since 2014 · 150 posts · 114 votes

8y

Here's the thing, your uncle must have $550,000 in the bank if he can buy both properties for that much, why not just use his cash until you have actual equity?

5 Reply

I this illegal to do with my condos?

I this illegal to do with my condos?

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