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Fraud in Real Estate?
November 29th, 2006 categories: Fraud, Real Estate
This is a very long post but jammed packed with good information for both home Buyers and Sellers. Fraud is rampant and each of you should read and be forewarned. I just cant begin to state how important it is to have a quality, ethical Real Estate professional working on your behalf. My statement and montage of Experience doesnt cost it PAYS is never so evident as it is concerning the following information. When you hire me, you get honesty, experience and the job gets done right!
Currently in Real Estate law, a Realtor/Real Estate Broker may take loan applications and seek out loans for buyers. Many of my colleagues do just that. I do not. It is my contention that this is a conflict of interest. Im good at what I do because I spend 100% of my time doing Real Estate full time. If dabbling in loans and real estate, it is my opinion that nothing would be done in excellence but be done in a mediocre way. I leave the loan portion to the experts that I have sought and know follow the same ethics that I demand in myself, and who I can quantitatively state are ethical. Which brings up a very valid point, in that I do not nor should anyone ever accept any kick-backs from any of the referrals that we as Real Estate professionals recommend to our clients, such as Pest companies, Title Companies, Mortgage Brokers, Home Inspectors and other Inspection and/or Repair individuals. When given a referral by me, you can count on good ethical service.
Now for the meat of this blog which is so very important for all!
Lender, Loan, Appraisal, Mortgage and Real Estate Fraud are not pleasant to hear about. This is not to Dis-wade anyone from obtaining a loan but to encourage and educate Buyers and Sellers of its possibility. An experienced ethical Real Estate Realtor will know if fraud is imminent or not. There are unscrupulous professionals (I use that term very loosely) in all areas of life. Fraud is found from the buyers filling out improper information on their loan application, inflating their income, etc. to Real Estate Agents writing Purchase Contracts with Addendums asking for money back from the Sellers which is not shared with an ethical Lender. Writing about monies within a transaction on an Addendum and not the Purchase Contract is a “Red Flag” for Lender fraud. If money is to be given back to the buyer for repairs which are documented and are actual, and the paper work is sent to an ethical Lender, the Lender prefers the amount to be no more than 3% of the purchase price. The Lender is required to know any and all monies that are to be exchanged within a transaction. The key word here, is ethical professionals. Some Real Estate agents will purposely write an offer, including an Addendum asking for thousands of dollars from the seller going back to the Buyer for any number of reasons. There are crooks in all professions and just because you indicate that you were not aware, is not an excuse for the Federal Courts. The FBI is prosecuting those individuals that are found to have committed fraud within a Real Estate transaction.
California is in the top 10 nationally for the highest rate of fraud and the lowest rate of prosecution. But this is changing with the change in the Real Estate market. Banks were taking the hit in years past, because not only were they embarrassed that fraud had occurred on their watch but they really didn’t loose all that much money since housing prices escalated at such a fast rate. But, now the picture has changed and banks are loosing quite a bit of money due to fraud and are working with the FBI to prosecute.
Many readers will think that fraud is based on the interest only loans and prepayment penalties and negative amortization of loans that were freely given out over the past several years. The answer is yes, and no. There are and were and will always be those buyers who this type of loan is the loan of choice. It the buyer plans on staying in a home for a lesser time, then a five year interest only loan may be the way to go. The key here is, whether or not the Lender explained this type of loan to the buyer and if the buyer was fully aware of the implications, penalties and such not. If not, that’s where there may be fraud.
There are two basic kinds of mortgage fraud, one for profit and one for property.
Buyers who embellish their loan application and require cash back from sellers are committing fraud for property.
An example of fraud is when an owner decides to flip a house, meaning buy, perhaps fix and turn around and sell quickly. Fraud occurs when the investor along with his/her Real Estate agent, gets the house appraised with a fraudulent appraiser who inflates the price and sells to what is called Straw Buyers. These strawbuyers many times are told that there is great profit in this house. A typical scenario is…the property is worth $150,000, the appraiser appraises the property for $300,000, they get a strawbuyer who typically is an illegal alien without a social security card or work history documented, no W-2 forms or credit and they use a fraudulent Credit Cleaner to obtain false documentation for the Straw Buyer so that the banks will loan money and line the pockets of the fraudulent seller, appraiser, Real Estate agent, mortgage broker etc. It is evident by looking on CraigList that StrawBuyers are being recruited. Many of these flips were on the rise due to some of these quick get rich scheme seminars held all over the different states and on T.V. Because of this scheme most mortgage lenders will not loan on property that is owned for less than 90 days.
There are cases of fraud where the out-of-town investor relies on a Real Estate agent to give them the correct information about a property. The agent who is un-ethical tells the investor that the property is listed for more than what it actually is and hires an un ethical appraiser who appraises the property for far more than its worth. Then they pocket the difference.
Recently, Casey Serin , a 24 year old young man, here in Sacramento who went to one of these get rich seminars is finding that the piper must be paid. He is learning a very valuable lesson…if it’s sounds too good to be true, it is. Casey finds himself in foreclosure. Casey thought he could turn property quickly and make a killing. Not so simple as he found out. Investors /sellers whose goal is to make money regardless of the law are committing fraud for profit. Casey Serin of Sacramento fits into this scenario.
The San Francisco Chronicle, Carol Lloyd Mortgage Fraud writes about the worst crime no one’s heard of where inflated prices of properties, appraisers who knowingly inflate those prices with money going back to the buyers or whomever. This is where an Addendum is used outside of the Purchase Contract where the ethical Lender is kept in the dark and never sees the Addendum (otherwise, the loan would not be funded) and the un-ethical Lender sees the Addendum but it doesnt matter.
Many Banks never pursued conviction since the shareholders would have been outraged that this happened on their watch plus when real estate was escalating so rapidly, the banks really didnt loose money. However, with the current trend and as interest rates, rises this will truly be a great loss to the Banks and therefore they are working together with the FBI to prosecute these un-ethical professionals, sellers and buyers. They are organized criminals as well as clue-less home sellers that are contributing to real estate fraud.
The criminal ring so far discussed includes investors, home sellers, strawbuyers, real estate brokers(agents), mortgage brokers, appraisers, notary, Title Companies, and some inside Lender employees. All or most of these criminals make money on real estate deals with the one exception being the Straw Buyer who is the one dealing with the inflated property cost and mortgage. What typically happens is that the Strawbuyer ends up defaulting on the loan and packs up and moves back to their country, leaving a vacant house sometimes a whole neighborhood. This impacts the surrounding homes and their values not to mention the impact that this has on the Bank. Using Straw Buyers as seen in seminars for investors is sometimes referred to as Chunking.
Now, you could say, how does this effect me? I havent sold a home not interested in selling in the near future there is NO FREE ride for any of us. Just as shoplifters impact each and everyone of us by the rising cost in merchandise to offset the loss, so too will this impact each and everyone who owns or will ever own a home.
Rachel Dollar, who practices law in Santa Rosa, CA handles mortgage fraud and is an excellent source for what is happening not only in California but in all the states where these individuals are being indicted. Edward Batayeh, of CHL Mortgage Group from San Ramon, CA was recently found guilty of defrauding financial institutions for over $13 million. Matthew Cox was convicted of fraud spanning three states and the list goes on and on, state by state.
Recently, I attended a seminar on Mortgage Fraud where I found that there is over $100 billion cost to communities for fraud for profit. Georgia and Colorado apparently require no licensing for Mortgage Brokers. An example of Fraud in Denver CO concerned over 1500 properties where most were home buyers who were fraudulent and 6 Realtors were indicted.
Another very sad indication of where this fraud leads to his with folks already at wits end who are on the verge of foreclosure and find themselves being talked into a Real Estate agent who is part of what is considered Foreclosure Rescue/Equity Skimming. This is when the homeowner is at their lowest ebb and is convinced by the agent/investor to deed the property over to them, pay them rent so that the owner can stay in the house. The owner believing that the agent/investor is paying the mortgage with the rent finds out that not only are they out the rent money but the Lender has not received any funds and the house is in default.
The FBI is following the money trail to find all of those involved in Real Estate Fraud.
Some Red Flags to look are:
- Social Security Identity Fraud “ where a Credit Cleaner makes up SS#, gives SS# of children, or those that are deceased, tax ID#
- Credit Reports/Letters of Explanation “ Borrowers with no credit history
- Earnest Money and Closing Costs “ where Realtors loan money to Buyers and close of escrow gift letters
- Verification of Employment “ where the address is a P.O. Box
- Self-Employed with no credit history
In the seminar it was recommended that Realtors not credit money to Buyers or Sellers in a transaction. This is a Red Flag for the FBI and if found that a certain Realtor does this on a regular basis, the FBI will prosecute.
This year I had a property listed which was impeccable, meaning that there was nothing in need of fixing or updating in this home and you could actually eat off the floor. An offer was sent with on a Purchase Contract asking for the Sellers to help pay for closing costs which was a reasonable amount. But the kicker was that an Addendum was also sent at the same time as the Purchase Contract which asked for $30,000 to be credited to the Buyer for home improvement. When I spoke with the agent, I was told that this is done all the time and that its sort of like an equity line of credit, as well as telling me that the Title company that this agent deals with knows how to handle this Addendum. HUGE Fraud! I asked the question, if the Lender would see this Addendum and was told, no. After notifying my sellers of my suspensions, I then asked the agent to put all the money issues on the Purchase Contract which the agent declined and said that they would just find another house.
In this case, all parties would have committed fraud had the transaction been accepted and closed.
Fraud Sentencing
- 5 years in prison for false statements on loan applications
- 5 years in prison for equity scheming
- 5 years for Social Security number misuse
- 30 years for Wire Fraud “ which is used in all Real Estate transactions
- 30 years for Mail Fraud “ which typically is used when mailing a loan application
As you can see, there is a lot more to Real Estate than just writing an offer or just showing a house. Those of us who are experienced, have ethics and honor do so much more for our clients than is realized. We fail to let our Buyers and Sellers know all that we do for them so its not unusual that our clients are unaware. Be cognizant of who you do business with and spread the word so that your friends, co-workers, church affiliates and family are not caught up in what appears to be the few that give a bad name to our industry. There are still good Realtors out there that have your best interest at heart. You just have to do your homework and find the right one.
If you suspect Real Estate Fraud, contact the Attorney General in your state. In Sacramento County click here for futher information or call the Sacramento Real Estate Fraud Hotline at (916) 874-9045
Please remember, Experience doesnt cost, it pays!
Related Articles:
Sacramento Real Estate Voice Honored
What Sellers Need to Know About Receiving Offers
2007 Where Knowledge is Power in Real Estate
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This is a great post, very informative and concerned. It’s among the best that I’ve seen concerning real estate fraud.
Ed,
I appreciate your positive comment. That means an A+ and that’s my aim. Come back anytime and enjoy a good read.
make money in real estate…
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[...] I have blogged, about Foreclosures, Short Sales , the process and the dangers as well as the Fraud, where you can read the in’s and out’s of Foreclosure. [...]
[...] Recently, Tracy Coenen, CPA MBA CFE of Milwaukee and Chicago who writes articles on Fraud acknowledged Sacramento Real Estate Voice. In December of 2006 Tracy’s article called Real Estate Fraud on the Sacramento Real Estate Voice, “an awesome post”. Considering how many articles on Fraud have been written, I humbly thank you for your vote and honorable mention. [...]
[...] In a previous blog entitled Fraud in Real Estate I mentioned a young man who lives in Sacramento, Serin who got caught up in purchasing Real Estate property in order to flip which became a flop. After attending get rich quick seminars (you know the ones I’m talking about)…there on TV, written books etc. Serin wanted to make quick money fast and unfortunately it back fired. Some of the mistakes that he made, as an uninformed investor need to help educate others so that this type of gut wrenching episode doesn’t happen again. [...]
Hi,
Thank you very much for one of the best articles we have seen published on mortgage fraud. We posted this story on our Mortgage Fraud Discussion Board: http://discussionboards.mortgagefraudqc.com/.
A similar thing happened to me in the mid-1990s by a company in Huntington Beach, Anastasi Realty and his brother who owned Anastasi construction. I was a single mother and making a very moderate income when I was coerced with promises of building my credit and hope of my own home ownership one day. After getting reeled in by promises of becoming a property owner (while renting myself), an intermediary orchestrated the loans on the homes that valued approximately $750k for the new construction town homes, back then!. There were first, second and Title 1 (or third) liens on the homes. Another co-worker was also in possession of three other units. After the simultaneous closings and the disbursement of all of the funds, of which I received nothing, the culprits pocketed close to two million dollars off of us. Within two months the “tenants†stopped paying the rents (one of the tenants was the individual who orchestrated the deals). When I began to inquire as the lender’s collection calls began, I was threatened with being turned into the FBI for my participation, and then my children were threatened and I left it alone.
This motivated my desire to learn more and I have had a career in fighting mortgage fraud for the past 10 years. If there is ever anything I can be of assistance with feel free to contact me. We welcome you to visit our Mortgage Fraud discussion board and encourage your readers to utilize our blog as well to share their similar experiences. The reason the criminals are allowed to continue is that their names and company information remain a secret until (and IF) there is a prosecution.
Please let your readers know they can openly share their stories so we can prevent other innocent people searching for the American Dream from having their lives destroyed.
Cindi Dixon, Director
Mortgage Fraud Investigations
Mela Capital Group
Cindi@MortgageFraudQC.com
http://ReportMortgageFraud.Org
http://discussionboards.mortgagefraudqc.com/
Nice post. I wish that I had picked an ethical and trustworthy realtor.
I am in the midst of being cheated by a dirty realtor. Fortunately, this only involves me and my realtor.
I was using Randy Gates from Keller Williams to sell my home in Michigan. We struck up a deal, where he would refund $3700 of my commision fee if I used him to buy a new home. We didn’t need a realtor. We could also bargain for better deals on the new construction that we were looking at without a realtor. However, we could use the money, so my wife and I agreed.
We found on our own all the homes we wanted to view. He just supplied us with the lockbox codes to enter, so he didn’t have to be there. This was fine with us, because we would recieve our refund after the purchase.
After signing the papers to purchase the home, we never recieved our agreed upon money. He will not answer his phone anymore or return any voicemails.
He just collected his extra cash and pushed us aside. We will probably never get the money, but we are in the process of reporting him and letting everyone know how crooked he is.
Cindi, I am thrilled that the bloggers at Mortage Fraud felt that this was the best article written on Mortgage Fraud and that you decided to post it on your site, in its entirity. However, it is customer to give credit to the author and I see no where on your “Fraud” blog where credit has been given. In my estimation, this would be considered fraud in itself or at least plagiarism. I do hope that you correct that and give Sacramento Real Estate Voice credit where credit is due.
Thank you.
Carl, It’s never a good idea for any reputable Realtor in my estimation to credit back money to a Buyer. Lenders are not keen on that unless the Lender is kept appraised of the fact that money is coming back to the Borrower which would in fact be expected to lower what the Lender was intending the Borrower to pay.
One accept that both Buyers, Sellers and some Realtors are unaware of is the tax implication of doing such a thing. If the Realtor is under handedly giving money back, the Realtor must pay tax on those funds.
I was shocked when you indicated that the Realtor gave you lockbox codes. I would say that if indeed that was done, this was not a Realtor but an agent who is unaware of the legal implications of his actions. Reporting these acts is certainly justified and hopefully the agent will learn something from all this.
[...] Fraud in Real Estate [...]
Gena,
A excellent explanation about mortgage fraud and the ways it is committed. It is distressing that it is so prevalent. even more troubling is the thought that all of this white collar crime might go unpunished due to an overwhelmed law enforcement system, judicial system, and penal system. I fear that we will have some very real choices to make in the near future. Do we prosecute the guy who murdered your neighbor or the one who defrauded them and cause them to lose their home?
The reality is that we simply do not have enough investigators, court time, or prison cells to go after all of these criminals. Believe me, I am not for allowing the perps to go unpunished, I am merely adding a dose of reality to the equation hoping to stimulate a dialog about what we might do.