False comps? Fraud?

[lniles]

I have personally experienced one of the sleezy tactics realtors use to drive up prices. They close at above-asking-price but they have an agreement with the buyer that they get cash back after the sale. For example, my neighbor wanted $640k for his house, the buyer and his sleezy agent came in and offered $700k with an agreement that the seller will give $60k cash back after the deal. That way, the buyer gets an additional $60k loan from the bank (that he wouldn’t have qualified for if it wasn’t a home loan), the seller gets his asking price, and the comps in the neighborhood go up because it closed on record at $700k. Thus, THIS IS A REALTOR-DRIVEN MARKET AND EVEN THE DATA YOU’RE GETTING FROM THE ASSESSOR’S OFFICE IS FALSELY ELEVATED!!! Isn’t this fraud?

[AK]

I’ve read about at least one set of prosecutions / convictions for “cash back at closing” abuse:

http://www.mortgagefraudblog.com/index.php/weblog/permalink/oklahoma_jury_convicts_six_in_cash_back_at_closing_scheme/

Apparently Arizona is catching on as well:

http://www.azcentral.com/arizonarepublic/news/articles/0120mortgagefraud0121.html

Nothing on it locally though. I guess we Californians have to wait until Citigroup, Bear Stearns, Goldman Sachs, and the other MBS bagholders reinvent themselves as “victims” of mortgage fraud.

[PerryChase]

I’ve read that it’s fraud if it’s not disclosed to the lender (which generally isn’t). The lender is being defrauded since he put up the money yet has no knowledge of the cash back.

Others have posted that lenders don’t generally allow anything more than 3% cash back to the buyer. So people do it outside of escrow.

A friend of mine recently did this when he sold his house. I told him it wasn’t kosher but he said that his Realtor and Escrow company and loan officer well all in on it so that they could close the deal. He gave money back to the buyer outside of escrow. But he legally didn’t have to since there was no contract for that.

If the Realty folks do such things for a commission, can you trust them to give you advise that’s in your interest? Buyers beware.

[lniles]

They’re in it for the money and the higher the closing cost the higher their commission.

If the comps are wrong, where else do you go to get a fair assessment of the value of a home? Zillow and all others use the assessor’s info and the sales history. I know the false comps didn’t cause the run-up in the market, speculation did. The run-down of the market on the other hand, is definitely being delayed by these false-comp tactics. I don’t know if it’s the “NORM” but 3 out of 3 friends of mine who sold their homes in the past 2 years had this happen. All different agents. All in Mira Mesa. What are the odds of that? IMHO it’s enough to discredit the sales and assessor’s records, which are used for all our “median housing price” graphs and calculations (I.e. things are much worse off than even piggington.com followers believe). I will also be avoiding the use of comps in the future when I buy a house.

Please post if you know of others who have been approached by realtors with these tactics. I’m curious to see how widespread it is.

[sdappraiser]

It’s very widespread, though in my experience it’s usually $5k-20k type concessions. Personally, I have not come across any that were over 3% of the sales price, but they are out there. It will get worse as credit tightens.

It is inflating the market and it is one reason why most indicators of value in SD are not showing their true levels of decline. As an appraiser, I contact every agent for the comps I use and back out any concessions they disclose from the sales price of that particular comp. If you know what you’re looking for these are fairly easy to spot in the MLS.

I’ve emailed Sandicor several times requesting that they update their rules to REQUIRE agents to disclose any sales concessions in the MLS once the deal closes. They refuse. This is another example of why prices appear to be sticky on the way down.

[SD Realtor]

I would agree that is it fraud as well. I have seen smaller amounts per what SDA quoted. I have not been involved in anything like that personally.

In – I agree that there are many people out there in my industry who make others look bad. I am not condoning or apologizing for the actions they take. I do not really they are doing this for the commissions like you state. More then not the people that benefit the most from this are the people who get the under the table money. It is much more of a risk for the broker to be involved with this sort of stuff. Take your 60k example. Okay so 3% of 60k is 1800 bucks. If it is large brokerage that gets cut up between the broker, agent, maybe even part of corporate. Again I do not think it is worth the risk. Again I am 100% in agreement with you that this data adds distortions to the market that are unacceptable. We just differ on why it is being done.

Please recall not to long ago on this site someone posted an idea about buying a home (and he was doing this without an agent on either side) in a manner that was not quite on the level and many on this board commented that we didn’t think it was a great idea.

I heartily agree with SDA that Sandicor should absolutely change the rules of reporting concessions in the sales price.

[Bugs]

These hidden sales concessions are another reason why Dataquik’s medians don’t appear to reflect what’s happening at ground level. It only takes a couple of sales in a neighborhood with hidden concessions to influence the median.

Sandicor’s refusal to require the reporting of these concessions does not do much for their credibility. It’s obviously an attempt to avoid alienating the agents.

[Alex_angel]

I said it wasn’t the norm but let me explain. It is the norm for the realtor to increase the price 10-15K to cover all closing costs for you and the realtors fee. Jacking it up over 50k is not the norm.

[lniles]

I see. Yes, I was blown away when my good friend told me about his home selling experience and the $60k cash-back deal. BTW the realtor recommended the lender and the appraiser. I would not be surprised if they were somehow in cahoots. The address of that home is

7947 Prairie Shadow Rd
San Diego, CA 92126

Although it is closed, the sale isn’t listed on zillow.com yet. The comps are, and guess what? They’re about $700k. Exactly the jacked-up price not deducting the $60k cash back (so I know for a fact the home sold for $640). This is my ‘hood and I own my place (since ’99) so I should be happy about it but I’m not.

[doublewide]

Add us to the list of people to whom this has happened.
The first offer we got on our place in Temecula last year was for 10K over asking w/ a 20K cash back to buyer request. Since we were not in a rush to sell we allowed our anger at the agent to prevent us from making a bad decision and accepting this offer. Not only would the buyers have gotten what we called a “booby prize” of 20K the agent dude, escrow babe, title chick would have recived extra too since they are all paid on percentage commissions.
Granted the buyers would have “technically” paid all these things since it was their lender “technically” loaning them the money to inflate prices and pay commissions, but we were so annoyed by the sleeze factor we took a pass on the deal…glad we did now that I learn it’s also ILLEGAL !

You can add my Mother-in-Law to the list too…she was advised by her San Diego RE agent to offer over the asking price for a place in RB she wanted, then ask for cash back to upgrade the place….M-I-L asked the woman, “why would I want to have a bigger mortgage and higher property taxes when I can just ask the seller to come down in price 20K and use my own money to do the upgrades?” The RE agent just stared at her for a good 10 seconds…it was quite classic !

Renting Rocks – for now..If we see Spring ’01 prices again we’ll buy again…until then 4.5% earnings on our CD and a fully funded 401K just can’t be beat !

Doublewide

[Alex_angel]

There is one part of this that I don’t get. Say that the home gets priced $60k and it will be kicked back to the buyer to offset the 20% loan. How does the seller give the buyer that money without tax ramifications. Now we are talking about tax evasion.

[PerryChase]

Technically there is no tax consequence since the buyer only gets back some of the basis he contributed.

This type of transaction if perfectly fine if the lender is aware of the cash back. The fraud is the hiding of the cash back from the lender. The lender funded a loan based on certain truthful information provided. If you lie to the lender that is fraud.

The loan officer generally doesn’t work for the lender. He gets points (commissions) based on the loan product that he sells.

[forsale_2007]

I don’t understand why any buyer in the right mind would want to do this. $700k with a 60k cash back (even if legal) means you would end up paying for higher property tax than you would need to. Of course you could reassess your property tax. But then you are subject reappraisal at any later date.

When we bought our home, we tried to negotiate with the seller to discount the home price if we agreed to pay all costs (including agent fees) to reduce the assessed value. But the seller didn’t want to deal with the hassle.

[Alex_angel]

For some people a 5% to 10% down will help a lot but most people don’t have the income or savings so they take the 5% kick back and put is as a down payment.

So the house sells for $500k. The buyer needs $25k for a down payment. The seller then says I will sell it to you for $530k, give you the $30k needed as your down payment. The seller gets the $500k they wanted and the buyer gets the $30k they need and only gets a loan for $500k which works out the same for them. They won’t pay more in anything but property tax.

It is a back door method of getting the home you want. An old realtor played this same game with me. I told him there was this house i wanted for $700k but cannot afford the taxes, closing fees and down payment. He said he will get the seller to sell for $750 and the seller will pay my down payment and all fees. This guy was SLEEEEEEEZY to say the least.

[PerryChase]

So the house sells for $500k. The buyer needs $25k for a down payment. The seller then says I will sell it to you for $530k, give you the $30k needed as your down payment. The seller gets the $500k they wanted and the buyer gets the $30k they need and only gets a loan for $500k which works out the same for them.

No, i doesn't work as you described. You buy at $530k and you owe $530k to the bank. The seller give you $30k. Assuming that you use that $30k to pay down you loan. Now you own $500k.

That doesn't bring your loan down to $470k like it would if you had put $30k down. The $30k is not free money. It was your money to begin with because you borrowed it from the bank.

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