Real Estate Fraud: Cash Back and Consequences

by Roberta Murphy

Opportunities for real estate fraud couldn’t have been more ripe than in 2005 and 2006, when real estate prices started to quietly soften–especially in fertile markets like San Diego, Phoenix, Las Vegas and Miami.

Home prices in these areas had rocketed to unsustainable levels, and some of the micro markets within these areas had already started to stall as early as 2005. By 2006, market time and “days on market” had begun to climb, to the discomfort of many sellers.

Many had listed their properties, hoping their homes could sell for at least as much as the recent neighborhood comparable sales or their own refinance appraisal–and perhaps even more. Some of these sellers were more motivated than others, and reduced their listing prices substantially to attract more buyers.

The stars were perfectly aligned for the real estate crooks:

• The housing market was declining, and there was general confusion in pricing;
• Mortgage money was easy, especially with stated income loans.
• Many of these shady real estate agents also wore the hats of loan brokers–and vice versa. This allowed better control of the transaction.

For example, we had an Imperial Beach home listed at close to $500,000, based on the owner’s 2005 refinance appraisal. Because the property needed so much work, the motivated absentee seller agreed to reduce the price to $399,000 and sell the home in as-is condition. Almost immediately, we had an offer for $500,000 (100 percent financing) with $120,000 to be credited back to the purchaser at close of escrow. The South Bay agent assured us the buyer was approved by their crooked in-house lending operation.

We presented the offer to the seller, and advised to him reject it outright. It was an obvious case of loan fraud.

A few months later, we had another fraudulent purchase attempt on a home we had listed in Carlsbad. It was a lovely listing in Rancho Carrillo that had also had a substantial reduction in price. We received a verbal offer from an out-of-area contractor who had never seen the property. His loan broker called from Northern California, and explained that their offer (100 percent financing again) required over $100,000 back because of all the work this contractor would have to do. They wanted me to write the offer, believing perhaps that if I “double-ended” the deal, I would be more cooperative.

We shot back a quick rejection. This newer home, by the way, was already in pristine condition–and was sold shortly thereafter to very qualified buyers.

This time, though, I called the San Diego office for the FBI, and reported all the information I had regarding this attempted fraudulent purchase. I provided names, telephone numbers and email addresses–and never heard anything more.

Since then, we have seen countless cases where homes were sold at highly inflated prices in 2005 or 2006 with 100 percent financing. That can be an immediate red flag for either buyer and borrower misrepresentation–or possible loan fraud.

There is also the technique of hiding a kickback in inflated commission, because lenders aren’t privy to real estate commissions paid. Though not exactly illegal, it is a practice that should be examined. I am inclined to think commission kickbacks should be considered a lender disclosure issue.

The untallied costs of these real estate and lending crimes and schemes have contributed enormously to the current real estate crisis.

In the meantime, the US Department of Justice (DOJ) has wasted huge amounts of time and resources the past few years pursuing the National Association of Realtors (NAR) over ownership of MLS data and other obscurities. Their time, I believe, would have been far better spent pursuing organized and fraudulent real estate practitioners. Had they, the FBI and other law enforcement agencies been more aggressive in this arena, the real estate market might be in a different position today.