Cash back offers are built into the very fabric of the American economy. Manufacturers promote their products with cash discounts. Credit card companies offer cash back on purchases. Even banks offer cash back offers to attract new customers. Now home buyers and scammers are jumping on the cash back bandwagon, and many of our own people (real estate professionals) are doing their best to serve them.
At first glance, cash back at closing seems like a win-win situation. The buyer simply pays a little more for a property than it is worth, and the seller agrees to return the excess cash to the buyer.
For buyers, it can be a smart financial move, allowing them to pay off outstanding credit card debt or use the extra money for home repairs and renovations. The seller unloads his house near or better than its sale price. The real estate agent receives a higher commission. The loan officer scores another successful loan. And the lender gets a bigger loan and can earn more interest over the life of the loan. If anything seemed like a win-win situation, it’s the cash back at closing!
Unfortunately, as with most offers that seem too good to be true, cash back in closing schemes is just another way to scam someone, in this case the lender, who is tricked into making a loan. risky.
But lenders aren’t the only losers. Buyers are often tricked into buying more homes than they can afford. Home values in the area are artificially inflated, making housing less affordable and raising property taxes. Honest real estate agents lose business to dishonest agents who offer cash back offers. And neighborhoods begin to collapse when homeowners default on inflated loans and their properties end up in foreclosure. Perhaps that is why cash back in lockout schemes is illegal.
Illegal?! Yes.
When I tell my colleagues that cash back when closing schemes are illegal, a surprising number of them are incredulous. Agents frequently approach me and describe cash back deals that they were convinced were legitimate.
I was recently speaking with a top listing agent in Florida who listed a home for $600,000. A broker who was not from the area had a buyer interested in buying the property. Although the broker and buyer had never seen the property, they submitted an offer of $695,000, $95,000 more than the asking price! The only problem was that the buyer wanted the seller to return the additional $95,000 at closing. The seller only wanted to sell the house, so he had no problem. When the agent asked me what I thought, I immediately recognized the scam and informed him that the deal was illegal. He explained that the seller really needed to sell the house and that the seller’s lawyer had informed him that there was nothing wrong with such a transaction. Unfortunately, the lawyer was not well informed.
The law governing these transactions is listed in the 1003, Uniform Residential Loan Application, which every buyer signs when applying for a loan: Title 18, United States Code, Section 1001. It’s part of the fine print that lawyers always tell you. They say to read carefully before signing anything. Paraphrasing Title 18, section 1001, you cannot lie on a loan application or any other document related to the transaction. When a buyer, appraiser, agent, loan officer or other party provides a false statement of property value on the 1003 or any other document, they are lying. They are breaking the law.
As real estate professionals, our job is to know the law, act in accordance with it, and abort any deal designed to mislead anyone involved in the transaction. That means we have to close cash back on closing scams before they close. The warning signs are readily apparent:
The buyer makes an offer on the property that is significantly higher than the sale price on the condition that the seller returns all or part of the extra money.
The evaluation is obviously inflated.
Neither the buyer nor the buyer’s agent have ever seen the property.
The buyer wants to use a different title company than the one chosen by the seller’s agent.
The buyer or buyer’s agent claims that the extra money will be used for home repairs or renovations or a contracting company will be paid to do the repairs or renovations.
The logistics of cash back in closing scams vary, so the warning signs tend to change over time, but the underlying law being violated remains the same. According to real estate attorney Rachel Dollar, “Whether through kickbacks from the seller, inflated purchase prices, or ‘repair’ costs, the common thread in these deals is that the lender is not informed of the true nature of the property.” transaction”.
As long as the lender is not informed, in writing, of the true nature of the transaction, the transaction is illegal. And if you agree to the scheme, you become an achievement, subject to prosecution. So what should you do when you smell something fishy?
Put a stop to it! Inform all parties that cash back in closing schemes is illegal, and then call the lender immediately. The lender’s phone number is in the closing documents, and believe me, they will be eager to hear about any pending deals that require them to lend more money than the property is worth.