Finally, something real estate related! Let’s get started…
One easy way to go to prison is by defrauding a lender or conspiring to defraud a lender. This is known as mortgage fraud.
There are many types of mortgage fraud. But one scheme in particular is more prevelant among real estate investors. And that scheme is described in the hypothetical scenario below.
Pay special attention to this story so that you’ll know to RUN when you see this in real life.
THE STORY
It all starts when Sammy Seller posts a wholesale deal on myHouseDeals.com with the following numbers:
ARV: $150,000
Asking Price: $100,000
Cost of Repairs: $20,000
After receiving a few calls, Sammy Seller decides to flip the house to Bobby Buyer. They agree on a sales price of $100,000. Sammy Seller is excited because that price is $10,000 more than anyone else offered.
Seems innocent so far. But then things make a turn for the worse when Bobby Buyer states that there are 3 conditions to the purchase. Sammy seller must…
1. Write down $150,000 as the sales price on the contract.
2. Give Bobby Buyer $50,000 “off the record” after the closing.
3. Write down Cathy Credit as the buyer’s name. Cathy Credit is Bobby Buyer’s “associate”.
Sammy Seller agrees because the net result for him is the same and “whatever Bobby Buyer does on his end is his own business.”
Sammy Seller reasons that he will still get his $100,000 from Bobby Buyer. He just gets it in a different way … by collecting $150,000 at closing and then giving Bobby Buyer $50,000 after closing.
Bobby Buyer wants to structure the transaction this way because he can get a significant amount of “tax free” money from the lending company when he BUYS the property.
Bobby Buyer decides to get the loan through a friend named Billy Broker. Billy Broker is a mortgage broker who works with a few different lenders that you’re familiar with … Bank of America, Chase, Countrywide, etc.
But the loan won’t be in Bobby Buyer’s name. Bobby Buyer’s “associate”, Cathy Credit, will be the borrower. After all, Bobby Buyer doesn’t like to put his own credit at risk.
Bobby Buyer and Cathy Credit have a side agreement that Bobby Buyer will give her a $3,000 “thank you gift” for using her credit after closing. She’ll be a “credit partner” — also known as a “straw buyer” — in this case.
Billy Broker knows that to get this deal done and collect his processing fees, he must get a high appraisal … an appraisal for $150,000, even though the property is worth $130,000 or less in its current condition.
So Billy Broker calls up his buddy Andy Appraiser to do the appraisal. He says, “Hey Andy. Go appraise this property. I need it to come back at $150,000. Make it happen.” And Andy, says, “Sure thing!” because he doesn’t want to disappoint Billy Broker and cut himself off from future business.
The appraisal comes back at $150,000 as expected. Bobby Buyer catches wind of the appraisal … and smiles an evil smile. He sees green in his future.
Now it’s closing time…
The loan is for 90% of the purchase price on the sales agreement. Based on a purchase price of $150,000, that’s a $135,000 loan. Bobby Buyer brings the extra $15,000 of his own cash to complete the purchase. It’s funneled through Cathy Credit’s account, since she’s the buyer on the paperwork.
Bobby Buyer then gets $50,000 from Sammy Seller after closing. So, Bobby Buyer walks away from the deal with a loan balance of $135,000 (in Cathy Credit’s name) and $35,000 in cash. ($50,000 minus the $15,000 that he put down.)
Then, Bobby Buyer gives his “associate”, Cathy Credit, a $3,000 thank you gift for getting the loan in her name. And Bobby Buyer promises to Cathy Credit, “I’ll never miss a mortgage payment, so your credit is ok.” Bobby Buyer has now “profited” $32,000 ($35,000 minus $3,000.)
Bobby Buyer can use this $32,000 to do the repairs and make the mortgage payments. But he doesn’t. Instead, he keeps the $32,000 and doesn’t make any repairs or payments. A few months later, the house gets foreclosed on. This hurts Cathy Credit’s credit, not Bobby Buyer’s.
Bobby has since spent the money on a new Lexus IS. Bobby Buyer’s buddies (and his lady friends) think he’s cool, just like he wants. Little do they know he’s a loser/criminal/scum bag who steals from mortgage companies and ruins the credit of unsuspecting victims like Cathy Credit.
By this time, Cathy Credit has done several “deals” with Bobby Buyer. So her credit starts getting pounded with negative items from several loans. Bobby Buyer doesn’t return her calls. In a desperate attempt to get revenge on Bobby Buyer, Cathy Credit casts a voodoo spell on him. But that’s beside the point.
In the meantime, all of these defaulted mortgages under Cathy Credit’s name throw up red flags at the mortgage company. And more red flags go up when the mortgage company sends a Realtor or Appraiser by her (Bobby’s) properties to assess their values. And the values come back much lower than the appraisals from a few months ago.
The mortgage company decides that there was conspiracy to defraud the mortgage company. They don’t have time to deal with it, so they hand the investigation over to their attorneys.
And the attorneys come after Cathy Credit. And then the Attorney General gets involved. Cathy Credit eagerly points to Bobby Buyer. And then a simple title check shows that Sammy Seller was involved as the seller. Now he’s in this mess. And before you know it, the appraiser and mortgage broker get thrown into the mix, too.
By the time all is said and done, the seller, the buyer, the credit partner, the mortgage broker, and the appraiser lose money, their reputation, and in some cases, their freedom. And it’s all because they got greedy and ignored broke law.
In layman’s terms, here’s why they were in trouble…
Bobby Buyer had full knowledge of and actually coordinated the “off the record” transactions of $3,000 to Cathy Credit and $50,000 to himself. He was the mastermind of the whole scheme.
Cathy Credit purchased the property with the sole intention of getting $3,000, handing over control of the property to Bobby Buyer, and never making payments. She also had knowledge of and actually received one of the “off the record” payments.
Sammy Seller gave money to Bobby Buyer outside of closing. This was money that was not on the paperwork at the title company. So he knowingly hid information from the mortgage company and thus helped to defraud them.
Billy Broker had knowledge of Bobby Buyer’s actions and conspired with the appraiser to get an inflated appraisal.
Andy Appraiser knowingly appraised a property too high, which led the lender to believe they were making a secure loan when, in fact, they were not. Conspiracy to defraud the lender!
I won’t go into the details of the punishments for these crimes. All you really need to know is to stay clean and operate within the law. And don’t shuffle money pertaining to the sale between parties “outside of closing”.
To learn how to do deals the LEGITIMATE way, sign up for a free trial at www.myhousedeals.com/freetrial, and I’ll take you through a series of free members only teleseminars that show you how to make money in real estate, LEGALLY.
Until next time,
Happy (and profitable) investing!
Doug Smith
President
myHouseDeals.com
P.S. Go to www.myHouseDeals.com/freetrial now .
