Cash back deals are stitched into the very fabric of the U.S. economy. Manufacturers promote their products with cash rebates. Credit card companies offer cash-back on purchases. Even banks dangle cash-back deals to attract new customers. Now, home buyers and con artists are jumping on the cash-back bandwagon, and plenty of our own people -- real estate professionals -- are tripping over themselves to cater to them.
On its surface, cash back at closing seems like a win-win situation. The buyer simply pays a little more for a property than it's worth, and the seller agrees to kick back the surplus cash to the buyer.
For buyers, it can be a savvy financial move, allowing them to pay off outstanding credit card debt or use the extra cash for home repairs and renovations. The seller unloads his house at close to or better than his asking price. The real estate agent gets a bigger commission. The loan officer chalks up another successful loan. And the lender scores a larger loan and stands to earn more interest over the life of the loan. If anything seemed like a win-win situation, cash back at closing is it!
Unfortunately, as with most deals that seem too good to be true, cash back at closing schemes are just another way of scamming someone -- in this case, the lender, who's fooled into making a risky loan.
But lenders aren't the only losers. Buyers are often tricked into buying more house than they can afford. Housing 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 deals. And neighborhoods begin to buckle when homeowners default on the inflated loans and their properties end up in foreclosure. Perhaps that's why cash back at closing schemes are illegal.
When I tell colleagues that cash back at 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 talking with a top selling agent in Florida who listed a house for $600,000. A broker who wasn't from the area had a buyer interested in purchasing 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 hitch was that the buyer wanted the seller to kick back the extra $95,000 to the buyer at closing. The seller just wanted to sell the house, so he had no problem with it. When the agent asked what I thought, I immediately recognized the scam and informed her that the deal was illegal. She explained that the seller really needed to sell the house and that the seller's attorney had informed the seller that nothing was wrong with such a transaction. Unfortunately, the lawyer was under-informed.
The law that governs these transactions is referenced on the 1003, Uniform Residential Loan Application, that every buyer signs when he applies for a loan--Title 18, United States Code, Section 1001. It's part of the small print that lawyers always tell you to read closely before signing anything. To paraphrase Title 18, section 1001, you can't lie on a loan application or any other document related to the transaction. When a buyer, appraiser, agent, loan officer, or another party provides a false statement of the property's value on the 1003 or any other document, they're lying. They're breaking the law.
As real estate professionals, our job is to know the law, act in accordance with it, and abort any deals designed to dupe anyone involved in the transaction. That means we have to shut down cash back at closing scams before they close. The warning signs are readily evident:
- The buyer places an offer on the property that's significantly more than the asking price on the condition that the seller kicks back all or some of the extra money.
- The appraisal is obviously inflated.
- Neither the buyer nor the buyer's agent has ever seen the property.
- The buyer wants to use a different title company than the one that the seller's agent has chosen.
- The buyer or buyer's agent claims that the extra money will be used for home repairs or renovations or paid to a contracting company to handle the repairs or renovations.
The logistics of cash back at closing scams vary, so the warning signs tend to morph over time, but the underlying law that's being broken remains the same. According to real estate lawyer, Rachel Dollar, "Whether it be through seller kickbacks, 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 transaction."
Whenever the lender is not informed, in writing, of the true nature of the transaction, the transaction is illegal. And if you go along with the scheme, you become an accomplice, subject to prosecution. So, what should you do when you smell something fishy?
Put a stop to it! Inform all parties that cash back at closing schemes are illegal, and then call the lender immediately. The lender's phone number is on the closing papers, and, believe me, they'll be eager to hear of any pending deals that call for them to loan more money than a property is worth.