Inflating Home Prices with Cash Back at Closing

Written by Posted On Wednesday, 27 February 2008 16:00

In many housing markets across the country, property values are declining. In terms of the overall market, this is not necessarily a bad thing. It means the laws of supply and demand are at work. It makes housing more affordable, especially for first-time buyers. It may even result in a drop in property taxes, giving homeowners a much-needed tax break.

Short term fallout, however, can be very painful, especially for those of us who make our living in the real estate industry. Builders and developers and their sales representatives, many of them real estate agents, seem to be suffering the most. The rest of us are also seeing a dip in sales and commissions. Not only are we selling fewer properties, but because of falling prices, we are earning lower commissions per sale. This double-whammy really hurts.

Unfortunately, more than a few professionals who are feeling the pain are using fraud to diminish it. To stimulate sales and keep prices inflated, they are offering "perks" in the form of cash back at closing and in other forms:

  • Cash back at closing: A lump sum cash payment that the buyer receives at closing, which acts as a sort of rebate on the purchase.

  • Lease-back payment: An investor purchases a rental property and the developer agrees to lease the property back from the investor for one to two years while the property is being developed.

  • Option-to-buy payment: The seller agrees to pay the buyer for an option to buy back the property and really has no intention of ever buying back the property.

  • Secret fund payments: Instead of paying the money directly to the buyer as cash back at closing, the money is placed in escrow to be paid at some other time or in installments.

Con artists are constantly coming up with new schemes that make these cash back at closing deals appear to be legitimate. The fact is that no matter what you call it or how you try to hide it, these arrangements constitute cash back at closing and are illegal.

These cash back deals are very successful in stimulating sales. People who would otherwise have never thought of buying a newly constructed home or investing in a development now see it as an affordable option. Not only do they obtain a valuable piece of real estate, but they also receive cash back (in some form), so they can afford the monthly payments and perhaps even some additional goodies.

My attention was recently drawn to a case in which real estate professionals, apparently driven by greed, were involved in cash back at closing schemes designed to stimulate the sales of newly developed properties by providing buyers with tens of thousands of dollars in rebate payments per transaction at closing.

To further hide what was really going on, the people involved in this scheme adjusted it so the cash back would not be paid as a lump sum but paid out in installments in the form of guaranteed rental payments. They also used the option-to-buy tactic as a way to hide cash back payments to some investors.

This allowed the developer to artificially inflate the value of the properties it was selling. Although prices for comparable properties in the same market were decreasing due to market pressures, the prices of this particular developer's properties increased! The developer was then able to advertise that properties in the development were appreciating significantly. Investors were completely unaware that the appreciation was completely manufactured.

In addition to contributing to the deepening of the current mortgage meltdown, these cash back at closing deals only serve to keep housing prices artificially inflated in a given area. Prospective buyers and appraisers look at the inflated sales prices of these properties and use them as accurate indications of their true market value. It completely confuses everyone involved and often serves to artificially inflate the values of all properties in a given area. It is little more than a sinister approach to boosting prices in the real estate market. For the real estate industry to remain healthy and robust and for consumers to regain their trust in our industry and in us, this price inflation via cash-back at closing must stop.

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