Builders Beware of Real Estate and Mortgage Fraud

Written by Posted On Thursday, 06 December 2007 16:00

Whenever we see a downturn in the housing market, we also witness a rise in real estate and mortgage fraud, and builders are not immune to it. After all, when you are carrying a large inventory of new homes and are receiving few if any offers, the crushing financial burden could be enough to tempt you into offering buyer incentives that cross the line.

I have been involved in a recent case of suspected real estate and mortgage fraud allegedly perpetrated by builder in Michigan. A concerned homeowner contacted me when she, her husband, and a few of their neighbors noticed a couple rundown homes in their subdivision -- homes without lawns, window coverings, or furniture. She was justifiably worried that these dilapidated homes were going to drag down property values in the subdivision. She and her neighbors wanted to know what was going on.

As soon as I looked at the numbers, I quickly realized what was going on. The builder first listed the home for sale at $679,000. Over time, he dropped the asking price to $659,000, $649,000, $629,000, $597,000, $549,000, and finally $529, 877. At this point, the builder received an offer of $785,000. Of course, the builder accepted the offer and sold the home -- for $106,000 more than the original asking price.

I did some additional research to find out comparable values of similar homes in the same subdivision and learned that most of the comparable properties were selling in the $520,000 to $550,000 range. So the builder was able to sell the home for at least $235,000 more than the home’s likely true market value. In other words, the lender (an out-of-state lender) was fooled into approving a loan for $235,000 more than the collateral used to secure it -- a risky loan if there ever was one.

More over, when I checked the Warranty Deed, it showed that the buyer had paid only $140,000 for the property (to keep the tax assessment low). This hints of a conspiracy to defraud the county out of a significant amount of property tax revenue.

What ultimately happens in cases such as these is that the buyers, who really have no interest in the home, default on their mortgage loans and leave a rundown house in their wake. The inflated values of these homes initially raise property values throughout the area, homeowners refinance based on inflated values, and then when the economy softens and they cannot afford their mortgage payments, we see an epidemic of foreclosures, abandoned homes, and a rapid decline in property values.

As real estate professionals, we all need to be concerned about this problem and do our part to spot, stop, and report incidents of real estate and mortgage fraud when we witness them. We make a living off of the American Dream of Homeownership. Each of us needs to do our part to keep that dream from becoming a nightmare.

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