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, homebuyers and scam artists are jumping on the cash back bandwagon, and many of our own people (real estate professionals) are going the extra mile 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 asking price. The real estate agent receives a higher commission. The loan officer notes another successful loan. And the lender gets a larger 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 deals that seem too good to be true, cash back at closing schemes is just another way of scamming someone, in this case the lender, who is tricked into making a loan. risky.
But lenders are not the only losers. Buyers are often tricked into buying more homes than they can afford. Home values in the area are artificially inflated, making homes less affordable and driving up property taxes. Honest real estate agents lose business to dishonest agents offering 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 on closing schemes is illegal.
Illegal?! Yes.
When I tell my colleagues that cash back on closing schemes is 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. An out-of-area broker 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 problem was that the buyer wanted the seller to pay the additional $95,000 back at closing. The seller just 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 attorney had informed him that there was nothing wrong with such a transaction. Unfortunately, the lawyer was not well informed.
The law that governs these transactions is mentioned in the 1003, Uniform Residential Loan Application, which every homebuyer signs when applying for a loan: Title 18, United States Code, Section 1001. It’s part of the fine print that attorneys always tell you. They say to read carefully before signing anything. To paraphrase Title 18, section 1001, you may not lie on a loan application or any other document related to the transaction. When a buyer, appraiser, broker, 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 the 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 pay back 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 the seller’s agent chose.
The buyer or buyer’s agent claims that the extra money will be used for home repairs or renovations or will be paid to a contracting company to do the repairs or renovations.
The logistics of cash back 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 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”.
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 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 require them to lend more money than the property is worth.