Cash-back arrangements are built into the very fabric of the American economy. Manufacturers promote their products with cash rebates. Credit card companies offer cash back on purchases. Banks even offer cash back deals to attract new customers. Now home buyers and scammers are jumping on the cash-back bandwagon, and many of our own people, real estate professionals, are tripping over themselves to service 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 your home at a price close to or better than the sale price. The real estate agent gets a higher commission. The loan officer scores another successful loan. And the lender gets a bigger loan and can earn more interest over the life of the loan. If something seemed like a win-win situation, cash back at closing is!
Unfortunately, as with most deals that seem too good to be true, cash back on closing schemes is just another way to scam someone, in this case the lender, who is tricked into making a risky loan. .
But the 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 housing less affordable and increasing property taxes. Honest real estate agents lose business to dishonest agents offering cash back offers. And neighborhoods begin to sag when homeowners default on inflated loans and their properties end 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 approach me frequently and describe cash back agreements that they were convinced were legitimate.
I was recently speaking with a top-selling agent in Florida who listed a home for $ 600,000. A non-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 sale price. The only problem was that the buyer wanted the seller to return the additional $ 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 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 that transaction. Unfortunately, the attorney was not informed.
The law that governs these transactions is mentioned in the Uniform Residential Loan Application 1003, which every buyer signs when applying for a loan: Title 18, United States Code, Section 1001. It is part of the fine print that lawyers always tell them to do. Please read carefully before signing anything. Paraphrasing Title 18, section 1001, you cannot link a loan application or any other document related to the transaction. When a buyer, appraiser, agent, loan officer, or other party provides a false statement of property value on 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 by closing the scams before they close. The warning signs are obvious:
The buyer makes an offer for the property that is significantly higher than the sale price on the condition that the seller returns all or part of the extra money.
The appraisal 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 chosen by the seller’s agent.
The buyer or buyer’s agent claims that the extra money will be used for home repairs or renovations or that a hiring company will be paid to handle the repairs or renovations.
The logistics of cash back at close of scams vary, so the red flags tend to morph over time, but the underlying law being broken 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 accept the scheme, you become an accomplice, subject to prosecution. So what should you do when you smell something fishy?
Put an end to it! Inform all parties that cash back when closing plans are illegal and then call the lender immediately. The lender’s phone number is on the closing documents, and trust me, they’ll be eager to know of any outstanding deals that require them to loan more money than a property is worth.
