Loan Fraud, Or How To Buy With No Money Down

We had a legal update last week. It’s not as boring as it sounds, and usually pretty interesting. One of the major topics was loan fraud, which is apparently running rampant in the Bay Area. According to our attorney, the FBI has set up a special unit here just to try and stop it.

Less than 24 hours later, I met a buyer who had been to one of our open houses and wanted to buy the property. Then he decided he really wanted to buy another one he had seen - for $1,345,000. No problem, sounds like a smart guy, sounds like he has cash and knows what he is doing, so I agreed to meet him the next day.

After nearly an hour viewing the property, he told me that he wanted to put in an offer and lowball it. OK, I think that’s fine in this market, especially since I knew the seller in question has relocated.

Then comes the kicker. He told me that he wanted to minimize the down payment, get the loan in process, then inflate the sales price by “$100,000 or so”, after we’re in contract, and get cash back from the seller in that amount.

And that’s how loan fraud works. The bank makes a loan on the larger amount, more than the property is worth. The buyer gets the cash back he put down originally, so he’s out nothing. The bank ends up with a loan that’s larger than the property is worth. Not a problem when appreciation is 15% a year, but when property values are flat or declining, it’s a big deal, especially if someone defaults. There is an excellent article that really explains this in last Sunday’s Chronicle.

Bottom line though: We don’t do it, and any good agent won’t either. No commission, no matter how easy it may seem, is worth losing your commission over.

I told him he would need to find another agent if he wanted to do that deal.

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