Avoid Liability for Fraud (Stay Out of Jail)

In today’s tighter real estate market, we are constantly getting calls from buyers, sellers, agents and lenders regarding various “schemes” which they have been told are legal, and they want to use these plans to help get a deal through. We have been shocked by some of the plans, and even more stunned to find that some of these methods are apparently common practices amongst local members of the real estate community. While it is certainly tough to sell houses in today’s market, it is virtually impossible to sell a house from a prison cell. We have been advised that all of the below scenarios are apparently common practices, and would caution any party to a real estate transaction that all of these “schemes” are illegal. Even if suggested or approved by a mortgage broker, the below scenarios would constitute a fraud upon the ultimate investor who purchases the loan portfolio.

1. The Seller wants to give a credit to the Buyer. The Lender’s underwriting guidelines will not permit it. Instead, the agent is listed on the settlement statement as having received a “bonus” commission. The settlement company does not cut the check to the agent, but instead gives it to the Buyer. Alternatively, the check is cut to the agent, who signs it over to the Buyer.

2. Same facts as Number 1, except that the settlement company shows a charge on the settlement sheet to the Seller, payable to “ABC Painting” or some other fictitious company, or held as an “Escrow for lawn work.” The check is then cut to the Buyer.

3. The Seller wants to “take back” a second trust. The first trust Lender will not permit this. The second trust is not shown on the settlement statement. This is known as a “silent second” which is blatantly illegal.

4. The parties sign two settlement sheets. One “phony” sheet goes to the Lender and does not show a closing cost credit. The other sheet reflects a closing cost credit to the Buyer. The Lender never sees the second settlement sheet, even though it is the one that the parties actually use.

5. The Buyer does not have enough money for settlement. The Seller instructs the settlement company to issue a portion of their proceeds check payable to the Buyer, which the Buyer then signs over to the settlement company. A variation of this scheme would require the Buyer to sign a Note promising to pay back the Seller.

The above scenarios are just a sampling of some of the things we hear are happening in the community. All parties who participate in these transactions, whether it be the buyer, seller, agent, lender or settlement attorney, are exposing themselves to serious civil and criminal penalties. We urge any party who is considering participation in such a plan to carefully evaluate whether they want to risk such severe penalties, just to make a single deal go through. In fact, if ever any party is told that “this is done all the time,” then those words should immediately send up the proverbial red flag, and the deal should be carefully reviewed by an attorney who does not participate in such wrongdoing. Buyers, sellers, agents and lenders are urged to contact experienced legal counsel if it is suspected that the deal involves illegal payments.