I have been hearing more and more stories of buyers approaching sellers with offers that include "Cash-Back". Why is this white collar crime and mortgage fraud making a re-occurrence? - Buyers are taking advantage of 'desperate' sellers hoping they will cross the line to do anything to sell a home.
Let me be clear that it is illegal. Period! In fact, on June 19th, the FBI charged More Than 400 Defendants Charged for Roles in Mortgage Fraud Schemes as Part of Operation "Malicious Mortgage. 
A cash-back transaction scenario is where a buy pays more than a home is worth with the extra money being paid from the seller (outside of escrow) back to the buyer
Wikipedia defines Mortgage Fraud Cash-Back Schemes:
"The buyer and seller or the buyer and real estate agent collude to deceive the lender as to the true sale price of a property. The seller or the real estate agent gives the buyer a cash rebate which is not disclosed to the lender. As a result the lender lends too much, and the buyer and/or seller pocket the overage. This scheme usually requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability"
Here is a Cash-back Scenario"
- Homeowner lists home for $320K
- Buyer approaches seller and offers to pay$400K and ask for $80K extra paid back to the buyer after and outside the escrow.
- Seller agrees as still receives the $320K net they had hoped
- Buyer is able to put down 20% on $400K ($80K) and receive a 30-year fixed mortgage with no PMI (private mortgage insurance)
- Buyer then receives the $80K back after the close of escrow; thus, getting a fixed rate, no PMI mortgage with no money down.
- other situations are buyers putting down $40K and getting $40K cash back in the buyer's pocket.
- Buyers are committing fraud.
- Buyers and sellers are inflating home prices which as the recorded sale becomes a 'Comp'.
- Houses usually go into foreclosure further hurting the housing market.
- Banks and shareholders take the losses.
- Losses are passed on to fair dealing consumers in higher rates and fees and stricter lending guidelines.
- All of these prevent buying; Lack of buying causes prices to fall or prevent recovery.
The Land 'Gold-rush' in Phoenix of the last 10 years saw the unfortunate proliferation of many unscrupulous brokers , appraisers, mortgage brokers, buyers and sellers who participated in cash-back schemes which hurt the honest majority and contributed to the large amount of foreclosures in metro Phoenix and many of the surrounding towns including Scottsdale, Tempe, Peoria, Gilbert, etc...
If you are approached with such a cash back deal or know of participants email: px_cashback@ic.fbi.giv
Thanks for helping the 99% who are contributing to your housing market and national economy.
For further details ask your local experts on Active Rain:
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during the hey-day, cash back fraud was a part of so many deals as you could get appraisals for about anything. Buyers would then get money back to pay for mortgages equal to 6 months (or more) and then try to flip the house without a dime out of pocket. Thes inflated appraisals have contributed greatly to the problems today
I understand how these illegal transactions are supposed to work but there can be no guarantee that the buyer will receive the cash back. Though I am no lawyer, I believe that an illegal contract is unenforceable. If the seller wanted, maybe they keep the money an make an instant, extra $80k on the sale of the property per the executed contract and signed paperwork. What a nasty, messy business these criminals engage in.
Rich - this of course is a very small percentage of the business back in what Sal calls the 'hay-day'. However, I remember getting an offer on a house with it 10% above asking and an additional addendum asking for the difference back to the buyer. amazing!
It is sometimes very easy to see these deals. Typically, the listing is cancelled. and then , there is a transaction at a price well above the list price (that was no market for a lengthy time and didnt sell). Buyer keeps the money, pays a few months mortgage, and then walks away. This is bad stuff and a situation where the good paying neighbors and banks lose out.
Jason - although, this is more prominent with 100% financing. I have heard of deals where buyers need money down that they really cannot afford. So they do put the money down, with the idea of getting it back from the seller after the close.
james - this practice is obviously illegal, and immoral as it destroys comps in neighborhoods, and causes major financial losses in communities and for lenders. I encourage everyone to report such a violation if you are aware of any. Thanks
as a mortgage broker I would hear stories about straw buyers who would buy properties with 100% financing, no earnest money, and get paid a few thousand dollars so sellers and third parties could facilitate transactions to get large amounts (six-figure) cash-back.