Is the mortgage fruad - Posted by Chris(ATL)

Real Estate Investing Real Estate Law
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Posted by John Corey on March 23, 2006 at 11:52:04:

Natalie,

People sometimes confuse a symptom with the cause. In many fraud situations there are items missing from the HUD1. Just because everything is on the HUD1 does not prove there is no fraud. Even when there is something handled outside the escrow that does not prove fraud.

It is true that many frauds in the RE sector involve undocumented payments. Hence many lenders and other RE professionals require that all cash be handled through the escrow and be documented on the HUD1.

Most investors can do just fine without ever dealing with payments that are outside of escrow. That does not mean that all who do otherwise are committing fraud.

John Corey

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Is the mortgage fruad - Posted by Chris(ATL)

Posted by Chris(ATL) on March 22, 2006 at 15:21:45:

I am taking my first stab at wholesaling I had a guy approach me about purchasing the property. Something seams kind of fishy with his proposal the numbers on the property are:

Purchase Price: 76k
Pay-off: 72k
Money to the seller: 4k
My fee: 3.5k
My sell price: 79.5k
ARV: 135k

My understanding of a wholesale is at the time you assign your contract you collect an earnest money deposit paid buy the buyer, and collect the balance of your fee at the closing along with the buyer cutting a check to the seller and paying off the balance of the underlying mortgage and the assignment the payoff and the money going to the seller are all recorded on the HUD1 and that completes the transaction.

However, the guy who wants to purchase my deal wants to pay me $500 more than my asking price and he wants to pay me 8k the same day of closing that won?t be recorded on the HUD1. He says he has a conventional lender who he says will loan him 90% of the ARV which comes to $121k. The $121k will be used to pay off the underlying mortgage and the balance will be made out to the seller. Then the seller will endorse the check over to him and this will complete the transaction.

His proposal is troubling to me because it is complicated and everything isn?t going to be recorded on the HUD statement (8k check to me). I?m in Atlanta and mortgage is bad here. I don?t want the feds raiding my home and slapping me with 10yrs in the pen.

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Re: Is the mortgage fruad - Posted by Natalie-VA

Posted by Natalie-VA on March 22, 2006 at 22:08:47:

Chris,

This one smells like loan fraud to me. Textbook loan fraud.

–Natalie

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Re: Is the mortgage fruad - Posted by Terrence

Posted by Terrence on March 22, 2006 at 20:24:11:

The buyer is trying to avoid paying taxes. He wants 41K cash at closing (121K - 80K) without having to pay taxes on it. Savy investor!

The deal you just layed out has the buyer getting his 72K payoff satisted, his 4K profit satisfied, YOUR & 3.5K profit saitisfied (+500) = 4K total for your profit. Taxes should be paid on 4K -you, and 4K -seller.

BUT, if you do it this guy’s way the HUD will show $49,000 profit going to the seller which means he’ll have to pay taxes on 49K (121K - 72K) instead of just 4K (his true profit).

This is not illegal. It’s savy depending on what puzzle piece you are. You could have to title company print you legal docs for the seller that show that 49K is ultimately going to the buyer so that he pays the taxes.

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Re: Is the mortgage fruad - Posted by Natalie-VA

Posted by Natalie-VA on March 23, 2006 at 08:11:12:

Terrence,

How do you think that this isn’t illegal? Maybe we’re interpreting his post differently. From my vantage point, they are inflating the sales price and giving each other money outside of closing. This is deceptive to the lender and is usually considered fraud. Did I miss-read this?

–Natalie

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Re: Is the mortgage fruad - Posted by Chris(ATL)

Posted by Chris(ATL) on March 22, 2006 at 21:11:34:

Thanks Terrence,
I was under the impression that all cash transactions have to be shown on the HUD statement or it?s considered fraud. The buyer told me that only one of the checks would show up on the HUD1. He also told me that the seller would avoid capital gains since she?s been in the house for more than 2yrs.

Chris(ATL)

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Re: Is the mortgage fraud - Posted by John Corey

Posted by John Corey on March 23, 2006 at 08:54:27:

Fraud does not come from a payment being made off the HUD1. The fraud would be from deceiving the lender by hiding something material to the lender’s decision process.

A gun is not evil or bad. A person using a gun to commit a crime does not make the gun bad. The gun has neither good or bad attributes. It is in the application and the specific circumstances.

The cash and the HUD1 are artifacts of the deal. If the person is deceiving the lender to get a higher loan then they are committing loan fraud. If the lender bases the loan decision on the ARV value determined by the appraisal and does not factor in the sale price the the lender is not being deceived so no fraud and are fine with cash back.

One reason why deals like this are not common is because it is messy to force someone to finish the deal after the title has transferred and the money was paid out of escrow.

If the buyer or other parties are paying cash outside of escrow to hide the gain so taxes can be avoided that is tax fraud. If the parties declare the numbers correctly on the respective tax returns the IRS does not care about what was on the HUD1.

It could be true that the seller will not have any taxes owed. It is also true that the gain would be determined by what was received and the HUD1 just happens not to represent the full transaction. The IRS has no view on HUD1s. They do not require the evidence of the transition to be documented on a HUD1. It might be common or easy when the HUD1 does represent the full transaction but the IRS has no requirement for a specific form.

There is one or more ways that the full deal is legal. There are also multiple ways the deal will shift into something that is not legal or was never intended to be legal. Atlanta has some of the highest rates of mortgage fraud in the US and the FBI has a dedicated team focusing on the topic.

If you are only going to make an extra $500 why even get involved. If you were going to make a lot more you could have the contracts & transaction reviewed by an attorney. Given the $500 difference it will not cover the added time and costs.

Find a different buyer or have this buyer do the deal the way you want to do the deal. If they are really sophisticated they will be fine with the alternative. If they only know one way to put deals together they will walk.

John Corey

PS. I am a little fuzzy on the following so someone can correct me if they know better. A HUD1 is not legally required. It is required for transactions that involve lenders with federal charters or something similar. Hence it is a procedural requirements for most transactions. Most title companies have standard practices and that includes using the HUD1. A convention or business practice but not required by law. All that is documented on the HUD1 is that which went through escrow. A payment made before or after the escrow is not illegal unless you sign something saying there are no other payments and then you participate in such a payment.

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Re: Is the mortgage fraud - Posted by Natalie-VA

Posted by Natalie-VA on March 23, 2006 at 09:50:54:

John,

I agree with your P.S.

In fact, I was recently accused on this board of committing fraud. Sometimes when I sell a contract to a cash investor, we keep the assignment fee off the HUD. The Seller and settlement agents don’t need to know how much it is. The contract is assignable and the Buyer is paying cash. Everyone knows it’s being assigned; they just don’t know how much.

Some people on this board made generalized statements that if it’s not on the HUD, it’s fraud. I don’t believe that to be true since there was no lender involved, and no one was being defrauded.

On the other hand, the initial poster in this thread was being asked to commit fraud IMO.

–Natalie