Reposting this in a bigger forum for feedback: I own 7 condos in a complex close to a local college. They were all bought for under 100k and are worth 150k now. My uncle who invests in property says I should post 2 of my 7 for sale on the MLS for 275k each. He will buy them at the inflated price for cash creating 2 new comps for my remaining 5 condos. I would give hime back the 275K he paid me and we would then go to the bank and leverage the remaining 5 and refi to pull out cash based on the higher comps and take that newly created money and the original 275k x2 money and go do this all over again at another condo complex. We have a complex locally where condos are in the 50k range. I would buy 4-8 of these new condos over time then wait a year and repeat the process. He comes in and buys 2 for an inflated value of 150k each and we borrow against my remaining condos based on the new higher comps. If they all can be borrowed against and cash flow at these higher prices why wouldn't I do this? He jokes that we should call this a condo crush. Does this sound illegal?

That pretty much is the definition of mortgage fraud.....non arms length transaction, straw purchase, etc. I don’t care how you want to try and justify or rationalize it, it is what it is. Besides, the lender won’t necessarily be so blind. @Chris Mason may can give you more specifics.

Sounds like the ultimate plan of how to not be trusted in the community and all around dirty. Mail us a letter from jail to let us know how it worked out.

@Thomas D. if I understand correctly, you and your uncle are going to form a conspiracy to falsely inflate the value of your properties for the purpose of taking loans from a bank in amounts larger that would be allowed if not for the artificial inflation. Did I get that right? If so, that sounds exactly like mortgage fraud (a felony) and conspiracy to commit mortgage fraud. The easy way to test the ethics of a situation is to put yourself in the other party’s position. That should make it pretty clear, right? As far as legalities, I’m not a lawyer but I think you would be in very hot water. Felony charges are no joke. The good thing about this post is that you have not disclosed your last name.

Oh my my ... real estate investing can be fun and profitable played straight or you can live the crime life committing fraud waiting to get caught. The fact that you are considering this nonsense is disappointing as it suggests that your business judgment is below water.

Probably against a few really good rules.... .... In spite of that, it's also standard operating procedure for many builders. Have Cousin Earl's LLC buy the first one all cash for an inflated price, basically do anything humanly possible to get the first batch sold for as much as possible in nominal sticker price. Once you run out of Cousin Earls, start giving away GIANT upgrade type incentives just to get that nominal sticker price as high as possible. It's called "setting the comps." The price difference between the first and last batch of homes sold in a development will be waaaay greater than overall appreciation in that same time period, because they keep on doing this all the way through to that last sucker buying that last home for vastly more than the first home in the development would today sell for. If you ever wonder why builders don't budge on price, but will budge all over the place on credits, 'free' upgrades, etc etc etc, that's why. One advantage builders have that you do not have is the pocket lender ordering an appraisal with the pocket appraisal management company. Nothing is in writing, but this AMC knows what will ensure future business from that pocket lender - hit value, no matter what. This is why the builder's will give you $5k or $10k in credits to work with the preferred lender -- if someone is selling a house for $40k more than it's worth, they can afford to cut you a $10k check to make sure it goes smoothly. If you've only got 5 units to sell, you don't have the volume that would get you such a sweetheart arrangement. I can be blatant about describing this because I've never been a builder's in-house pocket lender, so no one can point at a past transaction of mine and allege funny business. :P The second big paragraph above is mostly gleaned from just lurking in online discussion forums frequented by appraisers.

18 USC 1344 - Bank Fraud Whoever knowingly executes, or attempts to execute, a scheme or artifice— (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises;shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both. shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.

Thomas, I get your goal of wanting to be creative to increase your equity, however, all the responses point to your method as being potentially problematic. Typically, if someone intends to do something they know is unethical or illegal, they are highly unlikely to advertise it in an open forum as you have here, so I believe you put this out here for discussion because you really didn’t know if it was unethical or illegal (maybe suspected) and were searching for an answer.That’s a good thing and it’s something others can learn from. I, for one, appreciate seeing all of the responses.

Thomas - This is an intriguing scenario you've brought up and I see the value in putting it out for discussion. I’m glad you asked the question. At first, my thoughts were that your idea was pretty smart and should work. But after further reflection, I think what you're talking about doing might cross the ethical line into fraudulent territory. I just read something on the Freddie Mac page that refers to illegal flipping techniques. I know you’re not talking about quick flipping, but the fact that you would be making cash available to yourself that, under normal (non-fraudulent) circumstances, wouldn’t be available tells me your plan would not work in the long run. Please read the Freddie Mac article and let us know if you see any parallels in logic against carrying out your plan. http://www.freddiemac.com/singlefamily/preventfraud/flipping.html

I this illegal to do with my condos?

Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

8y

Yeah, that's some real shyster stuff right there and pretty much definitionally fraud. So don't do it.

Podcast Guest on Show #121

2 Reply

Joseph Walsh

Brookfield, WI · Member since 2016 · 191 posts · 108 votes

8y

Let's pretend it's legal. (not an attorney, don't know, my gut tells me it's not, but I'm a pretty "no gray area" kind of guy...so) you're effectively leveraging 5 properties for significantly more than they are worth. What happens in say, 5 years, when the market corrects? You're underwater on those 5 properties. Maybe not, maybe they appreciate, maybe you don't care, with the money you pulled out, you added enough "actual" value in other investments, but unless one of the "maybes" is "you plan to skip town and default", eventually, even if legal, this will require some dumb luck not to put you in a deep debt hole. Then again, I own exactly one rental, but even my "newb" feelers are tingling on this.

3 Reply

Briana Nasman

Investor · Seattle, WA · Member since 2017 · 34 posts · 16 votes

8y

An appraiser isn't going to use cash sales as comps.

3 Reply

Leland S.

Developer · LA, Nashville TN · Member since 2015 · 295 posts · 75 votes

8y

@Thomas D. - The old question "this sounds totally wrong but can I get away with it?" is not the kinds of question you should be asking to find success. You've done very well with your properties sitting on 350k of equity gains. Is that not good enough? I'd be happy to be in your shoes. Take it and make it into something greater without trying to con federally regulated entities (and please don't attempt to con dumb individuals cause you can either, it is just as wrong). Thinking that a "bank" deserves any different moral treatment than a person is your mistake.

Aside from the obvious fact that banks are pretty diligent in not being stupid (as much now anyway), seeing two high cash purchases of your properties way above market would signal a problem. They might be smart enough to ignore it as irregular noise, or ask you why it was bought, or be "smarter" enough to look and see that it was your relative. In this case, you're literally asking a bank to investigate you and likely report you, as they likely will not be happy with your scheme to defraud them.

You might refer to what happens when others come up with creative schemes to manipulate the market (other people or institutions buying):

https://www.marketwatch.com/story/two-traders-arrested-over-alleged-manipulation-of-more-than-2000-stocks-2016-12-12

3 Reply

John Fairbanks Miller

Member since 2018 · 5 posts · 5 votes

8y

WWDTD? What would Dominic Toretto do? Ride or Die!!

Just kidding bro...play it straight.

0 Reply

Cheryl Vargas

Rental Property Investor · Rohnert Park, CA · Member since 2014 · 306 posts · 160 votes

8y

@Jim K. Did these people who bought the REOs fix some problems or add granite counters or make other types of upgrades? Is the ARV at $150k in your area? If so, I don’t see a problem with buying at $5 and selling at $150k.

0 Reply

Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

8y

@Cheryl Vargas

Just how much value would granite countertops add to a property, or any renovations carried out over 7 months? Hmm. In any case"the ARV" is nowhere near $150K in that area. It's closer to $60K for properties like these as a jaw-dropping seller-doing-dance-of-ecstasy maximum. Let's zoom in on the first of the properties I pointed out.

Here are some numbers on this street, as checked today. The current Zestimates on the five properties standing side-by-side on that street with the first of the properties I am talking about in the middle are 1. $75K, 2. $68K, 3. $59K (the property), 4. $65K, and 5. $77K. The property sold on 7/17 for $115,000. In the month of 7/17, those number stood at 1. $62K, 2. $63K, 3. $79K (the property- then being listed at $139K), 4. $54K, and 5. $49K.

Those are Zestimates, and of course they're probably quite a bit off. But 5 Zestimates in a row THAT far off?

-------

Forget Zestimates:

Well, let's go to rooms, square footage, lot sizes for these same five single-family homes:

1. 3 bed/1.5 bath, 2 car detached garage, 1690ft2, lot - 5940 ft2.

2. 5 bed/1.5 bath, no garage, 1951 ft2, lot - 2970 ft2.

3. (the property) 5 bed/1.5 bath, no garage, 1452 ft2, lot - 2970 ft2.

4. 3 bed/1 bath, no garage, 1452 ft2, lot - 2970 ft2.

5. 3 bed/1.5 bath, 2 car detached garage, 1910 ft2, lot - 2970 ft2.

------

Tax assessments:

1. $29,600

2. $38,100

3. (the property) $30,300

4. $40,300

5. $44,300

Is the picture getting clearer?

Property 2 sold on 8/2015 for $24,000. That's the most recent sale out of the five properties, nothing else in the last 8 years, except for the property (again, No.3), which sold for $5000 on 1/17 and before that on 12/2012 for $1738.

0 Reply

Brad Braun

Realtor · Charleston, SC · Member since 2018 · 84 posts · 51 votes

8y

A guy and his brother here in town were doing this exact same thing when the feds came knocking on their door. They had effectively swindled mortgage companies out of 45 million at the time of their arrests. I'm pretty sure one got 14 years in prison and the other one got 6. Here's the article if you want to see how, what, why they did to get their prison sentences.

Summerville man arrested in mortgage frauds.

2 Reply

Cheryl Vargas

Rental Property Investor · Rohnert Park, CA · Member since 2014 · 306 posts · 160 votes

8y

@Jim K. Now I see what you are talking about with ARVs in the $60k -$70k in that area, and that the subject property has 500 less square feet than the others that you listed. It does sound fishy! Thanks for clarifying!

0 Reply

Stephanie P.Pro Member

Washington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes

8y

@thomas d

My husband and I are watching season 2 of Ozark on Netflix right now. This seems like something Marty Byrde could get away with.

My advice though; if you're not Marty Byrde, then don't do it because people are going to jail for mortgage/wire fraud.

@Thomas D.

3 Reply

Jack B.

Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes

8y

Ummmm...I honestly wonder about some of the newer posts/members on BP. This is called FRAUD. It is a serious felony. I'm guessing you bought those condos with inherited money or something. Anyone who earned these condos would realize that what you are thinking of doing is a serious crime.

3 Reply

Amber Gonion

Real Estate Broker · Hugo, MN · Member since 2016 · 688 posts · 596 votes

8y

@Thomas D. Save the profit for bail money.

0 Reply

Jeshua Patrick

Rental Property Investor · Charlotte, NC · Member since 2017 · 298 posts · 232 votes

8y

@Thomas D. I think this is a time to stop and reflect on a few things. First, your conscience is usually a good guide. If it feels wrong there is a good chance it is and even if it isn’t you probably shouldn’t do it. Second, it should be revealing of the kind of person your uncle is. If he’s willing to defraud the government who’s to say he doesn’t take the money and run after you refinance, assuming you can successfully, leaving you holding the bag and seriously underwater? Worse, he might even try to set you up as the perpetrator and himself the victim. The fact he even suggested this should be a HUGE red and cause you to run from any deals with him as fast as you can.

1 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

8y

@Thomas D. fraud by definition is intentionally deceiving for financial gain. This could be viewed as fraud because you are trying to deceive the bank into believing the value of your properties is higher than it is, with the purpose of getting money.

Aside from legality, I am fairly certain this scheme will not work. You are making a big assumption that the bank appraiser will use only your two properties as comps. I have never had an appraisal done that had less than three properties and the appraiser picks the properties. Also keep in mind, the appraiser looks for a certain window of time on comparable properties. There is a high likelihood they will use other comparable properties with value closer to $150K.

I think there is low risk in going to jail for this, but high risk it will not work. Probably more risk for your uncle because he is paying $550K for two properties worth $300K.

1 Reply

Account Closed

Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes

8y

Originally posted by @Briana Nasman:

An appraiser isn't going to use cash sales as comps.

Wrong. Cash sales are actually the very best indicators of value, as they truly reflect what someone is willing to spend with their own money. What an appraiser will not use, are non-arms length sales or, sales with prices not consistent with other market prices, which would be the case here.

0 Reply

Briana Nasman

Investor · Seattle, WA · Member since 2017 · 34 posts · 16 votes

8y

Originally posted by @Account Closed:

Originally posted by @Briana Nasman:

An appraiser isn't going to use cash sales as comps.

Wrong. Cash sales are actually the very best indicators of value, as they truly reflect what someone is willing to spend with their own money. What an appraiser will not use, are non-arms length sales or, sales with prices not consistent with other market prices, which would be the case here.

At least in WA, appraisers don't count cash sales. They only look at bank financed sales, and they typically call the agents to confirm that they actually appraised for value ;) guess it would depend by state or locale.

0 Reply

Phil G.

Real Estate Broker · MA · Member since 2013 · 361 posts · 297 votes

8y

Forget "Rich Dad, Poor Dad". How about "Flipping with Ma Barker"?

0 Reply

Michael Simolke

Rental Property Investor · Asheville, NC · Member since 2017 · 44 posts · 49 votes

8y

@Thomas D. Just because he buys them for that price to try and increase the price on the other 5 , it doesn’t it will work out that way. The market still has to want to purchase those properties at the unnaturally inflated prices. You would have to buy half a city to really inflate comps. Buying one or two condos close by won’t drastically raise the others prices if it doesn’t make sense in the market.

1 Reply

Thomas D.

OP

Cumberland Gap, VA · Member since 2015 · 38 posts · 25 votes

8y

clearly the idea is illegal. But lets not all act like if we owned these condos and some random buyer came along and bought 2 at 275k we wouldnt be rushing to cash out our condos or refi them. Lets be real.

0 Reply

Matt K.

Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes

8y

Originally posted by @Thomas D.:

clearly the idea is illegal. But lets not all act like if we owned these condos and some random buyer came along and bought 2 at 275k we wouldnt be rushing to cash out our condos or refi them. Lets be real.

That's not even in the same discussion, we aren't talking some random buyer. Your properties aren't even marketed, hows a "random" buyer going to find them for sale...

0 Reply

Matt K.

Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes

8y

This guy got 3 yrs 10 mos

Most of the payments to buyers were made out of escrow and were often paid through intermediaries, originating in Kovalev's bank account. The payments, which were not disclosed to lenders, had the effect of substantially reducing the sales price below what was represented to the lenders.

Dozens of properties were involved in the scheme, resulting in several million dollars in losses to lenders, the news release said.

https://www.sacbee.com/news/local/article208752464...

This guy... didn't get so lucky. He got prison AND had to payback 7 mil lol

“The scheme involved kickbacks from condominium builders during the 2008 financial crisis, kickbacks that were hidden from lenders to convince them to fund loans in excess of actual purchase price

Group members bought units for themselves and their relatives and on behalf of “straw buyers” with good credit scores who were recruited under the guise that the purchase was an investment opportunity that required no down payment and would generate rental income, prosecutors said.

“The builders benefited by making it appear that their condos were selling and maintaining their value, while members of the conspiracy obtained the kickbacks,” according to the U.S. attorney’s office.”

http://www.latimes.com/socal/daily-pilot/news/tn-d...

0 Reply

Karen MargraveBusiness Member

Moderator

Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

8y

@Chris Youssi Hey.. don't paint all of us with that same broad California brush! I've been a licensed GC in CA for 30 years. NEVER have I inflated the price of a house or practiced trickery to influence comps. Chris Mason is right in that builders would rather give away upgrades as an incentive to buy than drop prices, because lowering prices does affect the comps, and there's nothing wrong with that practice.

However; I have never known any builders that commit fraud to artificially inflate values. What purpose does it actually serve?

1 Reply

Karen MargraveBusiness Member

Moderator

Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes

8y

@Thomas D. if a random buyer comes along and pays $275,000 for a condo, that sets the market value. Of course anyone else owning in the complex and wanting to realize maximum value might consider selling. However; their units would only have that value if they too could find a buyer willing to pay the same price, or a lender willing to refinance their condos based on the lone sale for the higher priced unit.

0 Reply

Account Closed

Investor · Milwaukee, WI · Member since 2013 · 1k+ posts · 1k+ votes

8y

Originally posted by @Briana Nasman:

Originally posted by @Account Closed:

Originally posted by @Briana Nasman:

An appraiser isn't going to use cash sales as comps.

Wrong. Cash sales are actually the very best indicators of value, as they truly reflect what someone is willing to spend with their own money. What an appraiser will not use, are non-arms length sales or, sales with prices not consistent with other market prices, which would be the case here.

At least in WA, appraisers don't count cash sales. They only look at bank financed sales, and they typically call the agents to confirm that they actually appraised for value ;) guess it would depend by state or locale.

Uhm...are you sure about all that? I'd be willing to bet a couple beers you have been misinformed. Appraisers typically use financed sales because, most sales are typically financed - that's all. Those less-common cash sales are actually the ones that add strength to an appraisal, so it would be frankly negligent for an appraiser to systematically dismiss cash sales as a general practice.

Do appraisers actually ask you if a sale "appraised"? I have never heard of an appraiser asking that and the more perplexing question is, why would they? When appraisers call realtors, they are attempting to verify the details of the sale. Things like, was the sale between friends or family members? Was the seller or buyer atypically motivated? Why did it sell so fast? Why did it take so long to sell? Were there any unreported sale concessions? Was the financing typical? Was there anything about the property not reported on the MLS? How come no pictures of the finished basement were included? That sort of stuff. An appraiser ought not care what the property appraised for (because an appraisal is an opinion, not fact) and, realtors would not be expected to be privy to that information anyways, so it would be silly for an appraiser to ask about it. I suspect you have been told the wrong story. If not, the appraisers out there need some reeducation.

0 Reply

Briana Nasman

Investor · Seattle, WA · Member since 2017 · 34 posts · 16 votes

8y

@Account Closed

As a Realtor in a cash sale heavy area (Seattle), I can assure you, every call I've had from an appraiser asks if the sale was cash or financed. I have had multiple lenders tell me they can't use cash sales in comps. This totally could just be state-specific, or lender-specific, of course. Our MLS also requires that we report the type of sale once we enter a property as sold. I totally agree with you, in a normal market, a cash sale shows strength. But, in a crazy hot market, people aren't acting rationally. Houses were selling for 20% higher than list (or what they were worth), and cash buyers are predominantly from China- and they care much less about the value and much more about getting their money out of the unpredictable Chinese economy and into a "safe" space. So, our area could totally be situational, but, out of the many appraisers and lenders I've talked to, cash sales don't count.

0 Reply

I this illegal to do with my condos?

I this illegal to do with my condos?

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