Is this shady or not?
September 5, 2005 11:10 PM Subscribe
I live in the Phoenix valley. Over the past three or four years, the value of real estate around here has grown tremendously...
I have this friend (no, really), who's investing in real estate out here. The deal he's involved in is either very shrewd or very shady and I'd like to know what you think.
My friend (a lender in the Valley) is purchasing a handful of properties in the Phoenix area. He's paying over the appraised value and receiving the difference between the appraised value and the purchase price in cash after the deal closes (meaning that he'll pocket the difference that he's financing into the deal in cash after the sale closes).
He is not paying cash for the homes, nor is he paying the difference between the appraised value and his asking price as part of his downpayment. He is financing 100% (or close to 100%) of the purchase price of these homes though a bank (or similar lender).
Since lenders require a property to appraise equal to (or very close to) the purchase price, how is this possible? Does this require an appraiser that is willing to over-inflate the value of the home, or can it be done above board?
At the very least, this appears to be a backdoor method for driving up the property values in an area, since "comps" or previous sales have a strong influence over what other, similar properties will appraise at. At most, this seems shady, as it would appear that it requires "cooperation" from someone in the lending cycle to see that the initial appraisal goes smoothly.
Is this just a very shrewd (albeit risky), but above-board real estate investment scheme, or is something shady going on here?
My friend (a lender in the Valley) is purchasing a handful of properties in the Phoenix area. He's paying over the appraised value and receiving the difference between the appraised value and the purchase price in cash after the deal closes (meaning that he'll pocket the difference that he's financing into the deal in cash after the sale closes).
He is not paying cash for the homes, nor is he paying the difference between the appraised value and his asking price as part of his downpayment. He is financing 100% (or close to 100%) of the purchase price of these homes though a bank (or similar lender).
Since lenders require a property to appraise equal to (or very close to) the purchase price, how is this possible? Does this require an appraiser that is willing to over-inflate the value of the home, or can it be done above board?
At the very least, this appears to be a backdoor method for driving up the property values in an area, since "comps" or previous sales have a strong influence over what other, similar properties will appraise at. At most, this seems shady, as it would appear that it requires "cooperation" from someone in the lending cycle to see that the initial appraisal goes smoothly.
Is this just a very shrewd (albeit risky), but above-board real estate investment scheme, or is something shady going on here?
(IANAL) Note that if the arrangement is not formally disclosed to the lender, there's could be serious risk that he's taking part in loan fraud, a federal offense.
posted by nakedcodemonkey at 1:22 AM on September 6, 2005
posted by nakedcodemonkey at 1:22 AM on September 6, 2005
This is commonly referred to as fraud and it'll be all your buddy's fault when he tells the bank how much the value of the property is when he gets the loan.
The cash is an incentive for your buddy to buy. The seller must be desperate. He can probably see the end is near, what with the economy getting ready to tank.
posted by raaka at 1:34 AM on September 6, 2005
The cash is an incentive for your buddy to buy. The seller must be desperate. He can probably see the end is near, what with the economy getting ready to tank.
posted by raaka at 1:34 AM on September 6, 2005
My father was a federal bank examiner for several decades and now does more or less the same job but as a private consultant. Essentially, he goes over the banks loan records looking for "weak" loans. He has mentioned on more than one occasion situations in which banks had lent more money on a piece of property, business, or other asset than they should have. In some cases, the person taking out the loan gets an appraiser who - either for a fee or as a favor - is willing to give a higher estimate than a legit appraiser would. In other cases, the loanee simply asserts that the value of the asset is X dollars and the loan officer takes his word for it. But in both types of cases, the loan officer is either deliberately turning a blind eye so that s/he can score the commission or s/he's simply incompetent. It's usually the former, of course. In addition, it's not uncommon, particularly in smaller towns, for the Old Boy Network to play a role. Some local businessman has known the bank president since high school and one of them is married to the other's sister and yadda yadda yadda. Naturally, the businessman is able to get loans that he otherwise wouldn't be able to.
These types of lending practices can get a loan officer or even an executive officer fired. FDIC (or FSLIC if it's a credit union) can impose some sanctions, but mainly their function is to call attention to the problem. The assumption is that, once they're made aware of these threats to the banks profits, the board of directors will take care of the problem and that if the board won't do it, the shareholders will.
As I understand it, every bank is examined periodically. If you really want to check into this and you know the lending institutions that are supposed to be providing the jack, you may want to try to dig up their most recent FDIC evaluations and see whether anyone's caught on to the fact that they're making shaky loans.
posted by Clay201 at 5:36 AM on September 6, 2005
These types of lending practices can get a loan officer or even an executive officer fired. FDIC (or FSLIC if it's a credit union) can impose some sanctions, but mainly their function is to call attention to the problem. The assumption is that, once they're made aware of these threats to the banks profits, the board of directors will take care of the problem and that if the board won't do it, the shareholders will.
As I understand it, every bank is examined periodically. If you really want to check into this and you know the lending institutions that are supposed to be providing the jack, you may want to try to dig up their most recent FDIC evaluations and see whether anyone's caught on to the fact that they're making shaky loans.
posted by Clay201 at 5:36 AM on September 6, 2005
He's paying over the appraised value and receiving the difference between the appraised value and the purchase price in cash after the deal closes
I work in the industry. He's committing fraud. But unless he does something stupid to draw some attention, he will get away with it.
posted by 517 at 6:11 AM on September 6, 2005
I work in the industry. He's committing fraud. But unless he does something stupid to draw some attention, he will get away with it.
posted by 517 at 6:11 AM on September 6, 2005
517:
... unless he does something stupid to draw some attention, he will get away with it.
Thanks for reminding me, 517. I meant to add to my pervious post that, evidently, some people do get away with this sort of thing some of the time.
posted by Clay201 at 7:09 AM on September 6, 2005
... unless he does something stupid to draw some attention, he will get away with it.
Thanks for reminding me, 517. I meant to add to my pervious post that, evidently, some people do get away with this sort of thing some of the time.
posted by Clay201 at 7:09 AM on September 6, 2005
Damn. Sorry. One more thing.
This probably goes without saying, but... if your friend misses loan payments, defaults on a loan, asks to have the loan restructured, etc., there's a much greater chance that it will come to someone's attention and be scrutinized.
posted by Clay201 at 7:12 AM on September 6, 2005
This probably goes without saying, but... if your friend misses loan payments, defaults on a loan, asks to have the loan restructured, etc., there's a much greater chance that it will come to someone's attention and be scrutinized.
posted by Clay201 at 7:12 AM on September 6, 2005
This thread is closed to new comments.
* Who is paying him this cash back after sale?
* Have he and this payor put their payout agreement into a written contract?
* Did your friend have his lawyer review that contract before anything else (either committing to the "deal" or house offer) was signed?
* Are your friend's broker, attorney, accountant, and lender aware of his plan? If not, WHY not? Real estate investing is a legitimate activity, that such professionals normally are happy to discuss and endorse. Any plan that involves deliberately hiding one's intentions from them sounds like a bad idea, whether it turns out to be a scam or not.
* If he's borrowing the purchase amount, and netting assets (house + cash) exactly equal to that amount, then considering he also has closing costs, broker's fees, and mortgage interest to pay, does he understand that that the cash != profit? He's still gambling on the market to continue appreciating at the current fast pace. Whether that's a reasonable gamble or not really is something to discuss with local analysts and *cough* his accountant.
posted by nakedcodemonkey at 1:01 AM on September 6, 2005