I'm not unethical ... so why is the realtor pushing me toward being so?
August 21, 2015 2:56 PM   Subscribe

My father died last year leaving me a tiny bit of money. I'm using it to purchase a condo I will rent out. The realtor says: Well, you don't currently own a home so tell the bank it's your primary residence.

From the very beginning, I've told the realtor that I don't intend to live in this condo for at least two years. I live with my long-term boyfriend in his home (I'm not on the deed) and have for almost three years (together five).

BF's house will be paid off in the middle of next year. We also have a major city project being constructed near our house and the expectation is that the property value will increase.

The goal was to rent our the condo for a year, maybe two, sell BF's place and move into the condo.

With the money from my dad, I can put down 5% on a condo. (I've put the rest in an actively managed brokerage account for retirement.) I have stellar credit (above 800) zero debt and no dependents as well as a long relationship with Big US Bank. I got a smoking deal as a first-time homebuyer.

I continued to ask realtor about the legality of getting a residence mortgage vs. investor mortgage which requires 20% down. She poo-pooed. Then I got to the legal document that basically says "under penalty of civil/possibly criminal penalties, I certify that I'm gonna live here." Well, I can't certify to that. Realtor says no one will check, everybody does it. Big US Bank seems to be turning a blind-eye, too (As long as you tell me right now at this very minute you will live there, we're good.)

Real estate attorney friend says it's clearly fraud.

It's a condo in a great resort town. I'd rent it in a day if I put it on Craigslist. But I'm not trying to go to jail!

In the grand scheme of schemes, how risky is this knowing that there is no other property currently in my name. I haven't signed the loan docs. I'm too scared. I'd hate to lose this place. I could put down 20% by next March. And is this standard across the industry?

Thanks, Mefi. (Steps away from the ledge.)
posted by anonymous to Work & Money (17 answers total) 1 user marked this as a favorite
Real estate attorney friend says it's clearly fraud.

This, combined with the generally accepted knowledge that realtors do not have your best interests at heart, should guide you.
posted by Sternmeyer at 3:05 PM on August 21, 2015 [21 favorites]

I think you have two choices:

(a) figure out a way to make it true enough that you can sign the legal without it being fraud. Maybe that means moving in for a few months after you close. Maybe that means instead of leasing to a "tenant" you lease to a "housemate" and make it *technically* your residence for a year or two while you actually stay at the boyfriend's and your housemate has the run of the place. I can't imagine that signing the mortgage could legally prevent you from reconsidering your life in such a way those choices would be forbidden to you, but check with your real estate attorney friend and see if either would make it not clearly fraud.

(b) get the investor mortgage, and then refinance to residence when you do intend to move in.
posted by weston at 3:10 PM on August 21, 2015

Yes. Realtors are often slimy, almost always pushy, and never have interests fully aligned with yours. In addition, they are not necessarily aware of the legalities surrounding mortgages and tax law and everything. How regulated they are depends on your jurisdiction.

DO NOT sign saying you'll live there if you don't intend to.
DO NOT follow weston's (a) suggestion, because I'm pretty sure that either would be fraud, off the top of my head.

Risk: technically I'm not sure how risky it is. What's the enforcement rate, civil and criminal, of mortgage fraud? Probably relatively low. However, the penalty for it is severe. So the expected value of risk is moderate. It's your call on if you want to take that risk on.

Source: small-town lawyer who has a small practice in real estate law.
posted by Lemurrhea at 3:15 PM on August 21, 2015 [3 favorites]

Listen to your real estate attorney friend who says this is clearly fraud. They should know, and as your friend, they are on your side; they have no incentive to see you do something unethical just to make a sale.
posted by J. Wilson at 3:19 PM on August 21, 2015 [2 favorites]

It is very clearly fraud, albeit a fairly common one. But just because a lot of people do something, doesn't make it right or OK. Follow the rules, and sleep soundly knowing that you did the right thing.
posted by spilon at 3:27 PM on August 21, 2015 [2 favorites]

To address the "why" portion of your question: it is because of exactly this sort of financing issue, that's why. To be abundantly clear: getting financing for an investment property is a whole different thing than for a primary residence. There are way fewer accommodations, way fewer programs (like FHA) designed to help you along, and so as a practical matter it's a hell of a lot harder. And yes that is standard.

It is pretty likely, I am tempted to say "nearly certain," that you will be unable to finance with less than 20% down if you follow all the rules and tell the truth. So. You "aren't unethical," but you've put it out there that you want to do a thing that requires unethical (possibly fraudulent) conduct. The other person maybe feels like she's picking up what you're putting down, to be fair to her - not that it's a good idea, mind you.

If you will be able to put down 20% by March, just... WAIT. That's barely 6 months!
posted by Joey Buttafoucault at 3:52 PM on August 21, 2015 [4 favorites]

It is clearly fraud.

People go to jail for mortgage fraud all the time. Many of them were investigated for something else and the mortgage fraud was revealed, and the prosecutors go for the easy lay up. And it's easy -- facts are open and shut and very long minimums if you go trial, so you have to plea, and take more time in the plea than what they were after you to begin with. Not worth it at all.
posted by MattD at 4:11 PM on August 21, 2015 [1 favorite]

Are you going to refinance this when it becomes your primary residence? Yes? OK, problem solved.
posted by childofTethys at 4:23 PM on August 21, 2015

Is your boyfriends house in the same town?

Plenty of people do this. You receive all your mail there, maybe even show up once in a while, but essentially it's only your residence on paper even if you have a room there.

A lot of people do airBNBs this way. A lot of people rent their places out on craigslist this way.

I don't really see how it's that different than having two apartments but always staying over at your boyfriends. A lot of people just let a place sit empty without renting it.

If it's say, a two bedroom place, why not set up a room there for yourself and simply rent out the rest of the place, with the understanding that they essentially get the run of it but you're living there... you just aren't there much?

Friends have rented places off craigslist in that situation. They freaking loved it because it's always cheaper than outright renting the whole place. The owner ostensibly lives there but is always out of town for work/at their partners place/etc and just checks in every week and a half at most.(or crashes a few days between trips, etc). What do you think stewardesses, people who work at sea/fishermen, or freight train engineers do with their places? The ones who didn't just give up on having a permanent residence do well... this.

I think, regardless of legality, that this is a lot less of a clean cut case of fraud(in my mind, not legally, once again) since you have a solid plan to move in to it.

How differently about this would you feel if you had a contract to go work on a freighter or an oil platform for most of the next two years, or something?

If this was my thing, i'd "move in" and receive mail there but just spend most of my time... not there, and make it clear to whoever i rented to with something like "hey i'm out of town for work a lot, this is basically your house, i'll text you before i show up".

I firmly file this one under "everyone does it, hold up a fig leaf and no one will care as long as you pay the bills on time".
posted by emptythought at 4:44 PM on August 21, 2015 [1 favorite]

If it were easy to do the right thing, the ethical thing, people would always be ethical. There is a cost to being ethical. If you want to be the ethical person you believe yourself to be, then you will walk away from the sleazy realtor and/or wait until you have the investor 20% saved up. If you want to be ethical, then this is not about the odds of being caught. If you're trying to see what you can get away with, then that's a different question. I am genuinely not being snarky. I'm sure it's true that lots of people do this, and get away with it. But your friend--an expert in the field--has told you this is fraud. Honestly, what more do you need to hear? Is it a pain to do the right thing? Absolutely. That's why so few people do it consistently. Good luck!
posted by Bella Donna at 4:51 PM on August 21, 2015 [1 favorite]

Plenty of people do this

… and in doing this, make everyone else's borrowing rates go up. You're making everyone else's life just a tiny bit shittier. You're dropping litter in people's front gardens. You're making it that tiny bit harder for someone to get that loan, to afford that house.

A fraud charge looks lovely on the résumé. Expect to be ineligible for a whole bunch of jobs. Friends and family will check their wallet as you go by. Although the OP said they weren't going to do this, if they had, then maybe the realtor could be done for conspiracy to commit fraud, too.
posted by scruss at 5:22 PM on August 21, 2015 [2 favorites]

Ok ... this is not legal advice, just my opinion based on my experiences and interactions.

lets not go overboard with this being fraud because, frankly, its more like using a tax loophole than fraud.

Looking at some links from google about "definition of primary residence" its clear that

a) there is no strict definition. There is a lot of case by case evaluation.
b) there are ways to legally satisfy "primary residence" requirements without needing to live there for long.

Lets take this article as starting point. As per this, some questions that will help IRS determine primary residence are:

• Where do you pay your state or local income tax?
• Where do you vote?
• What is the address on your driver's license?
• Where do you get your mail?
• Where is your bank?
• Where are the recreational clubs and religious organizations to which you belong?

also note that the IRS says that "the mere fact that property is, or has been, rented is not determinative that such property is not used by the taxpayer as his principal residence."

So, How do you prove it?

• Keep a driver's license that shows your former address.
• Keep utility bills that could show when you lived in the house.
• Keep a voter registration card that shows the old address.

Also, from another link: as long as the home has a place for you to sleep, a bathroom, and a kitchen, it can be your primary residence. So, if you just keep a room for yourself where you can claim that you come and crash would be helpful.

Its possible to prove that this house is your primary residence. Just understand the local laws and make sure you fulfill the requirements.
posted by TheLittlePrince at 7:33 PM on August 21, 2015 [7 favorites]

Every primary-residence mortgage I've ever taken out has had a piece of paper somewhere in all the documents you have to sign that says something to the effect of "I swear that this will be my permanent residence, and I intend to keep it that way for at least a year, and if I don't I may have to pay back all the money I'm borrowing immediately" -- so there's that.
posted by rabbitrabbit at 9:31 PM on August 21, 2015

If you rent it out you will have to declare the rent on your IRS tax return as rental income and signed under penalty of perjury. Meanwhile you signed a mortgage declaring it as your primary residence under penalty of perjury. You will have signed two declarations under oath that conflict with each other. That's clearly fraud and easily provable. Both tax fraud and mortgage fraud are federal crimes.

You could purchase the property as your primary residence as long as you don't simultaneously rent it out as an investment property for the first year. You don't actually have to live there. This means foregoing a year's rent. But depending on your mortgage document, you may have to refi if you later convert it to a rental. You should ask your bank about this in advance. They may be cooperative if you are upfront about it.

And find a new real estate agent. This agent has indicated that they are dishonest. How can you trust them?
posted by JackFlash at 12:35 AM on August 22, 2015 [2 favorites]

1. Yes, that is fraud.
2. I can't imagine why the bank would ever care or even look into it if you pay your mortgage on time.
posted by Toddles at 9:31 PM on August 22, 2015

I'm having trouble working out the question here. If it's "why is realtor pushing me to do this," the answer is that realtor wants to close the sale and wants you to feel like you're getting a good loan because of realtor's advice.

Your question doesn't seem to be "can I sign the thing and be truthful," because you seem to know the answer to that already.

Is it "what happens if I do this and get caught?" I'm skeptical of the claims above that "people go to jail for mortgage fraud all the time" -- I'd like to see the citation. I have a condo that I rent quite a bit and I just learned that the county in which it sits charges sales tax on short term rentals. When I told my CPA about this, she said she didn't know about the tax, but it exists, and none of her other clients with rental properties pay it. I'm paying it. It's going to cost me a few hundred bucks a year, but it allows me to never worry about this thing again, which, knowing me, would be a problem, even if I never got caught. Maybe you're the same way, maybe not.
posted by craven_morhead at 9:25 AM on August 24, 2015

From the details you provided I am not clear if you could find more money to put down right now. If you don't have any more cash you can do one of three things. You can a) lie or b) arrange your affairs over the next 12 months so as to make this your primary residence or c) invest the money in something else until you can afford the higher deposit, even if that means losing this place. What you can't do is proceed with this mortgage and place, maintain your current living arrangements and not lie, i.e. have your cake and eat it.
posted by koahiatamadl at 12:20 PM on August 24, 2015

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