Real Estate Fraud – Let’s Be Careful Out There!

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By PETER ROSENTHAL, President
V.I.P. Trust Deed Company

Some time ago I authored a column on fraudulent loan applications. I explained my amazement that professional people, i.e. accountants, attorneys, and real estate brokers/agents would risk their profession, huge attorney fees and prison time by assisting clients in submitting fraudulent loan applications. This column addresses a more common problem that many of you may face in the course of selling your house or rental property. I call this the TOO MUCH or TOO LITTLE syndrome.

In the TOO MUCH example, imagine that you have a four-unit building listed for $200,000. Typically the buyer would put 25% down and would obtain a loan in the amount of $150,000. Perhaps the buyer would ask you to carry a second trust deed for $20,000 to $30,000. In this scenario the buyer makes you an offer of $275,000. They intend to get a 75% first trust deed, i.e. $206,000 and through a variety of schemes you, the seller, are asked to simultaneously refund the EXTRA $75,000. No big deal – it’s done every day. Well, banks are robbed every day and we all seem to take that in stride. Tens of thousands of checks are written every day with insufficient funds or on a closed account. Though this is a crime, it’s “ho hum” to most police departments. Although these TOO MUCH offers are done on a routine basis by some individuals, it is truly a Federal offense and a MAJOR felony. I can’t recite the penal code, but it goes something like “conspiracy to defraud a Federal lender.” When the net drops, it doesn’t only effect the buyer who instigated this; it effects the seller, usually the crooked appraiser, and sometimes the real estate “professional”. If you’re just an innocent seller you probably will not go to prison. The question is, can you afford $50,000 to $100,000 in attorney fees. Criminal attorneys are not cheap.

If you get an offer along these lines run, don’t walk, to the nearest fire exit. If there is a real estate broker/agent involved, I BEG you to report the incident to the Department of Real Estate. If you’re exposed to an offer like this and don’t know who to complain to, give me a call and I’ll put you on the right track.

Though the TOO LITTLE concept has been around for years and years, it is much more prevalent these days. Many real estate professionals are faced with this problem on, sometimes, a monthly basis. The same four-unit apartment building is listed for $200,000 and an offer comes in for $140,000. The offer really represents a $190,000 offer, and $50,000 will be given to the seller “OUTSIDE OF ESCROW” in one form or another – usually CASH. This is “theoretically” a win/win deal for the buyer and seller. The concept is that the buyer pays a substantially reduced property tax year-after-year and the seller pays a substantially reduced capital gain tax. The buyer gets rid of some hidden cash and the seller sees this as an opportunity to have a hidden nest egg. This has become very common and is done in some form or another many, many times every day in California real estate circles. Is this a Federal offense? You betcha! There is no question this is a violation of State penal codes, but it also constitutes MONEY LAUNDERING. The Federal Government is REALLY SERIOUS about this.

In closing, I must add that I am not really “that naïve”. I’m very aware of the wide scope of these “conspiracies”. Fortunately, the vast majority of professionals give these practices a wide berth: YOU SHOULD TOO.

Peter Rosenthal
VIP Trust Deed Company