Be aware of this pattern, typically with residential homes priced from $2 million to $3 million.
Here’s how the scam works . . .
There’s a request from the buyer for the seller to carry back a loan on a residential property.
The deal seems straightforward:
Full price cash offer
However, there are Red Flags that indicate a potential SCAM:
Minimal deposit relative to sales price, e.g. $10,000 deposit on a $2.5 million purchase price
Buyer asks for seller to carry back a substantial portion of the sales price (usually half)
Buyer is an LLC
Sometimes the buyer transfers their position to another “buyer” LLC
Prior to closing, the buyers advise they need a hard money loan instead of using cash
In this scenario, the seller has been moved to second position, with the hard money lender in first position.
Note: this is not always obvious. The buyers make it complicated – and may disguise the switch.
In some of these cases, the closing statements are missing information about the seller being in second position – and don’t mention the additional financing where the hard money loan was in first position
In other cases, the seller advised he didn’t get all of the financing documents
Sometimes, the buyer gets the hard money loan with upfront cash back – so all loans combined (hard money first plus the seller carryback) exceed the purchase price.
Sometimes the buyer asks the seller for cash and adds it to the seller carry back loan.
The transaction closes, and then the problems start:
The buyer LLC makes one payment and stops.
The hard money lender is in first position and forecloses on the home
The seller in second position is left to either cure the loan or lose everything
This situation is disastrous for the seller, and can be a very expensive oversight for agents who miss the switch with the hard money loan.
Beware of any buyers that suddenly need a hard money loan near the closing date. This could be part of their plan to send all parties involved into a frenzied rush to still make the deal happen. When a transaction is rushed, it’s easier to overlook critical elements.
So always do your due diligence with all closing documents to protect your seller, your business, and your reputation.
If you have any concerns about a transaction, wouldn’t it be great to know you could call your CRES ClaimPrevent® Legal Team? All CRES E&O plans include Pre-Claim Legal Services. We’re here 7 days a week to help you prevent claims – and avoid scams like these.
This blog/website is made available by CRES Insurance Services for educational purposes to give you general information and understanding of legal risks and insurance options, not to provide specific legal advice. This blog/website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state. Claims examples are for illustrative purposes only. Read your policy for a complete description of what is covered and excluded.
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