Fraud Alert #1: Full Price Offer, Minimal Deposit, Large Carryback
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
- Quick close
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.
Scam #2: Two Escrows, Late Changes, Cash Out
Higher interest rates can mean that borrowers will look for alternative means of financing. Enter new seller carryback loan scams, designed to defraud your seller of money and their property. Here are some red flags to watch out for . . .
Buyer’s agent has never met the buyer/borrower – COVID protocols made it easy for fraudster “clients” to avoid meeting their agent in person. These “clients” look and sound legitimate but use someone else’s identity to take out a loan and purchase property.
Two escrows – Often a sign that the property is being resold immediately after the underlying sale (the one with the seller carryback loan), and the seller is being moved to a junior position
Borrower wants cash and they will wrap it into the loan – The borrower asks for cash up front from the seller and wraps the cash into the loan. The risk here is that the borrower does not pay back the loan so the seller is out the cash and the property.
Last minute changes – Last minute changes to the contract, wiring instructions, bank information, addenda – changing title, ownership, or moving the seller’s loan to a junior position. Read last minute changes carefully. Understand what is being changed and why and who is making the change. How does this change affect the seller?
Learn more about how to protect yourself and your seller with a carryback loan.
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 real estate 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.
We’re part of one of the largest insurance brokers in the world, so we can help find you the best coverage at the best price from our unrivaled access to more options than anyone else!