It’s bad enough that our inventory levels are high, buyers are scarce, and some sellers are really not interested in selling at market value.
Predators are out there committing mortgage fraud and even if it doesn’t happen to our deals, now it could cause our sellers grief if we’re not careful.
I’m talking about not being cautious when preparing a Comparative Market Analysis, and overestimating market value because a few of the recent closed sales were fraudulently inflated.
I recently discovered two neighborhoods that may have been affected this way, by suspicious cash back deals that were way too good to be true. I found sales comparatives that were listed for months without selling, then suddenly the list price jumps up and the property sells for well above the price of similar homes. And the buyer takes out 100% financing (usually an 80/20 combo) as owner occupant but uses a different address than the property.
Something fishy, you think? Yes, especially in one neighborhood where I found one buyer bought two homes for $550,000 each… the same month nearly identical (or better) comps closed at $450,000 and $420,000. The two homes in question had both been listed at around $480,000 for months before they went under contract.
Still don’t care? Doesn’t affect you? Perhaps you’re one of the listing agents representing the nearly 30 current sellers of very close comparable listings in that neighborhood. Is your seller’s property listed in the low $400k’s or in the low $500k’s? Were they counting on you to help them set the right price? Are they wondering why they are getting no showings at $500,000, while they continue to pay carrying costs on a home they want to sell? Are you wondering when you’ll have your next closing so you can pay your own mortgage?
First, those deals are likely mortgage fraud… where the buyer (and/or third parties, such as appraiser, mortgage broker, real estate agent, title company, and intermediaries) received a hidden cash payment after closing which the lender was not aware of. Nobody wanted the property at the list price, let alone the sales price.
So we shouldn’t count them in a CMA… however, we probably need to explain to our customers why the sales carry no weight, since they may be aware of the neighborhood sales and are expecting to get similar results. That may be a difficult conversation, but it will also be very difficult to sell an overpriced listing unless we find another buyer just like the fraud artists… and why would anyone want to be involved in that?
The unfortunate thing is that the poor market has actually made these schemes easier for the crooked buyers. They simply need to find a motivated, desperate seller who’s been on the market a while, who is willing to look the other way or may even think such a deal is totally OK, as long as they can sell the place. Heck, the buyers may even find listing agents anxious for a sale who think it’s OK. (But it’s not OK, right?)
More than just affecting the lenders, these illegal deals will fool sellers into listing too high, and potentially cost them thousands of dollars as real prices decline even further. Would you rather have a seller who lists and sells for $400,000 today, or $350,000 in six months because you used bad comparable sales and initially list their home at $500,000?
If the comparables don’t make sense, take a closer look. Check the price history leading up to the sale if your MLS system displays it. Check similar neighborhoods to see if pricing is in line. Wide spreads in closed prices for similar homes or sales above original list price should be red flags. If you can, call the listing agent and ask if there were any concessions or cash back, or if there was a reason for the disparity (but don’t expect to hear the truth every time).
This type of fraud is happening everywhere… we can’t stop it all, but we need to minimize its impact on our sellers by being aware of it and more careful in our pricing analyses.
September 25, 2007 at 9:08 pm
Interesting angle. Real Estate fraud is rampant and inflated CMAs are another way for unsuspecting buyers to get taken to the cleaners.
October 6, 2007 at 6:15 pm
Mark thanks for the comments… Wouldn’t the buyer pick another cheaper property… unless he was only shown a very limited number of homes?
Smart buyers should of course take advantage of all the information available (and from various sources such as appraiser, agent, and the Internet) to help make a purchase decision.