Buyer Brokerage: What is a “Fraudulent Activity?”

Home buyers in Georgia often sit down with their Realtors prior to previewing homes and have a buyer’s orientation.  This process accomplishes a plethora of preparation activities and not only includes an overview of the buying process, but also a discussion of the Exclusive Buyer Brokerage Agreement (BBA).  The BBA is an agreement between the broker and its affiliated licensee (your Realtor) that allows the Realtor to legally represent the your interests.  In fact, it’s illegal for a Realtor to provide advice without the BBA.

During the buyer orientation, I often get questions about various sections of the BBA.  As a result, I thought I’d provide an overview related to those items that are sometimes confusing to buyers.  Today’s post is about fraudulent activities.  While I am not an attorney, I can offer some examples related to the BBA content.  Paragraph 11 of the Georgia Association of Realtors (GAR) BBA reads:

Disclosure of Potentially Fraudulent Activities
A.  To help prevent fraud in real estate transactions, Buyer does hereby give Broker permission to report any suspicious, unusual and/or potentially illegal or fraudulent activity (including but not limited to mortgage fraud) to:
     1.  Government officials, agencies, and/or authorities and/or
     2.  Any mortgage lender, mortgage insurer, mortgage investor and/or title insurance company (and/or their agents and representatives) could potentially be harmed if the activity was in fact fraudulent or illegal,
B.  Buyer acknowledges that Broker does not have special expertise with respect to detecting fraud in real estate transactions.  Therefore, buyer acknowledges that:
     1.  Activities which are fraudulent or illegal may be undetected by Broker; and
     2.  Activities which are lawful and/or routine may be reported by Broker as being suspicious, unusual or potentially illegal or fraudulent.

Clear as mud, right?  After having done countless buyer orientations, I have yet to have a buyer sit up and say, “I know what a fraudulent activity it.”  Unfortunately, this is one of those examples where ignorance is not bliss.  When fraud occurs, somebody goes to jail.  So, what are "fraudulent activities?”  They can include one of these elements:

• Making ANY false statement to a lender.
• Accepting rebates or credits as a result of the real estate transaction that are not disclosed on the settlement statement.  This could include selling bonuses to Realtors, cash incentives from sellers to buyers “under the table,” or inclusion of high value items as incentives such as keeping the boat in the back yard.
• Unacceptable, undocumented, or misrepresentation of the buyer’s down payment.  This is often a confusing element when buyers are using gift money for their down payment.  Gift funds are acceptable, with the proper documentation.
• An inflated appraised value for the property that is the collateral for the mortgage loan.
• Secret second mortgages, which may or may not be recorded.
• Bogus earnest money deposits.
• Falsely claiming that the owner will occupy the property.  Some loans are intended only for owner occupants, not investors.   If a buyer gets one of these loans (e.g., FHA or VA), then the buyer will have to sign a statement at closing that they will occupy the property.  Some loans ask for verification that the buyer will occupy the property for a specified amount of time.
• Using a fictitious or stolen identity on the loan application.

In addition to the loan-specific fraud, there are a other types of schemes that have been tried such as:

• Foreclosure re-mortgaging.  Homeowners who are at risk of defaulting on their loans or who are already in the process of having their homes foreclosed may be solicited to transfer the deed to their home to a “professional” who is supposed to help stall or eliminate the foreclosure.  Unsuspecting homeowners pay a fee for the service, but the schemer may re-mortgage the property and take any existing equity or pocket the fees paid by the homeowner.
• Equity skimming.  This is a scenario wherein false credit reports and income documents are used to secure the purchase, then the buyer signs the property over to an investor via a quitclaim deed.  The investor does not make mortgage payments and rents the property, pocketing the cash, until the bank eventually forecloses.

These activities are serious and scary.  Fortunately, they only occur in extremely small percentages of real estate transactions.  The bottom line for a buyer is to have clear and frequent communication with the Realtor who is representing him/her.  Any questions, concerns, of “funny feelings” about the activities surrounding the real estate transactions should be put on the table.  For more information about buyer representation, give me a shout out.  I’ll be happy to discuss the pro’s and con’s.