Is a deal worth going to prison?

As lending standards loosen, the environment for fraud — and cautionary tales — returns 

BYJIM WEIX

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When former Keller Williams and RE/MAX real estate agent Holly Pasut shared her experience of going to prison for a 2013 mortgage fraud case, my heart raced. Had it not been for good legal advice, this could have just as easily been me.

I remember clearly the day that I came to my office and noticed a dark Suburban parked at my office’s front door. Upon entering, I saw my receptionist with a shocked look on her face. Next to her were two serious looking men in suits, sporting FBI shields.

The crazy days of ‘liar loans’

For several years before the real estate crash in 2008, I was living was a Realtor’s dream. I had my own brokerage firm, with 12 agents, and life was good. Not only did homes sell quickly at record prices, but also the buyers often threw a fresh coat of paint on them and relisted them with you at an even more ridiculous price.

Even more astonishing was the fact that nobody seemed to get turned down for a mortgage, and the homes always appraised.

Even the fellow who cut my grass was able to qualify for a $400,000 mortgage with no money down. This was because he could declare any income that he wanted and didn’t have to provide any documentation.

Then comes the creative deal

In 2006, I got a call from the owner of a new small real estate company. He asked me about one of my ocean access canal homes. I met him at the home, and an hour later he gave me a full-price offer of $700,000. I was amazed because the home was overpriced by at least $70,000.

It was not uncommon, with annual appreciation rates of 30 percent, that sellers would price their home high and wait four months for values to rise. But this offer was unusual. Although the purchase price was $700,000, the buyer would get a 3 percent cash credit, and the seller would pay a 7 percent commission to that real estate company, and I would also pay a $30,000 referral fee.

To top it off, the buyer was doing 100 percent financing.

When I questioned the broker, he explained that the credits and commissions would be used to fix up the properties, rent them out and then resell them for a profit in about a year. Given the real estate market at the time, it seemed like a reasonable business plan.

Run to the attorney

I was fortunate enough to have an attorney who used to be a prosecutor for Florida’s Division of Real Estate. I blocked out the buyer’s name and purchase price, and then I emailed him the sales contract. I also advised my seller to contact his attorney.

My attorney responded that as long as all of the credits and commissions were included in the closing documents, there should be no problem. He doubted, however, that the buyer would ever get financing for such a deal. The seller’s attorney also agreed.

Not only did the buyer get financing, but this same buyer — plus two others — got 100 percent financing on another 12 homes. Seven of those homes were my listings.

How this scam worked

Although it appeared that this real estate company was simply making a killing in commissions, this group — the real estate company and the three buyers — were in reality sharing the roughly $100,000 in credits, commissions and referral fees.

The 12 homes purchased and financed at 100 percent resulted in about a $1.2 million windfall. Whether they ever intended to fix up and resell the properties is unknown, as the real estate market began to crash. However, with most of the purchases, the buyers only made a few payments, if any at all. The result was that all of these homes went into foreclosure.

Here comes the FBI

Although foreclosures were rampant at the time, 12 foreclosures involving the same real estate company and same buyers caught the attention of the FBI. A number of other local real estate brokerage firms and agents were suddenly getting surprise visitors — and they weren’t looking to buy or sell a home.

Their investigation lasted about a year. During that time, the listing agents involved were getting to know the FBI agents way too well and wondering if their phones were tapped.

In the end, the real estate broker, the three buyers and a mortgage broker all went to prison.

Tread carefully, and get legal advice

Like real estate agent Holly Pasut, many agents will encounter unusual or creative real estate situations in their careers. This doesn’t mean that they are scams, but you need to keep yourself protected by fully understanding the deal.

The return of so-called “liar loans,” where buyers simply state their income and may not have to provide much in the way of proof of income, creates an ideal environment for fraud. The last thing you want is to be connected in any way.

If you find yourself questioning a particular deal, talk to your broker. Let them run it by their firm’s attorney. You might also want to talk to a real estate attorney you know.

Jim Weix is a Broker Associate with The Keyes Company, Florida. He is best known as being the catalyst that brought about “MLS of Choice” nationally.