How does this work?

A friend of mine at work keeps buying houses and cashing out large amounts of money at each closing. I’ll use all arbitrary numbers, but from what I understand he has a seller who is willing to sell him a house at say $100k, he then has it appraised by his mortgage broker for $150K, at closing he satisfies the seller for $100K then puts $50K in his pocket. Before I go any further I need to add that his mortgage broker is a relative and I believe the closing attorney and appraiser are all aware of what is going on. First and foremost, is this mortgage fraud? I understand that many of these loans are sub prime and they try to refinance very quickly or at the very minimum rent these houses out to cover their mortgage costs, but the bottom line is he says he’s making large amounts of cash at the closing. I’m just a little confused?

What’s your take…I’m real curious to hear.

Howdy Malone:

If his friend is the loan broker and the appraiser is also a friend this is illegal. It is supposed to be an arms length transaction especially with the appraiser. He could be doing phony appraisals and getting part of the scam. Call the FBI and Federal Trade Commission and report your friend if you suspect wrong doing. One way to tell is if they are getting $150K loans and the fair market value of the home is $100K. You may pull some comps or something to check them out if you can find the loan amounts too. It is not illegal to over finance a deal as long as he is getting an honest bargain. But this set up sound suspicious.

I think whoever is doing to appraisel is definitely adding a little “fluff” to the actual market price. But if it is an honest appraisel and the seller is willing to sell at their predetermined price regardless of what the appraisel comes in at, then your saying there is nothing illegal in what their doing?Where’s the checks and balances for the lender to know that the seller is asking for one price but in fact they are over funding to put up front money in the buyers pocket? Correct me if I’m wrong but I always thought mortgage lenders lent money per the stated amount on the sales contract, not the appraised amount?

I agree that this is very suspicious. If it is in fact illegal activity this is the same crap that caused problems in the Cleveland,Oh market and started the whole section 32, High cost loans issues. >:(


Without ALL the details, it is impossible to say whether it’s being done illegally or not.

There are lenders out there that will loan against the appraisal regardless of the purchase price. HOWEVER, the most that I’ve ever seen is 80% of appraised value. I’ll also add that the lender usually requires an approved appraiser to do the appraisal as well.

From what you’ve said, it does sound suspect, but again, we don’t have all the facts. IF he is getting a 100% loan, then it has a strong possibility of fraud.

What is your friend doing with all the cashout money? If the appraisal is padded, and he’s just blowing it, then he will probably be taking a big fall soon, whether the deal is fraud or not. When one or two properties become vacant or don’t rent soon, the castle will start crumbling.

If it is fraud, then I hope that he’s put alot of it back to cover the legal expenses.

My thoughts,