A Builder's Special Incentive ... Your Opinions Please

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Services for Real Estate Pros

Scenario:  A builder actively solicits buyers by agreeing to make their first 12 house payments. The buyers are given a lump sum at closing to use when making the payments.  Like most builders, this one has assembled a team of trusted professionals comprised of a title company, loan officer, and listing broker.

The money is migrated from builder to buyer in a creative way. 

 In one specific example, a commission of 13% was intentionally charged to the builder on the settlement sheet even though the actual commission paid was only 6%.  After closing, the difference between the 2 commission amounts was rebated to the buyer by the real estate broker.

 Selling price of property:    $250,000
Commission @ 6%:             $15,000
Commission @ 13%:           $32, 500

Buyer's payment:                $1,498.88/monthly
Buyer's payment:                $17,986.56/annually

Bottom line:                        $17,500 rebated to buyer

This is an actual scenario shared with me recently.


Question: Is the above scenario an example of mortgage fraud if the 13% commission is represented on the settlement sheet?

 

Click here to view my response.


 

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Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Dan

Thanks for commenting.  I appreciate your opinion. 

Jun 11, 2007 05:50 PM #119
Rainmaker
299,778
Ryan Hukill - Edmond
ShowMeOKC Real Estate Pros of KW Elite - Edmond, OK
Realtor
If it walks like a duck & talks like a duck.... 
Jun 11, 2007 10:56 PM #120
Rainer
15,237
Suburban Chicago Illinois Real Estate
Suburban Village Realty - Barrington, IL

Hmmm.. what makes it confusing is the 6% statement.  I'm going to assume that the 6% commission was not actually on the HUD and that it was stated as 13% charged to the builder.

Which would make it the same thing that some certain new real estate companies are offering... a partial rebate of the commission at closing... just in this case at a questionable commission rate... but as we all know, commissions are negotiable. 

If it is mortgage fraud, how would this be any different then real estate companies offering commission rebates? 

Jun 11, 2007 11:16 PM #121
Rainmaker
95,494
David L. Britt
Platinum Realty, LLC - Olathe, KS
MBA
Ed, this is fraud in Kansas!  Rebates to buyers doesn't work in Kansas either!
Jun 12, 2007 12:00 AM #122
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Ryan

Thanks for stopping by. 

Jun 12, 2007 04:27 AM #123
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Paul & Michelle

Interesting analogy.  In the above scenario, the commission is actually 6% but inflated on the settlement sheet to collect money from the seller to give to the buyer.  It's fraud because an agreement between seller and buyer is intentionally and deceitfully concealed from the lender.

Real estate companies that partially rebate commissions to buyers aren't artificially inflating commissions (hopefully) or hiding the rebate from lenders.  The practice is ostensibly a component of their business model. 

Good talking point.  I didn't think of it. 

Jun 12, 2007 04:35 AM #124
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Ryan

Thanks.  I know little about practices in Kansas and need to learn more. 

Jun 12, 2007 04:38 AM #125
Rainer
26,036
Stephen Graham
Inactive - Atlanta, GA

As a seasoned agent who rebates commission legally, I can tell you the aforementioned scenario is certainly deceptive -- if not all out fraud. It's one thing to give a buyer a rebate from legitimate commissions, but it's another to inflate the commission in an attempt to disguise a "seller" kickback. RESPA has given me strict guidance in this area.

Jun 12, 2007 01:33 PM #126
Rainer
9,298
Shawn Nichols
Homelink Real Estate - Red Bluff - Red Bluff, CA

Hello All,

I also follow the RESPA guidelines when rebating to a client.  We have a special for buyers where we pay the first months house payment if they use us for the loan and sale.  This is a totally different thing as we are not connected to the seller.  The rebate comes from commissions earned from the sale and loan fees.  We do both to make sure that the buyers are getting the best possible loan and we run it at PAR.  So in the end, the buyer gets a better loan, better service, and the home they want at the right terms.  We offer buyers another choice in a market where it can be very confusing. 

I thank Ed for clearing the issue.  When I first read the original post, I assumed the listing contract was for 13%.  If at 6% and they inflated the charges, I would probably run the other way.  We are in business for the long run and cannot afford the bad press something like this could generate.  I read on the NAR or CAR newsletter today that Arizona has made Mortgage Fraud a felony. 

 As to other states than California, each has its own rules and laws.  I have read of a few lately where any rebate at all is now illegal.  Anyone who is in these states, please feel free to make mention of it.

Jun 12, 2007 02:37 PM #127
Ambassador
748,868
ASHEVILLE 1031 PROPERTIES RESOURCES & REFERRALS
Asheville 1031 REFERRING BROKERAGE - Asheville, NC
Tell Us What Is Most Important to YOU
Feels like a no-no to me. I rely on my "gut" and a verse..."If it's NOT ion the HUD, it 's probably MUD."
Jun 13, 2007 06:28 AM #128
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Stephen

Thank you.  Very well said. 

Jun 13, 2007 06:42 AM #129
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Shawn

Very well said.  Thank you. 

Jun 13, 2007 06:43 AM #130
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

janeAnne

You share my sentiments exactly.  If it's not the settlement sheet, there's a very real problem. 

Jun 13, 2007 06:44 AM #131
Rainer
26,036
Stephen Graham
Inactive - Atlanta, GA

Depending on the state you live in, a rebate of commission doesn't necessarily have to be on the HUD. Of course, if the rebate is used for settlement charges, then it must be approved by the lender and recorded on the HUD-1. If a check is issued to the buyer directly from the agent/broker after closing, then it is deemed a "gift".

Now with that said, one cannot conspire to inflate real estate commissions in an attempt to disguise a seller kick-back to the buyer. We all know what normal commission rates are and 13% is not normal! This particular buyer is walking away with 7% and that is more than the broker is making. If this is indeed true, then this kind of behavior is what adds fuel to the fire during the rebate debate. The state of TN can use this as an example of abuse. The USDOJ is not fighting to allow rebates so the practice can be abused. The purpose of the FTC's mission is to allow healthy price competition in real estate, not inflating commissions to kick excessive funds back to the buyer through deception. Shame on anyone who is abusing this practice.

Jun 13, 2007 08:16 AM #132
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Stephen

Thank you for sharing the benefit of your experience and knowledge. 

Jun 16, 2007 05:40 AM #133
Rainer
26,036
Stephen Graham
Inactive - Atlanta, GA

You're welcome, ED.

Jun 16, 2007 09:24 AM #134
Rainer
234,324
Susie Roscoe
Signature Realty Associates - Brandon, FL
Real Estate Specialist | Brandon, FL

I have to say that anything that is not clearly stated on the HUD is indeed fraud...now I'm heading to YOUR NEWEST BLOG to read what you think!!

Jun 17, 2007 05:53 AM #135
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Susie

Good pick up.  Anything that's intentionally concealed from the lender on the settlement sheet is fraud. 

Jun 17, 2007 06:26 AM #136
Rainmaker
600,883
Chris Griffith
Downing-Frye Realty, Bonita Springs, FL - Bonita Springs, FL
Bonita Springs Fl Real Estate
I just had a person contact me to list a townhome they are buying, it is under construction.  The developer is offering them a check for $8K at closing to keep them in contract, not on the settlement statement.  I am not party to this transaction, by the way.
Jun 17, 2007 06:27 AM #137
Rainer
100,724
Ed Rybczynski
Havre de Grace, MD

Chris

Thanks for telling me about this.  Have a wonderful day with your family.   

Jun 17, 2007 06:35 AM #138
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