Buy and Bail – The Latest Flavor of Real Estate Fraud
June 13th, 2008 by Mark Flanders“Do you think its okay to help a client who wants to buy a new home now, so she can then let her current home be foreclosed on?”
This question was posed to me 2 weeks ago in a meeting at my office. The Loan Officer asking the question has been originating loans for many years. She’s a wonderful person, but suffering from a lack of business just like many other Loan Officers around the country. It was an unexpected meeting as we no longer work together. She just stopped in for a visit. We were catching up on each others lives, both professional and personal.
This was the first time I heard of a new form of Real Estate Fraud called “Buy and Bail”. The process goes like this. A homeowner, realizing that they have either no equity in their home, or worse yet, negative equity, attempts to buy a new home, with the intention of letting the old home go into foreclosure after the new transaction is complete. In order to pull this off, the homeowner often provides the lender with a Lease Agreement to artificially inflate their income so the homeowner can qualify for both mortgages at the same time.
After my initial “You’ve got to be kidding me” response, I asked some more questions, thinking maybe I had misunderstood the buyer’s intent. I hadn’t. This was a deliberate, planned attempt to get a new mortgage by misleading the new lender. The buyer had no intention of telling her new lender what she was planning.
This story is morally repugnant on so many levels, I don’t even know where to start. My first reaction was, “this client will have a difficult time finding real estate professionals willing to get involved”, then I found out the client already had a Real Estate Agent working for her, and the Agent was fully aware of what the client intended. The client also had engaged a willing Loan Officer to handle the new mortgage.
I told my friend simply, “If you have information about a transaction that you deliberately withhold from the lender, you are colluding in a deception”. I walked away, shaking my head, hoping she had heard me and would stay as far away from this transaction as she could.
A Wall Street Journal Article
Yesterday I was not surprised read an article in the WSJ, detailing an instance of this scam that is happening in California. The buyer not only thinks nothing is wrong with her plan, she has let herself be quoted in a major newspaper. Her Real Estate Agent’s quotes make it obvious the Agent sees nothing wrong with the plan either, calling it “a business decision”. I hate to state the obvious but “a business decision” to screw a lender, is not a good “business decision”. And any Agent who helps promote it puts themselves in legal harm’s way. The same goes for any Loan Officer who might get involved. And any appraiser (if they are privy to the plan). Not to mention the (probably ficticious) “renter” who signs the lease agreement.
Difficult economic situations, like we have in America today, are just that; difficult. It doesn’t give any of us the right to lie, cheat or steal to improve our own financial situation. Nobody forced this woman to buy a house in the first place. She bought a home, most likely, because she thought she would benefit financially. She made a decision, hoping to improve her personal situation. Now that she finds her decision has hurt her, she wants someone else to pay for a bad decision.
If you are a consumer, and have heard of this ploy as a possible way out of your negative equity, go talk to a lawyer as fast as you can. If you are a Loan Officer; run. And the same goes for any Real Estate Agent who might read this article. Contact your brokerage’s attorney before getting involved. This isn’t the newest opportunity in real estate, this is dangerous territory.
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Tags: buy and bail, ethics, real estate fraud
