Beware of price inflation transactions

The following article comes via the California Department of Real Estate...

It has come to the DRE's attention that in recent months, there has been a number of purchase offers being negotiated throughout California that involve offers to purchase that significantly exceed the listing price. These purchase offers specify that the amount offered over the listing price be refunded to the buyer or to a third party at the close of escrow. While there are many variations to these purchase transactions, it is typical for these offers to be $70,000 to $100,000 over the listing price. The purchase agreements often have addendum directing these monies to be paid through escrow either to the buyer, or to a third party sometimes described as a repairman.

These transactions carry a high degree of risk of default and foreclosure for the lender because the buyer essentially has no money invested in a property that is most likely over encumbered. While there is not a specific provision in the Real Estate Law that prohibits an arrangement such as the one described, these transactions raise significant concern that the lenders funding the loans are not aware of the terms and are being defrauded. Real estate licensees should exercise caution when representing parties in these transactions. Diligent efforts should be made to ensure that the lenders who ultimately fund the loans are aware of the original listing price and of the fact that there is cash being rebated through escrow at the direction of the buyer. One method for accomplishing this is for the listing and/or selling agent to require as a condition of closing escrow that the lender sign an addendum acknowledging awareness that the property was sold for an amount over the actual listing price and that there are monies being refunded through escrow to the buyer or a third party.

Depending on the circumstances, real estate licensees who participate in these transactions subject themselves to potential disciplinary action under general statutes prohibiting participation in fraud or dishonest dealing. Also, the real estate appraisers involved in these transactions share in the risk of potential disciplinary action as their appraisals will be referred to the Office of Real Estate Appraisers to determine if the comparable sales used to justify the appraised value were valid. Morever, in addition to potential license discipline and civil liability, there is also the prospect of criminal prosecution under federal or state law for defrauding a lending institution, and this applies not only for the real estate licensees involved, but also for the appraiser as well as for the buyer and seller. When faced with the possibility of representing a buyer in one of these transactions, or when one of these offers is presented on a listed property, real estate licensees are well advised to take steps to ensure that the transaction terms are in the open for all parties to consider.

To avoid potential consequences at a later date, remember the old adage: When in doubt, disclose, disclose, disclose, and do it in writing. In addition, a licensee may be best advised to seek their own legal counsel prior to being involved.

[We do not participate in fraudulent transactions, and report to and cooperate with State and Federal authorities in bringing those who do to justice.]