Mortgage underwriters have been restricting their guidelines over the last several months, making it harder for many buyers to qualify for their mortgage. This, of course, brings out the "creative" side in people - buyers, sellers, realtors, and lenders - all looking for a way to maximize their effectiveness within the new set of rules.
Yesterday I heard about a new system that I think crosses the line between creative and shenanigan. Here's an overview. (it can be a little hard to follow, so bear with me...)
Mr. Buyer goes to work for a membership-selling company, getting paid a fat commission for every membership he sells. Mr. Buyer then sells a membership to Mr. Seller. The membership will provide discounts to certain home-furnishing stores. Mr. Seller pays upwards of 6% of the sales price of his house for this membership. 1% of the fee is kept by the membership-providing company; the remaining 5% is paid out to Mr. Buyer in the form of a commission – a fully legal commission which will require a 1099 at the end of the year. Mr. Buyer then uses this 5% of new-found, "legitimate" money as the source of his down payment for Mr. Seller's house. The rest of the contractual terms, including any closing cost assistance provided by Mr. Seller, would be unaffected by this arrangement.
This seems perfectly legitimate on the surface. But now let's ask some tougher questions. (I'm going to assume a $350,000 sales price for this example.)
Is it realistic to believe that anyone would pay $21,000 for a discount-type membership? I'm pretty sure my Costco membership is less than $100.
Isn't there a massive conflict of interest, or other stronger term, that the Seller is buying a $21,000 membership from the Buyer, which might be the only way the Buyer can afford to buy the house the Seller otherwise can't sell?
If this is a legitimate company, selling legitimate memberships, and paying legitimate commissions, how many employees/contractors sell more than one membership?
How many legitimate companies are there where you can earn a $21,000 commission within a month of starting your new job?
If this arrangement is purely to expedite the sale of a house, doesn't it create an artificially high sales price? The Seller would net the same amount by lowering his sales price $21,000. And isn't an artificially high sales price, not disclosed to the lender, considered loan fraud?
In my opinion, this is another one of those "ideas" which is deep into the gray area – probably a dark charcoal. I've said it before, but if it looks like a duck and it walks like a duck...
ps – I'm not a professional astrologer, but let me peer into the future... I see lawsuits. lots of lawsuits. coming from Mr. Buyers. very upset that they received 1099s for a mysterious $21,000, when all they wanted to do was buy a house. Mr. Loan Officer, and Mr. Realtor, you've got some 'splainin to do..
Your sitting this one out Realtor,
[tags] mortgage fraud [/tags]