Cash under the table seen as fraudulently propping up prices
A certain type of cash incentive some homebuyers are seeking may lead them, and their real estate brokers, into a legal gray area...Because real estate transactions in many states are completed without help from an attorney, brokers often are the only layer between their clients and the lender. In many cases that leaves the broker and the buyer liable if they are not properly disclosing the true financial terms of the deal.

Illegal incentives can lead to jail
Cash under the table seen as fraudulently propping up prices

By VINNEE TONG
Associated Press
Posted: Oct. 21, 2006

New York - A certain type of cash incentive some homebuyers are seeking may lead them, and their real estate brokers, into a legal gray area.

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In markets where sellers are struggling to offload properties, some buyers are demanding cash back as part of the terms of closing a deal. The practice is more common now as sellers and homebuilders press harder to close sales and the incentives grow in number and variety.

"You can see that there's really no limit on their creativity on what they're offering," said Chris Hunter of the law firm Morgan Miller Blair, which works with national homebuilders. "They'll list everything from generalized price reductions to interest rates to amenities to trips and shopping."

Because real estate transactions in many states are completed without help from an attorney, brokers often are the only layer between their clients and the lender. In many cases that leaves the broker and the buyer liable if they are not properly disclosing the true financial terms of the deal.

California is one state where transactions are normally completed without the assistance of an attorney. Tom Pool, spokesman for the California Department of Real Estate, said undisclosed cash back deals could lead a broker to have his or her license suspended.

Brokers are fiduciaries, Pool said, so they are obligated to report truthfully to the principals in the deal. If the buyer defaults on an artificially inflated loan, leading to a foreclosure, that buyer could be prosecuted for fraud.

The key to avoiding liability is fully disclosing any cash deals.

If the seller puts money in escrow for repair or renovation purposes, there is no additional risk for the lender. If cash is exchanged and the lender doesn't know about it, the lender isn't getting all the information to evaluate how risky the loan actually is.

Pool said the issues people are raising now are similar to concerns lenders and regulators faced during the real estate boom of the 1980s. The practice of giving cash back at closing or arranging hidden second mortgages led to a significant number of loan defaults and resulting fraud cases then, according to Christopher Mayer, director of the Milstein Center for Real Estate at Columbia University.

"In general, I see no reason why someone should do this - credit is available," Mayer said.

"I can't see any good economic reason for this, but I can think of a lot of fraudulent reasons for doing it."