I recently saw a home go up for sale in my area. It sat for a reasonable amount of time and then sold (maybe 2 or 3 months). It was priced well.
I decided to check out Zillow to see what it sold for.
BTW, it was listed for 629K.
Zillow says it sold for 650K.
FirstTeam’s archived page said it sold for 620K.
Wayback time machine says it was listed for 628.9K
Which one do you believe?
It’s possible all of them are right. House sold for 620K with a kickback to buyer for 30K, not including other concessions. Buyer gets financing based on 650K.
Who was helped by this: Buyer, Seller, Agent
Who was (could be) harmed by this: Bank (bagholder)
And people wonder why credit will be restricted. The same house sold for 620K in February 2005. We’re already back to February 2005 pricing in February 2007. Not a great moneymaker when the same house model can be rented for less than half of the after-tax equivalent of buying. It depends on how much tolerance you have for fraud. Cash back at closing not stated in the escow document is a good place to start.
Still, you’ll say, Chuck, this is just one house out of many. True. There are many, many more which did not get sold in February and will need to compete in a restricted credit environment. These owners got out by the skin of their teeth. The next ones may not be so lucky.
There are plenty more where that came from. Throw a stone nowadays and you’ll hit real estate fraud.
Where is the Title Company culpability in this?
Steve the Dog
woof.
You mean title insurance?
As Colonel Klink said:
I see nothing, I hear nothing, I know nothing!
Chuck
I think that was Sergeant Shultz…
I used to really like that show. I think Richard Dawson got his start there. Too bad about Robert Crane…
Oh, yeah, that’s right. Got my Hogan’s Heros mixed up there.
My bad.
Chuck
I truly believe that the only way these recent sale prices did not drop that much is that the sellers are offering cash kickback for the purchase or other incentives. I think the “true” selling prices are at least 7-10% lower than what they’re telling us. For example… some dude sales his house for 270k… but it’s listed as 300k in paperwork. The buyer puts down nothing but in papers… he puts down 30k…
) What you guys think ?
This is a problem often discussed on some of the appraiser forums. Seems that MLS does not require or does not enforce the disclosure of these concessions. Many appraisers who utilize these properties as comparable sales do take the time to call the realtor but this is often a waste of time as often the parties are not interested in disclosing this information.
If I may I’d like to make note of a bigger problem – 80% of all appraisals for purchases and refis are typically ordered by 3rd parties who have a financial interest in assuring that whatever inflated deal being proposed squeaks through. This means that “comp checks” or predetermined values are offered by those appraisers who want to maintain business with these mortgage brokers. This is a clear violation of professional standards but is commonplace. Those who do not abide are often relegated to appraising as a part time hobby. This contact between loan originators and appraisers has resulted in the appraisal profession turning into a complete joke.
As someone who has been shunned for not hitting the number or providing a value up front, and as someone who has done reviews of appraisals in Los Angeles County I can tell you that the level of fraud is epidemic. By fraud I mean from outright disinformation to the more prevalent case of ignoring the most relevant sales and utilizing superior properties as comparable sales to elevate the value of the home of interest. Worse yet, home purchases pushed through via elevated appraisals have been utilized as comparable sales in legit appraisal reports creating a snowball effect. While the pressure from the loan originators is the most important, it is not the only source. I have had buyers and buyer agents contact me to try and get me to raise the value opinion of the home they are buying. What backwards universe does this exist in? The backwards universe where the extra $50,000 they want me to add to my value opinion and therefore agree with the contract purchase price will cost them literal chump change per month with the low % ARM they were applying for at the time but will get them into the house. In many cases it seems that this is the ARM loan that is probably exploding in their face right now. So instead of a renegotiation based on the appraisal amount or god forbid this buyer passing on the deal so that someone who could actually afford a proper down payment gets to bid on the house, typically an inflated appraisal made the whole deal go down nicely.
Chuck,
I linked to you in my latest post: Southern California’s Cultural Pathology.
http://www.irvinehousingblog.c.....pathology/
http://tinyurl.com/2ofb2u
Come check it out.
Excellent Post.
Cultural issues are just as important as the financial issues.
Chuck Ponzi
Nice post Irvine.
I think debt exhaustion and run away inflation also contribute as much as psychology.
I was looking for signs of debt exhaustion for a while there. Cause i’m an engineer and new to all of this I didn’t realize it at first.
Basically all those Neg AM/IO products screamed debt exhaustion. Unable to service the rates on the loans and the FED was unable to drive rates lower.
So, it goes beyond psychology in a lot of cases. The huge account and trade deficits are just strangling us. Funny that Ross Perot talked about this… a lot of others as well back in the Reagan years.
Boy is this going to one jujuflop flop of a situation.
LAEF2,
I had a unique perspective into the end of the speculative blowoff. In June 0f 2006, I was working for KB Home. That month their national sales dropped from 800 per month to 250. It wasn’t a slow, gradual decline, it simply fell off a cliff. Being a bubble watcher, I knew exactly what it meant, and as any rat would do, I left the sinking ship.
All these factors seem to be coming together in a perfect storm.
I talked to my brother.. college friend worked at New Century and just got the boot a few weeks past.
Small world.
This crisis will hit everyone.
No industry is really safe.
Government will have less money.
Discresionary spending will go down.
China will get burned with over production.
Finance will have a slowdown and major displacements.
Oh. Just funny how the Doug Adams lines from Hitchhiker applies so well. I forget which book but the finance minister notes that since everyone had been on a state declared holiday for the last five years, and since nobody had done and work; it had become one whole jujuflop situation. The entire civilization had collapsed overnight.
Wonderful analogy for our current situation.
The Washington Post just posted a story about widespread mortgage fraud and appraisal fraud in Atlanta [url at bottom]; the story ends with the the postulation that the fraud in Atlanta looks so widespread only because the local prosecutors and real estate professionals got together to look for it after some huge blatant scams came to light. The “unstated rebate” noted above by Chuck is smaller but still the same animal.
Question: how is the seller rebate offered by ziprealty any different?
http://www.washingtonpost.com/.....?nav=slate
I think it’s fundamentally different. The commission rebate is from a disinterested third party as an incentive to do business through that intermediary… it’s good for reducing transation costs in buying and selling houses.
Kickbacks given by the seller inflates the value of the property to the bank (interested third party) and allows buyers to profit from the bank’s ignorance to that in the transaction. If the final settlement paperwork were given to the bank, then I doubt that the bank would see eye to eye on the appraisal.
Essentially, if I buy a 500K house and anyone else can come in and only pay 500K, then the seller is no worse off, and it would be valued at 500K. Now, if the seller would sell it at 550K, and “rebate” me 50K, then the house’s value is really 500K, and banks need to know that. Unfortunately, it requires that an appraiser is brought in to “hit the number” of $550K. That’s fraud.
Now, if I choose to go through a lower-service buyer agent who rebates me a portion of their commission, I haven’t fundamentally changed the purchase price, I just have a more efficient buyer’s agent, and I get the rewards for it. The value is not inflated to the bank (interested third party, again), so I’m just fine.
Big difference.
Chuck
“I just have a more efficient buyer’s agent, and I get the rewards for it”
I don’t think efficient is the word I would use…
Chuck
I recent;y received an offer to buy into a development and receive a 30,000 cashback consession plus all closing cost paid in full. Should I proceed – could this be a scam? While doing my research I came across your comment above – but you state that the buyer benefits from this – how so? What is the worse case scenario for me as a buyer? Will I be able to sell in the future?
The problem of cash back can fall into 2 different kinds:
1. An agent sacrifices part of his/her commission to you. Since you don’t pay the commission as a buyer, you’re not trying to convince the bank of a higher value to the property.
2. The seller pays cash back as part of “sweetening the deal”. While this is illegal, the industry has looked the other way. I know it happens as a normal course of business, and frankly, I’m not all that concerned with it unless it exceeds a couple percent of the transaction (for closing costs, etc).
Either way, I think it should be disclosed to all parties in the transaction, and perhaps even recorded in the sale information so “net sale proceeds” can be compared to like-kind sales. That levels the playing field.
For example, it means nothing if your neighbor sold their house for 600K and had to offer $100K in cash back. The bank is not aware that the house is really worth 500K, neither is the next comparable sale. It’s a system fraught with error and stupidity. In recent years, cash back at closing has become rampant and part of the business.
With all of that said, I wouldn’t personally judge you if you took cash back. But, remember, you’re paying tax on the inflated value, so if you don’t need the money, the seller is just trying to save face to previous buyers. In new homes, this is part of the “trick” to offer concessions so that previous home buyers don’t get their panties in a twist.
Chuck Ponzi