Loan Fraud

I have seen some strange property listings in the past year. They follow the pattern of a Central Tucson house that is currently in escrow. Here's the home's sale history:

March 2006, sold for $201,000.
May 2006, sold for $350,000.
August 2006, sold for $375,000.

In November 2007, the lender from the May 2006 sale purchased the house for $319,000. All these transaction occurred outside the Multiple Listing Service. Now it's listed for sale at $230,000.

What's going on? I went to see this house, expecting that it had been over-improved by some ill-advised investor, but that wasn't the case. Original kitchen, windowless dining room in the center of the house, mish mash of floor coverings, no landscaping. The carport was hastily enclosed with small windows and wall AC, and it still has the unfinished, sloping, concrete floor, but the carport enclosure is brazenly called a bedroom. Your typical Central Tucson do-it-to-yourself project.

I asked the listing agent why it was listed at $145,000 below last year's sale price, and she said she thought $230,000 was about what it was worth. She didn't know why someone paid $375,000 for a house that has such a bad floor plan and no upgrades. Her client (the current owner) is the lender who acquired it from the $375,000 purchaser. She thought loan fraud may have something to do with it.

That seems like a good guess to me, too. Before the lender bought it, the buyer who paid $375,000 received 100% financing, in the form of two loans, one for $300,000 and one for $75,000. There's no way a legitimate appraiser could say this house was ever worth $375,000.

The problem with these high jinks is they distort the comparable sale data that we Realtors use to evaluate property values. Any real estate agent familiar with Central Tucson would look at the $375,000 sale price and know something is fishy. Unfortunately, agents who are new to this business might not hear alarms, because they may not realize they should look at the sale history of any house they are selling.

Inflated sale prices may also skew the automated programs like Zillow.com, as well as the program that calculates our property taxes. Bogus sales give sellers unrealistic expectations of their home equity, and may cause unwary buyers to over pay for comparable houses.