Closing Real Estate Transactions in the Post-Subprime Market: Appearances Count!

[Kathleen A. Scanlon, Esq.]

It was a wild ride the last couple of years...house values skyrocketed with seemingly no end in sight to appreciation, No Income No Asset (NINA) loans were all the rage, 106% financing was fashionable and making home ownership available to all was admirable. Well, the bubble has burst and real estate practices that many did not think twice about are now re-categorized as "fraud" because you are denying the bank's "right to know" (never mind that bank's utter failure to do any due diligence). I want to discuss some of these practices that some of you may have engaged in without a second thought, because now that America needs a scapegoat for the financial mess (created by the banks), the real estate industry is being scrutinized and folks, it is a witch hunt out there.

Undisclosed Credits
Remember that credit for the roof that would just be in an agreement drafted at the closing table between the parties? Well, all credits between buyer and seller are supposed to be disclosed on the HUD-1. Failure to do so could be considered fraud, especially in an FHA transaction.
As a matter of practicality, it can often be difficult when a purchaser does their pre-closing inspection and finds something amiss. Often, these items are hammered out at the closing table and either an escrow agreement for repair is drafted (which attorneys hate because of the post-closing work) or a credit is given at closing. This credit should be disclosed and included on the HUD-1 but often the bank attorney does not want to include it to avoid the Lender refusing to fund.
Perhaps the escrow agreement is the best route with a paragraph that states if the work is not complete within a certain time frame, the escrow monies shall be released to Purchaser.

Contract Preparation by Non-Lawyers
A couple of years back there was a big push to allow real estate agents to prepare Contracts of Sale. This is often common practice outside of New York where attorneys are not necessarily part of a real estate transaction (foolish!). Technically it is permissible for non-lawyers to prepare form Contracts of Sale but they cannot explain the Contract as that would be dispensing legal advice and therefore the unauthorized practice of law.
It is the appearance of impropriety that can get investors, real estate agents and lay people in trouble here in NY. The custom is for attorneys to prepare contracts of sale and have them executed by their respective clients. Let the attorneys prepare the contracts and meet with the clients. I know its sometimes faster if you do it and I know its inconvenient to have the clients set up a meeting with their lawyer, but the fact is law enforcement looks at this practice as indicia of a fraudulent scheme.

Show Checks
This goes back to undisclosed credits and so forth (see above). Many real estate investors would inflate the purchase price to create cash out or no money down transactions for prospective purchasers, unbeknownst to the bank. They would often get a bank check, make a copy and submit it to the closing agent (who, for the most part, had no idea that it was a show check) and after closing, re-deposit the money back into their account. Bingo! You have now committed grand larceny as well as fraud!
DO NOT BRING SHOW CHECKS TO CLOSING!!! EVEN IF WE DON'T KNOW ABOUT YOUR SCHEME, YOU HAVE NOW EXPOSED THE ATTORNEYS AND EVERY OTHER PARTY TO THE TRANSACTION TO A CHARGE OF CONSPIRACY TO COMMIT FRAUD!!!
There are many programs, including FHA, which allow for gift funds, subsidies etc. Do it the right way - work with a mortgage professional who knows how to structure these transactions legally.

These are a just a few of the items that can be questionable or downright fraudulent. In this market, we need to work together to rebuild the housing market and to protect ourselves from those who wish to lay the blame for the collapse at our door.