Thursday, January 31, 2008

Your check register needs to match the HUD-1

Isn't that a simple rule? But for some reason, many closing agents and title companies just can't quite seem to follow this rule. When I look at a title/closing/escrow company's trust or escrow account check register for a particular file, it needs to match exactly what is on the HUD-1 Settlement Statement. So, if the seller is getting $23,000 on the settlement statement, your check register better show a check to the seller for $23,000. Not only that, but the names need to match. If the settlement statement says "Repairs to Smith Construction," that check best have gone to Smith Construction, and not back to the buyer or seller. Likewise, the seller's proceeds need to go to the seller, not to the seller AND the buyer, as some of the "flexible" closing agents will do.

The buyer and seller sign under this language on the HUD-1 Settlement Statement:

I have carefully reviewed the HUD-1 Settlement Statement and to the best of my knowledge and belief, it is a true and accurate statement of all the receipts and disbursements made on my account or by me in this transaction.

The closing agent signs this:

The HUD-1 Settlement Statement which I have prepared is a true and accurate account of this transaction. I have caused or will cause the funds to be disbursed in accordance with this statement.

Those statements are pretty simple too, aren't they? What often happens is that the purchase agreement says that the seller will pay $3,000 of the buyer's closing costs (we won't discuss the fact that they have artificially inflated the purchase price by that $3,000). Sometimes, the closings costs don't amount to $3,000. Sometimes, the lender will not allow the seller to pay certain closing costs. Sometimes, the buyer would end up getting money back if the buyer gets the full $3,000, and the lender does not allow the buyer to get a check at closing. Doesn't matter.
Let's say the lender, for whatever reason, only allows the buyer to receive a credit for $2,000 of the $3,000 seller paid closing costs. The loan officers and real estate agents will beg, plead, and argue that you should give the seller $22,000 of the $23,000 shown on the settlement statement, and give the other $1,000 to the buyer. When the real estate agents and the loan officer are telling you that it's not fair if the buyer doesn't get the full $3,000, that all the other title companies in town will cut checks which differ from the settlement statement, go back and read what you just signed:

The HUD-1 Settlement Statement which I have prepared is a true and accurate account of this transaction. I have caused or will cause the funds to be disbursed in accordance with this statement.

And then ask yourself if their business is worth damaging your community, hurting our economy, and committing mortgage, RESPA, mail, and wire fraud.

Wednesday, January 30, 2008

Fake second mortgages

Why would anyone give a "fake" second mortgage? Here's how the scam works. Let's say the seller wants $100,000 for their house. The buyer does not have a down payment, and does not want to pay mortgage insurance. The buyer, seller, and sometimes the real estate agent, loan officer, and title company all conspire to increase the purchase price to $120,000 with the seller "financing" $20,000. The $20,000 seller financing is shown on the settlement statement. There is an actual note and mortgage signed by the buyer at closing evidencing the $20,000 debt. In extreme cases, the title company will even record the mortgage (though most do not).

So far, this is completely legitimate. What happens next though, is that the mortgage is immediately released, and the note cancelled. I have actually heard tell of the president of a big title company in our area who actually makes a big show of tearing up the note at closing.

As soon as that is done, it becomes a $20,000 gift from the seller to the buyer. And it becomes mortgage and RESPA fraud. The end lender is led to believe that the purchase price is actually $120,000, and that the buyer will be making payments to the seller on the $20,000. The truth is that the house is only worth $100,000 and the buyer has absolutely no investment in the property. Not really any different that under the table kickbacks, except that they put it on the table first.

Tuesday, January 29, 2008

Corporations selling real estate

Since the Quad Cities is a community which is split into two states, we often have "jurisdictional" problems. One common problem is when a corporation or LLC sells real estate in a state in which it is not authorized to do business. In other words, an Iowa corporation sells real estate in Illinois without being authorized to do business in Illinois.

In Illinois a corporation does not need to be authorized to do business in Illinois if all it does is buy and sell real estate. Buy it and sell it. That's it. As soon as it does anything to the property, the rules change. The problem arises when that corporation "transacts business" in Illinois. For example, if Iowa Property, Inc. buys a lot in Illinois, then builds a house on that lot, Iowa Property, Inc. needs to be authorized to do business in Illinois. Similarly, if Iowa Property, Inc. buys a house or building in Illinois and then fixes it up, it also needs to be authorized to do business in Illinois. In both of these examples, Iowa Property, Inc. is transacting business in Illinois and therefore needs to be authorized to do business in Illinois.

If Iowa Property, Inc. is not authorized to do business in Illinois when it buys property, improves it, and then sells it, all of the franchise tax, income tax, and registration fees it would have owed had it been paying its fair share become liens against any real estate it owns in Illinois. So essentially, if an attorney or title company allows the Iowa corporation to sell this real estate, the buyer could end up being responsible for this lien.

I have had numerous "stern discussions" with Iowa attorneys regarding this. I will never let my buyer-client purchase property from a corporation not authorized to do business in Illinois, when it should have been authorized to do business in Illinois. It is a simple enough process to will tell you whether or not a corporation or LLC is authorized to do business in Illinois. Unfortunately, I see attorneys and title companies allow this to slide by all the time. They succeed in failing their clients.