 Have you every seen a shell game? A fast-talking huckster puts three cups on a table, puts a ball under one of the cups, switches them around, and bets that you can’t tell which cup has the ball under it. You may guess right the first time and win your dollar back, but the next time he’ll double the bet, and you lose. Well, some real estate transactions can work that way. If you can’t figure out where the money is going, something is probably wrong.
Sellers of real property in Texas and around the United States have been receiving offers that are significantly above the asking price. Some buyers are offering as much as $100,000 above the asking price. While the residential real estate market has been doing well for the past several years, rarely do offers that are significantly above the market value of the property make sense. An occasional wealthy buyer may be willing to pay significantly above market price for a house for a personal reason; for example, she may own the house next door and may simply want to tear down the house for an expansion of her own home. But most of these abnormal offers are probably driven by mortgage fraud.
Anyone involved in Texas real estate in the 1980s will remember the savings and loan crisis. For a variety of factors, investors were led to believe that the demand for real estate was virtually unlimited. S&Ls had recently been deregulated by the federal government and were paying above-market interest rates to lure deposits. The S&Ls turned around and loaned that money out to real estate speculators who built more buildings throughout Texas and other parts of the country than could be absorbed. Eventually the pyramid collapsed, causing many financial institutions and individuals to declare bankruptcy. American taxpayers wound up picking up the cost of the crisis to the tune of $500 billion.
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Fortunately, lawmakers and regulators have tightened oversight of financial institutions, and it is unlikely that we will see a return of the 1980s crisis. What is happening today is a smaller-scale version where unscrupulous buyers and appraisers are taking advantage of a buoyant residential market to persuade lenders to write loans above the market value of the property securing the loan. They may attach an addendum to the sales contract stipulating that some amount of money will be paid at closing to a third party, supposedly a builder who will remodel the house. What can happen is that the builder is really the buyer who pockets the money, then walks away from the property, forcing the lender to foreclose on the property. The buyer may turn out to have been a fictitious person, perhaps a stolen identity, or a shell corporation. The irony is that the seller probably didn’t get any more money for the property than she would have if it had been sold at market price, and she probably wound up being dragged into a criminal investigation.
What should you do if you are presented an offer dramatically above the market value of your property? You should consider having an attorney review the offer for legitimacy. You should probably reject the offer if the buyer doesn’t have a credible reason for being willing to pay far above the asking price. Ask your REALTOR® whether there have been market changes in your neighborhood (new highway, school, or other facility) since you put the house on the market that might justify the dramatic increase. But above all, if it seems too good to be true, it probably is.
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