ByJulie D. Friess–Consider pebble dropped in a glass smooth pond. Close to where the pebble enters the water, the ripples are big.
The farther the ripples move away from the pebble, the smaller they are.
If the pond is large enough, by the time ripples reach the edge, they are unnoticeable. They are still there, just small.
Real estate and mortgage fraud act in the same way. Close to the event the waves and impact are large, however, at the other end of the pond, maybe the impact is small and unnoticeable.
Fraud is a pebble dropped in the pond at the other side of town (you hope), however the waves are moving your way and are reaching everybody, including you. The real estate news and mess is filling your pond and affecting your life even though you are thinking “but I didn’t do anything wrong.”
How? Why? It starts with that home selling on the other side of town for more than it is worth. The buyer needed a down payment and didn’t have it so the seller agrees to raise the sales price of the house by the amount of the down payment.
Somehow the money makes its way from the seller to the buyer and the buyer produces the “down payment” at closing (and the home appraises for the revised sales price coincidentally). So you think, what is the big deal? A ripple has just hit the pond.
Multiply this deal many more times and property values “appear” to be going up. The county assessor can almost hear the “cha-ching” from the rise in property taxes for everybody in the pond.
The news media starts to report about how property values are increasing in your pond. Investors take notice but they want more. Investors who have read books about how to get “cash back at closing” show up in your pond and find real estate agents and mortgage brokers who are uneducated and don’t know that it is illegal to write a contract with the sales prices inflated by $50,000 and give the buyer that money back at closing, and start scamming deals all over your pond like these.
Soon they are throwing in 6 months worth of mortgage payments, furniture, cars, and homeowners association dues (this is the true story of what happened at Mountain Gate in Clarkdale, Arizona), and the sales prices are so inflated that there is a hurricane going on in the pond and the boats are rocking all over the place and it is out of control.
The real estate agents, buyers, appraisers and lenders are all part of creating the storm and everyone is making lots of money for a while except…
As your boat rocks the sales prices are going higher, property taxes and insurance rates are increasing, demand increases interest rates, and artificial appreciation occurs all over.
Great appreciation is supposed to occur from something like growth in population brought on by increased employment opportunities, increased demand for housing because there is a shortage, economic growth, and other things such as these. Home values do not just spike upward for no reason at all.
Gradual appreciation from a healthy economy is normal. So what goes up for no natural economic reason will come down even harder.
We all know what happens next. The boat turns over (the mortgage brokers/lenders), people start drowning (homeowners), the Coast guard (government, police, licensing agencies) can’t keep up and some people are left to drown because there isn’t enough resources and the people are abandoned.
And we created it. I keep hearing “but I am a good person.” And we all are good people, but we could have prevented this. If the real estate agent, appraiser, mortgage broker/lender, and buyer took some responsibility for themselves and were educated and thought about someone other than themselves we would not be here.
Even today I am still being badgered by real estate agents to hit sales prices that are not reasonable because the buyer wants the house. It is not just one sale! It is everybody’s pond! Maybe if we stop looking out for just #1 and start taking care of everyone in the pond and see how our pebble ripples out and affects everyone we can stop the next storm and live in the pond in peace.
We can prevent the next storm if we stop being selfish, greedy, get educated and start taking care of each other. Or are we bracing for the next storm right now? Educated people will push them out of our pond.
Julie Friess is a Certified Residential Appraiser/managing director of IRR Residential, and has been appraising real estate for the last 22 years. Feel free to write me at firstname.lastname@example.org (928) 204-9814