In Part 2, we introduced the scenario of “The Flip” in which there is a “strawman” established in the middle of a transaction between seller and strawman, and another between strawman and buyer.  In this third article of the series, we’ll introduce a scenario dubbed “The Old Switch.”

In this transaction, the buyer and seller agree to change the sales price in the contract and the seller kicks money back to the buyer at the closing (maybe without knowing it). For instance, the seller enters into a contract for sale for $400,000. The home appraises for $600,000, the buyer then returns to the seller and asks that they increase the sales price to $600,000 so he can get the higher loan and pocket the difference. The broker’s commission, oddly enough, is not increased, but the title policy premium is increased—it must reflect the sales price. The seller then kicks back the excess proceeds to the buyer. This occurs as a cash payment to a fictional company, a third party as a cover for the buyer. It could also show up as a “soft second lien” to the seller that will never be repaid, but shows up on the closing statement. Once again, we have a lender making a loan for more than the property is worth, putting money in the buyer’s pocket and destroying the loan-to-value ratio that the lender had anticipated.  The problem with this scenario is the seller is happy to do it, because the seller ultimately gets his agreed sales price and doesn’t care that the buyer profits in the transaction.  In addition to this, the seller and the broker make their sale! The buyer never makes one mortgage payment and moves on to his next transaction.

In the next article of this section, we’ll discuss “The Contractor’s Scheme.”