I recently came across the following article which describes various “fraudulent conduct” schemes in real estate: http://www.nclta.org/sites/
The article is a good reminder that some things which might be innocuous when dealing with other real estate investors or “sophisticated” parties could be misconstrued as fraudulent if a property is sold to an “end buyer”—someone who will live in the property or anyone getting a federally related loan.
For example, say a property is worth X but the seller is highly motivated (e.g., needs a quick cash sale due to job transfer in 2 weeks) and an investor manages to negotiate a discounted purchase price of D. The investor buys the property for D and then a short time later is able to sell it for X to an end buyer who uses a bank loan with a government connection (FHA, 203K, etc.).
If there is some kind of problem down the road, for example the end buyer has financial problems and walks away from the loan/property, the investor could be charged with mortgage fraud on the rationale that the property wasn’t really worth X because s/he bought it for D, so the investor must have “inflated” the price to defraud the bank.
The investor may know for a fact that the property was really worth X, and s/he could only buy it from the original seller for D due to extenuating circumstances (immanent job transfer), but the rationale above is exactly the mortgage fraud scenario described in the “Insta-Flip” fraud section of the article.
The investor used available cash reserves to help someone who needed to sell quickly, but could end up on the defensive in a fraud proceeding because s/he sold to an unsophisticated “end buyer” who used traditional financing.
Investors need to remember that when dealing with end buyers, especially owner-occupants, there are a lot of extra requirements. These include additional disclosures, documenting the reason for price increases (keeping rehab receipts), and holding properties for at least 90 days before going under contract to sell—a rule many banks still follow even though FHA has technically waived it through 2014.
(And if an investor chooses to provide financing to an end buyer instead, there are now even more requirements that must be complied with.)
Sometimes even the appearance of impropriety is damning, so extra care really is warranted when selling to end buyers. A longer and more detailed paper on the topic of mortgage fraud schemes is at https://www.ffiec.gov/exam/