To sell these excess units, there has been an increasing trend of incentives being offered to entice potential buyers. Common incentives include “cash back at closing” or “guaranteed mortgage payments” for a specified period of time. Many condominium units are being marketed to investors looking for “no risk” investments, rather than to buyers looking to occupy the units themselves.

Incentives offered by developers are often legal. Unfortunately, some engage in questionable practices that may involve fraudulent activity, such as condo conversion bailout schemes.

What is the condo conversion bailout scheme?

A condo conversion bailout scheme is one of intentional deception and misrepresentation. It commonly involves multiple perpetrators who create and promote incentive packages that are deliberately concealed from lenders. This scheme also involves inflated property values, and the masking of illegitimate cash disbursements on the settlement statement or failure to disclose them at all.

How does the condo conversion bailout scheme work?

The seller, developer, or promoter typically targets buyers with excellent credit who are looking to purchase “no risk” investment properties with little or no money down.

As a condition of the sale, the buyer executes a purchase contract detailing the incentive package, which often includes substantial cash back. Other incentives to attract buyers might include:

•  A mandatory “turnkey” management agreement for the income producing properties, granting exclusive authority to the management company (often a subsidiary of the developer) to find tenants. Turnkey management implies that the borrower is not responsible or tasked to do anything to manage the property.
• An offer to collect rent payments and make the mortgage payments.
• A promise to guarantee cash flow whether the unit is rented or vacant.
• Inflating the sales price of the property generates cash to fund the borrower incentives. Funds are provided to the buyer as a lump sum used to make the mortgage or other payments.
• The inflated sale price is supported by an inflated appraisal report.
• These transactions become problematic when the incentives are not disclosed to the lender. This omission, and the inflated appraisal, mislead the lender into funding the loan.

For more information about see:  www.freddiemac.com

Important Freddie Mac fraud resources:

• Call our Fraud Hotline at (800) 4 FRAUD 8 to report incidents of fraud.
• Watch the fraud awareness video ‘Protect Yourself from Mortgage Fraud’  on YouTube

For more information about the Prescott Arizona condo and townhome market, contact me.