How cash-back-at-closing schemes hurt the real estate market

Posted Dec 5th 2007 5:13PM by Zac Bissonnette
Filed under: Television, Housing

If you've watched any of those awful late-night real estate investment infomercials, you've heard of cash-back-at-closing real estate deals. You know, the ones where the guy with the buckteeth holds up the check for $11,000 and says, "I bought a house with no money down and got $11,000 back at closing!"

In an excellent article on RISMedia, Ralph R. Roberts explains how these schemes work and why they're so bad for the real estate industry:

On its surface, cash back at closing seems to benefit everyone involved. The buyer pockets some extra cash. The seller unloads his house at or near the asking price. The real estate agent gets a bigger commission. The loan officer chalks up another successful loan. And the lender stands to earn more interest over the life of the loan. Everybody wins.

But in reality, the big loser is the lender, who is conned into lending more than a house is worth by a sham transaction. This practice can inflate home values by allowing people to buy homes for more than they would normally be able to and can also, according to Roberts, artificially inflate property taxes.

How much of a role did cash-back-at-closing play in the subprime debacle? It s hard to say, because a lot of these transactions aren't legal and so no reliable data is available. But they're definitely a contributor to the epidemic of people who owe more on their homes than they're worth.

Tags: Housing, infomercials, Real Estate, RealEstate

Print this

Reader Comments (Page 1 of 1)

12-06-2007 @ 1:19AM

DREAGENT said...

When inflation out numbers the lack of pay increases, this is the result. This really is not a result of poor lending practices entirely. Largely its due to the economic inflation. Gas prices have taken a toll on every household, not just in our automobiles, but in every one that delivers a product or service to "us" (the consumer). Not very long ago gas was $1.39 a gallon and holding for a long time. Now you have to look at the price on the pumps daily. Same thing with the grocery prices, gas co. bills, electric, property taxes, etc, etc. It has no end! REGULATIONS would be the answer...not just freezing mortgage rates! Lets not just worry about the investors in the banking industry, how about the consumers "we the people" who make this world go round.