Real-Estate Sleight of Hand

Itzhak Ben-David is a Ph.D. candidate in finance at the University of Chicago’s Graduate School of Business. (Levitt is one of his dissertation advisors.) While pursuing his original research idea — the degree to which housing prices efficiently incorporate anticipated tax increases — Ben-David stumbled upon a slightly juicier topic: a real-estate sleight of hand known as the “cashback transaction,” in which the seller gives the buyer a clandestine rebate that the lending bank never finds out about.

Yes, it’s illegal.

Our current New York Times Magazine column is about Ben-David’s research. Here is his paper on the subject. Not only is the subject matter interesting, but the detective work he employed — a sort of mashup of the methodologies in the Levitt/Syverson real-estate paper and the Duggan/Levitt sumo paper — is really impressive.

As always with our N.Y. Times columns, we’ve posted some complementary research materials on the subject.

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  1. kkwan5 says:

    My initial reaction is that this is nothing new to familiar with real estate as an investor or agent. This has been happening in Denver which is considered a hot market. The ‘seller contribution’ is sort of a generally accepted practice because it greases the transaction and helps lower the cash down payment required. They the contributions are ostensibly to help defer closing costs and is a major bargaining point for many transaction.

    I can also see this with low income properties as well where low or no down payments are crucial to transactions. There programs that offer down payment assistance where a third party becomes involved as an escrow agent of sorts in order to legitimize the transactions.

    I’m not sure how clandestine this really is. It is another form of creative negotiating/financing vehicle. I’m not entirely convinced that this is victimless because it inflate appraisals and may come to bear in down markets but as a transaction between buyer and seller who is being cheated?

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  2. kkwan5 says:

    My initial reaction is that this is nothing new to familiar with real estate as an investor or agent. This has been happening in Denver which is considered a hot market. The ‘seller contribution’ is sort of a generally accepted practice because it greases the transaction and helps lower the cash down payment required. They the contributions are ostensibly to help defer closing costs and is a major bargaining point for many transaction.

    I can also see this with low income properties as well where low or no down payments are crucial to transactions. There programs that offer down payment assistance where a third party becomes involved as an escrow agent of sorts in order to legitimize the transactions.

    I’m not sure how clandestine this really is. It is another form of creative negotiating/financing vehicle. I’m not entirely convinced that this is victimless because it inflate appraisals and may come to bear in down markets but as a transaction between buyer and seller who is being cheated?

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  3. kkwan5 says:

    I dug into the details of this more and this is truly a cashback that is greater than any closing costs incurred by the buyer or repair allowances and the like. Given that I recind any defense for the cashback type of program since it has more far reaching and clearly illegal.

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  4. kkwan5 says:

    I dug into the details of this more and this is truly a cashback that is greater than any closing costs incurred by the buyer or repair allowances and the like. Given that I recind any defense for the cashback type of program since it has more far reaching and clearly illegal.

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  5. fheinsen says:

    Nothing new — this kind of fraud has become more and more common since the residential real estate market started cooling off. Here’s an earlier article on the same subject:

    http://www.washingtonpost.com/wp-dyn/content/article/2007/04/20/AR2007042000887.html

    “The basic scenario, Crabtree said, involves real estate agents who have listed houses that aren’t selling. To move the properties, they entice buyers or friends to ‘submit an offer [for the home] that is $30,000 to $100,000 above the current list price’ with the promise that they will get substantial cash at closing.”

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  6. fheinsen says:

    Nothing new — this kind of fraud has become more and more common since the residential real estate market started cooling off. Here’s an earlier article on the same subject:

    http://www.washingtonpost.com/wp-dyn/content/article/2007/04/20/AR2007042000887.html

    “The basic scenario, Crabtree said, involves real estate agents who have listed houses that aren’t selling. To move the properties, they entice buyers or friends to ‘submit an offer [for the home] that is $30,000 to $100,000 above the current list price’ with the promise that they will get substantial cash at closing.”

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  7. Li says:

    Are you sure this is illegal everywhere? A friend was recently shopping for condos in Washington, and at least one property’s listing price was “X, with $5,000 cash back.” The condo was structurally sound but needed work, and the 5k was supposed to go towards renovations. The same friend put an offer on another condo which included a cash back clause in the contract.

    But to be fair, neither condo went to a stage where the bank was involved, and I don’t know how they would have reacted.

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  8. Li says:

    Are you sure this is illegal everywhere? A friend was recently shopping for condos in Washington, and at least one property’s listing price was “X, with $5,000 cash back.” The condo was structurally sound but needed work, and the 5k was supposed to go towards renovations. The same friend put an offer on another condo which included a cash back clause in the contract.

    But to be fair, neither condo went to a stage where the bank was involved, and I don’t know how they would have reacted.

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