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. Mack says:

    @4 -

    I’m sure it’s possible to legally structure almost any kind of loan, especially one where part of the proceeds goes toward the purchase of property and part goes to improvements. That’s quite common.

    It doesn’t matter whether you advertise it as ‘cash back’ or not — what matters is that the lender and the borrower agree on the terms and that everything is done in the open.

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  2. Mack says:

    @4 -

    I’m sure it’s possible to legally structure almost any kind of loan, especially one where part of the proceeds goes toward the purchase of property and part goes to improvements. That’s quite common.

    It doesn’t matter whether you advertise it as ‘cash back’ or not — what matters is that the lender and the borrower agree on the terms and that everything is done in the open.

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  3. fredjones says:

    There are other reasons for a cash back transaction. Years ago, when purchasing a condo in San Diego from a developer in an all cash deal, the developer said he would only accept our offer if we paid a 25% higher price to be refunded to us at escrow. The reason was so that there would be a public record of the higher transaction so they could convince future buyers to part with more money. Worked out well for us … the property appreciated quite well from our perspective.

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  4. fredjones says:

    There are other reasons for a cash back transaction. Years ago, when purchasing a condo in San Diego from a developer in an all cash deal, the developer said he would only accept our offer if we paid a 25% higher price to be refunded to us at escrow. The reason was so that there would be a public record of the higher transaction so they could convince future buyers to part with more money. Worked out well for us … the property appreciated quite well from our perspective.

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  5. procrastinating_econ says:

    I will humbly deviate from the post and bring bloggers attention to some Gatonomics from Bill Gates for Harvard Students during their commencements:

    http://www.news.harvard.edu/gazette/2007/06.14/99-gates.html

    My favorite part, “We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities.”

    It sounds so cool, only if it was true! I think the probability of the world being destroyed is much higher than poverty being eradicated, simply because poverty is a relative concept. Once you reduce hunger-related poverty, you’ll have other good reasons to feel miserable if you are at the bottom half of the economic pie.

    Unfortunately, even evolution teaches us that all lives are not created equal.

    Here is Bill Clinton’s address also for Harvard students:
    http://www.news.harvard.edu/gazette/2007/06.07/99-clinton.html

    Clinton talks about how we are 99.9 same i.e. all of us are %#$#$* in the same way.

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  6. procrastinating_econ says:

    I will humbly deviate from the post and bring bloggers attention to some Gatonomics from Bill Gates for Harvard Students during their commencements:

    http://www.news.harvard.edu/gazette/2007/06.14/99-gates.html

    My favorite part, “We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities.”

    It sounds so cool, only if it was true! I think the probability of the world being destroyed is much higher than poverty being eradicated, simply because poverty is a relative concept. Once you reduce hunger-related poverty, you’ll have other good reasons to feel miserable if you are at the bottom half of the economic pie.

    Unfortunately, even evolution teaches us that all lives are not created equal.

    Here is Bill Clinton’s address also for Harvard students:
    http://www.news.harvard.edu/gazette/2007/06.07/99-clinton.html

    Clinton talks about how we are 99.9 same i.e. all of us are %#$#$* in the same way.

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  7. osamaomar says:

    We have these real estate fraud people operating in our area but they are very slick. The money back to the buyer is usually based on a overly generous appraisal that can only come from someone who is colluding with the scamsters. Several of these houses are in my neighborhood, one across the street for me.

    The straw buyer is used to create an additional layer of distance between the masterminds and the fraud itself.

    Read a little about it here:

    http://www.mortgagefraudblog.com/images/uploads/2005-07-05_-_Inman_Article_-_Ebay_Straw_Buyer_Ad_-_7-12-05.pdf

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  8. osamaomar says:

    We have these real estate fraud people operating in our area but they are very slick. The money back to the buyer is usually based on a overly generous appraisal that can only come from someone who is colluding with the scamsters. Several of these houses are in my neighborhood, one across the street for me.

    The straw buyer is used to create an additional layer of distance between the masterminds and the fraud itself.

    Read a little about it here:

    http://www.mortgagefraudblog.com/images/uploads/2005-07-05_-_Inman_Article_-_Ebay_Straw_Buyer_Ad_-_7-12-05.pdf

    Thumb up 0 Thumb down 0