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By Ralph R. Roberts

RISMEDIA, Jan. 22, 2008-Those who have read my articles on real estate and mortgage fraud, know that cash back at closing is a form of fraud that is particularly prevalent and destructive. The reason I focus on it so much is because many people think that cash back at closing is acceptable and that at its very worst, it is a victimless crime. A buyer simply agrees to pay more for a property than what it is really worth in order to receive the excess proceeds as a refund when the transaction closes.

More and more people are beginning to realize that cash back at closing is illegal, so the con artists are starting to do what they usually do when the public wises up-they modify the technique and give it a new name. Recently victims of a large-scale real estate scam in Florida, Texas and Nevada called my attention to a new adaptation of cash back at closing called “lease back at closing.” In a letter from Ricky Stokes (who was selling these investment opportunities on behalf of Cay Clubs Resorts) to an investor, Stokes acknowledges that “kickbacks” at closing are illegal, so the company uses lease backs instead:

“… at closing, as the investor, you get a 15% kickback they call a “guaranteed lease back.” They make this legal by calling it a lease back instead of a kickback. These kickbacks more than cover your out of pocket expenses for two years! This also allows them to have free will to renovate and then rent it to vacationers/snow birds.”

In the same letter, Stokes provides the following example to show how the lease back scheme would work on a $500,000 property:

“Let’s say you buy a townhouse conversion for $500K. You get 100% financing and get a check cut back to you at closing for $50K (return of your deposit). Ten days later you get another check for $75K (this is their guaranteed lease back…kickbacks are illegal). This cash back at closing will more than cover your outflow for the next 2 years. With appreciation sitting at around 23%, you can roll out of it in 18 months, and make $320K.”

In other words, Stokes is claiming that simply calling cash back at closing a “lease back” rather than a “kickback” makes it okay. This is absurd. Using the same logic, we could simply refer to “murder” as “killing” to avoid a conviction for first-degree murder. Dress it up however you like, call it whatever you like, cash back at closing is illegal.

What Cay Clubs Resorts was doing was simply refunding a portion of the mortgage loans used to finance the purchase of the property to the investor. This was not Cay Clubs Resorts’ money to give away or use however it wished. This was money that the lender was led to believe was to be used solely for purchasing the property and that the property’s value was sufficient collateral to secure the loan.

Lying to the lender, which is essentially what Cay Clubs Resorts was doing, is mortgage fraud, plain and simple, no matter what you want to call it.

For more about Cay Clubs Resorts, including stories from investors who fell victim to the scam, visit http://flippingfrenzy.com.

Ralph Roberts is a real estate fraud expert and activist and co-author of Protect Yourself from Real Estate and Mortgage Fraud: Preserving the American Dream of Homeownership (Kaplan, August 2007). You can contact Ralph at RalphRoberts@ralphroberts.com or 586.751.0000.

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