One of worst scams that has been going around is a major culprit in getting us to where we are today. Take for instance a regular home builder that has 10 people come through his model home every week in hopes of buying a house. After a preliminary interview, it is apparent that although nice enough as they might seem, only 1 or maybe 2 couples at best will be able to qualify for a home loan. The other couples most likely will not qualify usually because of not enough down payment or other credit issues. Now this builder is industrious and he‘s not about to let a little thing like a low credit score or several thousand dollars deter him from selling his product. The builder discovers a way to make all 10 people qualify to buy his homes. How does he do this?
One way is for the builder to purchase a motor home or a boat or some other large ticket item from the potential buyer so that they will be able to qualify for the down payment required to obtain financing. Seems legitimate enough, except for the fact that the motor home, boat or what ever does not really exist at all. Yet it looks good to the potential underwriter of the loan that the potential home buyers have now put a check into their bank account for $10,000, $20,000 or maybe even more.
Now the builder has to recoup that $10,000 or $20,000 that he laid out for the down payment of these buyers. So if he usually sells their particular house for $200,000 he now has to sell that house for $220,000 to cover that cost. No harm, no foul, right. Wrong, the house is not really worth the $220,000 it sold for. In reality it is only worth $200,000. That 10% increase is now spread out and duplicated every time he makes a deal like this, flooding the market with over valued homes.
Basically housing values go up in value at a constant rate, although the rate is different for certain parts of the country it usually is reflected as doubling in value every 10 years. However, if those rates are negatively effected because of recession or other economic reasons, housing values actually fall which is what has been happening since about the end of 2007. Houses that were purchased for $200,000 dollars are now worth less than what is owed on them. This leaves people upside down in the mortgage and in some cases, it is easier for these people to walk away from these homes since they have actually not invested anything substantial into it.
We need to get back to basics, There are a lot of builders out there that are very good builders and very good businessmen and do not need to resort to tactics as those described above. There will always be greedy individuals that will find ways to work around the system legally or illegally to profit from the naivety of others. We just need to rely more on our own morale compass and not associate or do business with the individuals that have contributed to the predicament that we are now facing.
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