Financial watchdogs have warned that below market value and no-money-down property firm are scamming mortgage companies by falsifying loan applications.
The Financial Services Authority is urging sellers and private landlords buying from these firms to watch out for fraud.
The firms are buying up homes at 20% to 30% below their market value by offering quick completions to sellers facing repossession or bankruptcy.
The FSA claims the firms then ask sellers to inflate the sale price on completion paperwork so anyone arranging a mortgage can ask lenders for 100% deals by falsely reporting the value.
The FSA says a £150,000 home is typically bought for £110,000 – which means the maximum buy-to-let mortgage available at 75% loan-to-value is £82,500.
Then, the property firms suggest the buying price was £150,000 by asking sellers to wrongly state the value – upping the available mortgage to £112,500 to cover 100% or more of the buying price.
However, mortgage lenders have a rule that states the loan offered is a maximum of 75% of ‘the buy price or valuation, whichever is the lowest.”
Inflating the house price to obtain a mortgage by deception is fraud – and can end up with anyone signing the mortgage papers going to court and facing a hefty fine or even jail.
“The value of a mortgage obtained through fraud is a crime,” said a spokesman. “Fraud can occur through providing false details, failing to provide information required by law or even where you know only that the information used by others, such as the price of a house sale, might be misleading or untrue.”
The FSA also warns sellers facing financial difficulties that sale and rent back schemes can also be fraught with problems.
“Sellers are sometimes offered the option to stay in their home and rent it from the investor who purchased it. If so, this is a Sale and Rent back agreement and firms offering this must be authorised by us. If they are not, don’t deal with them,” said the FSA.
“Firms may offer other solutions which appear to repay debts and may allow you to remain in your home without selling it immediately. Treat all schemes like this with caution.”