Dual Contract

Definition

A “Dual Contract” is an illegal real estate practice where two separate contracts are used for a single transaction. This is typically done to mislead lenders about the true purchase price or any other terms of the sale. One contract is presented to the buyer and the seller, reflecting the actual agreed-upon terms, while the other inflated contract is shown to the bank or lender to obtain a higher mortgage loan.

Examples

Example: Suppose Abel wants to purchase a home from a builder for $288,000 but lacks the cash for a down payment. The builder suggests they prepare a fictitious contract for $320,000 so that Abel can borrow 90% of $320,000, which allows Abel to have additional funds that can be used as a down payment. The bank’s attorney, however, addresses the dual contract, highlighting the potential legal repercussions of attempted fraud.
Example: In another scenario, a real estate developer agrees to a genuine sales price of $500,000 with a buyer, but creates a second inflated contract of $600,000 for the lender. The purpose is to secure a larger mortgage based on the higher price, even though both the buyer and developer know it will lead to more capital for their own uses, though unethically.

Frequently Asked Questions (FAQs)

Q1: Is using a dual contract legal?

A1: No, using dual contracts is illegal and is considered a form of mortgage fraud. It is designed to deceive lenders and improperly influence loan terms.

Q2: What are the potential consequences of using a dual contract?

A2: Legal consequences can include fines, criminal charges for fraud, and potentially jail time. Furthermore, ethical consequences may include the loss of reputation and professional licenses.

Q3: Why might parties in a real estate transaction use dual contracts?

A3: Parties might use dual contracts to secure a larger loan amount by inflating the property’s price or to meet financing needs that they otherwise would not qualify for.

Q4: Can lenders detect dual contract activities?

A4: Yes, lenders often have stringent verification processes and due diligence methods to detect discrepancies and fraudulent activities, including dual contracts.

Q5: How can stakeholders ensure they do not inadvertently participate in dual contracts?

A5: Engaging experienced real estate attorneys, transparent communication with all parties, and adhering to legal and ethical standards can help ensure compliance and avoid inadvertently participating in dual contracts.

Mortgage Fraud: A crime in which someone knowingly makes a false representation or misstatement on a mortgage loan application.
Contractual Fraud: Intentional misrepresentation or deception during the contracting process to achieve illicit goals.
Predatory Lending: Unethical practices by lenders that exploit borrowers through high fees, interest rates, and unfavorable terms.

Online Resources

References

United States Department of Justice (DOJ)
Federal Financial Institutions Examination Council (FFIEC) - Mortgage Lending Fraud
The Uniform Residential Loan Application Guidelines

Suggested Books for Further Studies

“Mortgage Fraud and Predatory Lending” by Alexis C. Pullin
“Real Estate Law” by Marianne Jennings
“Real Estate Finance: Theory & Practice” by Clauretie & Sirmans

Real Estate Basics: Dual Contract Fundamentals Quiz

### What is a dual contract in a real estate transaction? - [x] Using two separate contracts for one real estate transaction to mislead lenders. - [ ] Utilizing two contracts due to different property owners. - [ ] Having multiple parties' names on the contract. - [ ] None of the above. > **Explanation:** A dual contract is the unethical practice of using two separate contracts for the same transaction to deceive lenders, often by inflating the sale price on one contract. ### Is using a dual contract a legal practice? - [ ] Yes, in specific states. - [ ] Sometimes, depending on the terms. - [x] No, it is illegal and considered a form of fraud. - [ ] Yes, but only if disclosed to all parties. > **Explanation:** Dual contracts are illegal in all jurisdictions as they constitute fraud, intentionally misrepresenting the true terms of the transaction to lenders. ### What could be a consequence of using a dual contract? - [x] Criminal charges and potential jail time. - [ ] Increased property value. - [ ] Approved mortgage at higher rates. - [ ] None of the above. > **Explanation:** The use of a dual contract could result in criminal charges, fines, and potentially jail time, highlighting the practices' seriousness and illegality. ### Why might parties in a real estate deal engage in dual contracts? - [ ] To strengthen their negotiating position. - [ ] To simplify transaction processes. - [x] To secure a larger loan amount or meet financing requirements. - [ ] For tax incentives. > **Explanation:** Parties use dual contracts mainly to inflate property prices to obtain a higher mortgage amount or meet otherwise unqualifiable financing needs, though it is done illegally. ### Can lenders detect activities involving dual contracts? - [x] Yes, through due diligence and stringent verification methods. - [ ] No, lenders cannot usually detect such practices. - [ ] Only if an outside party informs them. - [ ] No, since it does not affect their processing. > **Explanation:** Lenders have rigorous verification processes in place to detect fraud, including the presence of dual contracts, by cross-checking document consistency and verifying transaction terms. ### Who might enforce penalties against dual contracts? - [ ] Real Estate Agencies - [ ] Property Appraisers - [x] Government and law enforcement agencies such as the FBI and DOJ. - [ ] Homeowner Associations > **Explanation:** Agencies like the FBI and Department of Justice enforce penalties against those involved in dual contracts as the practice constitutes mortgage fraud. ### What can be done to avoid participation in dual contracts? - [ ] Avoid hiring real estate agents. - [ ] Keep information confidential from lenders. - [x] Engage transparent practices and consult with real estate attorneys. - [ ] Disclose different contracts for various uses. > **Explanation:** Adopting transparent practices, consulting with experienced real estate attorneys, and adhering strictly to legal guidelines can help avoid unintentional participation in dual contracts. ### In dual contract cases, what document typically misrepresents the transaction price for higher loans? - [ ] The listing agreement. - [ ] The lease contract. - [x] The second, inflated contract submitted to lenders. - [ ] None of the above. > **Explanation:** The second, inflated contract misrepresents the transaction price to secure a higher loan amount from lenders, while the first contract contains the actual agreed-upon terms. ### What is one of the first actions someone should take if they suspect dual contract use? - [ ] Ignore and proceed with caution. - [ ] Modify their contract terms. - [ ] Attempt to renegotiate the transaction quietly. - [x] Report it to the relevant authorities or legal counsel. > **Explanation:** If there is suspicion of dual contract use, the first responsible action is to report it to legal counsel or relevant authorities to address potential fraud properly. ### In dual contracts, what determines the legality of the practice? - [ ] The profit margin from the inflated contract. - [ ] The buyer's and seller's agreement on terms. - [x] The intention to deceive and misrepresent true contract terms to lenders. - [ ] The involvement of multiple banks. > **Explanation:** The legality issue stems from the intent to deceive and misrepresent the true terms of the transaction to lenders, which constitutes fraud. The intent to obtain an unmerited financial advantage marks it as illegal.