Sdrealtor, what are your thoughts on cash-back at closing?

[lendingbubblecontinues]

I have actually considered trying to find a way to take advantage of a special situation, offering someone who I know is stuck (divorce pending and “tits up” broke) their current asking price (because it was purchased early 2006, it should appraise near the current ask as comps would support it) less 200K back to me outside of closing for needed repairs, upgrades, and just generally to use to pay the mortgage for the next few years if I ran into trouble.

I have strong doubts the seller would agree to this…I do know they will lose the house and their 200K down payment either way as they are headed down Foreclosure Lane. If they agreed, what are your thoughts about the legality of this? Again, I am talking about using an independent third-party appraiser here, not someone complicit in a scheme.

Thanks in advance for your thoughts!

[lendingbubblecontinues]

I digress…obviously this may appear to you as a “scheme”. I am just sincerely interested if there is any place for “cash back at closing” deals, or are they all “schemes”?

[PerryChase]

Big question. Where is the seller going to get the $200k cash back to rebate to you? If the seller is going to loose his 200k downpayment anyway, why would he sell and give it to you?

In order for this to work, there needs to be something in it for the seller.

The seller might go with a 100k cashback. But then you might be overpaying for the house even with the cashback.

Don’t think it’ll work.

[PerryChase]

The only way for those sorts of schemes to work is for the buyer to overpay for house, then the seller rebates part of the proceeds to the buyer. The buyer then walks leaving the lender holding the bag.

The sum needs to be big enough to motivate the buyer to commit mortgage fraud. It’s mostly the buyer and the appraiser since the seller can more easily plead ignorance.

You have to look at this in terms of motivation. The most the seller can loose is his 200k equity. He could just lower the price by $100k or even $200k for a quick sale. The reason he’s facing foreclosure is because he trying to get out whole. In the seller’s mind, he needs that 200k back to start over somewhere else.

I’m afraid that your cash back proposal won’t go anywhere unless to offer to over-pay for the house.

[lendingbubblecontinues]

Thanks PerryChase.

Now, let’s go back to my original assumption that “I have strong doubts the seller would agree” and the question remains is it legal to get cash back from a seller (upside down or not, facing foreclosure or not) outside of closing…so long as the appraisal is done fairly and ethically and at arms length from the cash at closing (appraiser in the dark, even)?

Also, this would be for a home that I would plan to live in for 10+ years.

Thanks.

[PerryChase]

I don’t see why cash back would be illegal. But mortgage fraud is. If you do it with the intend of defrauding the lender then it’s criminal.

If it’s done outside of closing, then there certainly is an element of concealment on your part and a prosecutor maybe able to prove fraud. If everything is on the up and up, then why not go through escrow? Remember, if it’s not documented in the sales agreement, then the seller is not obligated to pay you the cashback. Then what’re you gonna do?

[lendingbubblecontinues]

I hadn’t thought about taking it through escrow..makes sense to me. Practically speaking, has anyone ever heard of something like this happening?

Hypothetical:

Seller…bought house for 200K, current comps suggest 800K value, but the market has frozen up and I am the only bidder at 600K…they are happy to just get out of the deal with 400K profit, but they don’t want to blow the comps for their neighbors.

Independent third-party (lender’s) appraiser comes in and appraises house at 800K.

Bank lends me 800K, I transfer it to seller, seller rebates me 200K at escrow table. I live in the house for 10+ years and make my mortgage payments on time. All on the up and up, right?

These are all just questions I have…trust me–I don’t want to buy a house anytime soon…the wife is bitching at me though and I am trying to find a method to justify buying…not likely in my mind 😉

[no_such_reality]

I hadn’t thought about taking it through escrow..makes sense to me. Practically speaking, has anyone ever heard of something like this happening?

Isn’t that what those 125% loans were originally intended for? Buying a fixer with good credit knowing you would need to put X extra in to get a house worth 1+2X.

[lendingbubblecontinues]

N_S_R

Possibly.

Sorry, my brain is short-circuiting here as I haven’t been forced to even consider thinking about buying for some time.

I don’t like the idea one bit either, except that I’d like a more comfortable home that doesn’t leak so much heat in the winter.

[PerryChase]

LBC, also remember if you buy that house for 800k instead of 600k to save the comps for the neighbors, you’re paying property taxes on $800 not $600k. At 1.2% that’s $2400 extra per year forever, plus that extra $200k basis will increase at an annual compounded rate of 2%.

What is the NPV of saving the neighbors comps? Are the neighbors going to help you pay your taxes? F— the neighbors!

[sdrealtor]

If it walks like a duck……..

If the bank is lending you X dollars, they are doing so based upon a set of assumptions which generally dont include a $200,000 rebate to a buyer. I’m not a scheme kind of a guy and dont really know enough details to say whether its legal or not. But I wouldn’t do it myself or for a client.

[lendingbubblecontinues]

Thanks sdr.

LBC

[Wiley]

It’s fraud.

[SD Realtor]

What you are proposing is fraudulent.

Appraisers are hired by lenders, you have no say on who the appraiser would be for the valuation of the home. You can go ahead and hire an appraiser but the lender will not care unless that appraiser is approved by the lender. This is no different then any of the fraud cases that have been the topics of many posts.

Generally lenders will not even underwrite the loan if you receive more then 3% of the sales price as a credit back.

Alternatives –

If the home is going to foreclosure then let it go. Attend the auction and put in a bid.

Sit on the fence and wait for a better deal.

[lendingbubblecontinues]

Thanks for all the feedback. Guess I wasn’t clear on what I meant by “independent third-party appraiser”.

I meant the lender’s appraiser, whoever THEY choose.

Also, hopefully this is an eye-opener to everyone who has done this (shame on you…don’t drop the soap) or is thinking about it (the gig is up).

Adios,
LBC

[Author]

Posts