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What Is A Cash-Back Transaction?
Question: What is a "cash-back" transaction?
Answer: It is sometimes claimed that it is possible to buy a home and receive both the house a substantial amount of cash at closing. For example, a home will be "sold" for $100,000. The deal will be financing with a 95 percent loan-to-value mortgage. However, the seller will provide a $15,000 certificate of deposit to the buyer at closing. On the surface, we have a deal with a $100,000 purchase price, $5,000 down, $95,000 in financing, and a $15,000 CD. Alas, $100,000 was never paid for the house. There was a "sales price" of $100,000, but then as part of the deal the seller provided a $15,000 rebate in the form of a CD. Since a CD is a certificate of deposit which presumably is worth $15,000 in this example, this property was sold at discount -- the real price is $85,000. This is a classic "cash plus" deal where the amount financed is greater than the debt to the owner. The surplus would be returned to the buyer at closing, if there was a closing. Lenders will decline this transaction because the amount of financing sought is greater than the discounted value of the property. Even if this property appraises at $100,000, lenders will value the deal at the appraised value or the true sale price ($85,000), whichever is less. Worse, if the lender is not told, in writing, in the loan application and in the sale agreement about the CD, there may well be grounds to consider charges involving fraud. Bottom line: Should someone propose a cash-plus deal, sign nothing until you have spoken with an attorney.
© 1997 Peter G. Miller. All Rights Reserved.
Written by Peter G. Miller.
© 1997 Peter G. Miller. All Rights Reserved. Rules, Disclaimers & Notices.
Copyright © 2012 Realty Times. All Rights Reserved.
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