Question: I am presently trying to purchase a two unit residential house in a neighborhood in Chicago that is appreciating quickly. The seller offered to sell it for $300,000. He told me that the building had been rehabilitated but when I hired a home inspector I found out that a lot of work hadn't been completed. The inspector also told me that the front porch doesn't meet city code requirements.

We have an appraisal that states the property value at $300,000. After I told the seller about the home inspection report, he told me he would give me back $30,000 if I would purchase the property "as is." I want him to finish the work.

Another issue I have is that I don't think the property will command enough rent to keep it going because of the neighborhood and the shoddy work.

Here are my questions:

• What are the legal procedures for rehabilitating a property? Shouldn't the seller be responsible for all repairs?

• Is a $30,000 cash rebate feasible?

Answer: There are a lot of issues you need to resolve before signing a contract with the seller. Let me address them specifically.

First, your concern that the units won't command enough rent suggests that the property is indeed overpriced. Think of a rental property as a share of stock. It can throw off money in two ways: positive cash flow from rental revenues and natural appreciation. Whether or not the rental revenues are enough to enable you to hold the property for the long term is a function of your mortgage payment and maintenance costs.

How much of a mortgage are you planning to put down? If you make only a small down payment it is likely that your monthly mortgage payment and maintenance costs will exceed the rent. This means you will have to "feed" the property every month to offset the negative spread between the expenses and revenues of the property. If that's the case, you need to be able to afford the negative cash flow long enough for the property to appreciate. The problem is that no one knows for sure what property values will do over the short term.

I can't be certain of the laws regarding rehabilitating property in Chicago, but my guess is that major improvements need to be completed by a licensed contractor. The owner or contractor applies for a permit to do the work, and city officials would inspect the work in various stages until completed and approved.

Most standard residential real estate contracts require that plumbing, HVAC, appliances and electrical components be in "working order." If not, the seller is obligated to make the repairs. However, parties to a ratified contract are only obligated to fulfill the terms of the contract. If you want certain improvements or repairs made before settlement, you need to make sure they are expressly written in the contract.

Now let me answer your last question. A $30,000 cash rebate is perfectly acceptable as long as the parties agree to the specific terms in a written contract. Such a rebate is nothing but an agreement to purchase the property for $270,000 instead of $300,000. But you will run into trouble with the lender. The lender won't allow the rebate unless it's reflected in the down payment.

Different mortgage programs require different down payments. For example, if you were planning on putting down ten percent, or $30,000, the lender might allow a loan of $270,000. But a $30,000 cash rebate from the seller would effectively create a 100 percent financing deal, which would probably not be allowed under the same mortgage program. The lender would consider the purchase price to be $270,000 and then drop your loan amount to $243,000.

Most lenders will allow so-called "seller concessions," but they are usually limited to the lower of six percent or the total amount of the closing costs. If the seller contribution exceeds the actual amount of the closing costs, the lender will lower the purchase price, which would lower the loan amount.

I have heard situations where a buyer and seller agree to a cash rebate that would not be allowed by the lender. To get around it, they make the transaction "under the table," or omitted in the closing papers. Don't even consider such a move. It's called mortgage fraud and you can get in big trouble.

It's clear that you need to practice a lot of due diligence before signing up. Here's my advice:

• Determine specifically what repairs need to be made and the associated cost.

• Determine what rent revenue you can reasonably expect.

• Consult with a qualified mortgage loan officer and establish a financing plan.

• If you still like the deal, make the seller and offer that you can live with. If he rejects it, move on.

Published: December 26, 2005

Use of this article without permission is a violation of federal copyright laws.

, the president of PMC Mortgage Corporation in Alexandria, VA, is a mortgage columnist whose work has appeared in numerous consumer, real estate, and mortgage publications. Mr. Savage welcomes your questions for possible use in this column, however because of the volume of mail received, Mr. Savage cannot answer questions individually.