A variety of signs accompany the changing of a market from one that favors sellers to one that favors buyers. There are more open house signs. Newspaper real estate sections are thicker with ads. And -- mostly only agents (and their attorneys) become aware of this -- there is a resurgence of unusual, often fishy, kinds of offers. The latter is our topic today, one of which listing agents and would-be sellers need to be aware.
Here in California, we haven't seen a recurrence of gemstones as down payments -- yet -- but there is increasing talk of offers with cash back to the sellers. This spring, the legal department of the California Association of Realtors® (CAR) saw fit to issue a memorandum on the subject. Recently, Realty Times featured an article on this topic.
It is important to note that there is nothing per se wrong with a seller receiving or being credited cash in a real estate transaction. Rebates on commissions from agents and mortgage brokers have become increasingly common, and they are perfectly legal.
When the cash comes from the seller, though, more restrictions apply. But still, it can be perfectly legitimate. A buyer may receive cash from a seller to pay closing costs (usually a credit) or to make repairs after the close of escrow. Both will be looked at closely by the lender in the transaction. The lender who, after all, is putting up most of the money, wants to know that the buyer has sufficient 'skin in the game,' and also that they (the lender) can be comfortable with the loan to value ratio.
When the cash going back to the seller gets to be more than a few thousand dollars, lenders become very reluctant. They become concerned that they may be the only ones with a (proportionately) significant amount of money in the deal, i.e. that they are the only ones at real risk.
What sort of transaction are we talking about? Suppose your house has been on the market for a few months at $600,000; and you would probably be happy to take $580,000. Mr. Buyer comes along and offers you $700,000, but wants you to rebate $100,000 back to him. Sounds ok, doesn't it? A little odd, but it works for you.
The problem is, how do you pull it off? Even if the buyer puts a real $70,000 down, he will still walk away with an extra $30,000; and the lender is left with a $630,000 loan on a property that, at best, is worth $600,000. What lender is going to go for that? None, actually; that's why a little fraud is needed.
The fraud may come in a variety of ways, usually involving at least an appraiser, an escrow company, and you. You need the appraiser to do something that will convince the lender that the property actually is worth $700,000. The cooperation of you and an escrow company is needed so that the lender -- who is supposed to receive certified copies of the escrow instructions and any amendments -- never sees the part about the $100,000 going back to the buyer.
"Okay, okay," you may say. "But I really need to sell this house, and what's a little fraud these days anyway?" Well, not just the lenders, but the U.S. Government thinks it's a big deal. It has something to do with the government-backed insurance programs that underlie many of the mortgage loans and institutions that make them. That's why 18 U.S.C. §1014 provides for up to thirty years in prison and a $1 million fine for committing fraud for the purpose of obtaining a mortgage loan. That fine applies even if someone from the lending institution knows what's going on.
Real estate licensees who participate in such schemes are also subject to the same penalties. They could lose their licenses, too. But, then, what's somebody going to do with his license while he's spending thirty years in prison?
