Cash From Seller After Close
Theres many ways to do this, but I just would like to know if the following method is legal:
1. Buy $200K property with 10% down = 20K.
2. sign promisary note with seller to receive $25K as "bonus" after closing on the loan.
3. Receive $25K as a "bonus" to buying the property from the owner.
in other words replenish the 20K down payment for future deals.
I know its done, but the question is, what are the legalities of such a deal, and how is the $25K taxed if at all?
Basically you are receiving a 2.5% discount to buy a $200,000.00 house. If you do as you have descibed the deal you will pay tax at your personal rate on the $5,000.00 rebate/bonus. You are buying the house for retail,and in my opinion is not a good deal for you,but a great deal for the sellers.
No, Im not buying at retail.
The purchase price is $200K, the bonus/rebate of $25K means that I technically bought the property for $175K. My loan is for $180K, and I still have my 20K + 5K available for the next deal.
Does this still mean that Im only taxed on the 5K ?
My question is, why would the seller give you a bonus? If he does give you the bonus, why not make the extra $5k a concession fee towards closing and pay no taxes. I recently did a deal where the seller gave me a $5000 concession fee for closing costs. Turns out, I only needed $2850 of that money for closing and put the rest into my pocket for my next deal. Ended up making $6400 (including other loans) on that deal. If I can get a bonus, that would skyrocket my profit! Please share.
There are a couple things that you need to be leery of.
1. Loan Fraud. If you don't disclose this on the REPC or in other documentation that is provided to the lender it is a "silent second" and considered fraudulent. Happens all the time, but it's still illegal.
2. Along the same lines, if you inflate the value above what it's really worth (which is a whole different subject) that's also considered fraudulent. "What does it matter?" you might ask, it's a private transaction.
It matters because there are 3, not 2 parties involved (your lender). There was a case a number of years ago where you would get $100K in cash if you bought a certain home. Homes were worth closer to $300K, but they were selling for $400K. The builders, loan officers, and appraisers were all in on the scam. The buyers bought them, spent the $100K. Theres no problem with this until they start to foreclose or try to sell them and other buyers are only willing to pay $300K.
That's 25% of the purchase price ABOVE FMV. So what if you buy at a 25% discount? Well, lenders will argue that whatever you paid IS the FMV and if you increase the sales price it's fraudulent. Additionally to make a contract legal you have to be exchanging goods and services that have value. Closing a contract does have value, as long as you don't overdue it.
As for whether or not you should do it, that's your call. These are just a few other things to keep in the back of your mind.
BTW, generally lenders won't allow more than 6% in concessions and kickbacks.
So let me get this straight. If the lender lends you 90% LTV and you borrow the other 10% plus more from the seller, that's illegal? Or is not disclosing it to the lender the illegal act?
Quote:
On 2004-03-22 13:55, cmyke wrote:
So let me get this straight. If the lender lends you 90% LTV and you borrow the other 10% plus more from the seller, that's illegal? Or is not disclosing it to the lender the illegal act?
Not disclosing it to the lender is the problem. Chances are they would not give you the loan if they knew you where getting the 10% down from the seller plus extra cash.
Thanks for the clearup. However, I don't agree with the fact that the lender won't lend you the money if you get the 10% from the seller. I got 100% financing plus closing costs by getting the seller to help me and the lender was totally aware and had no qualms about it. Guess I just got lucky!
The other problem is the extra cash. You threw that in and that complicates it. Unless there is cash back in escrow for repairs you are looking for trouble.
Hi Hilo type. You got a goody. Maybe you know someone in the bank, or the Seller knows someone in the bank. But it is done. In economics it is a no no and can be considered fraudulent on occasion if the intent is there. But this one just sounds like a goody.
Some time in the future try it again and see if you come up with the same result. Remember the game changes and it changes place to place.
Sometimes the bank needs loans as it has a portfolio to sell and that is primary, so they include a few loans that are on the line. If the bank is smart enough to insert prior to a foreclosure and just let you out if it does not work. Everybody becomes a winner and save me space cause I am finaly going to build on the 5 acres just to the North of Maui. That is if I can find anybody willing to build.
Lucius 8-)