Inflating The Sale Price.
Hello, all,
I just came accross the inflating the price technique; here's how it works.
1.)Accepted sale price: $60,000.
2.)nflate the sale price by, say, $5,000; now the final price is $65,000.
3.)The seller cuts you a check for $5,000.
Anyone else done this?
I certainly like it!
Thanks,
OTW 
Why would the seller do this? What is the $5k for? What kind of deal is this, and how did you find the property?
I'd say it sounds fraudulent ot me and I would steer clear of any b.s. like that.
You don't know enough about the deal, and if you do, please explain, and if you are talking in hypotheticals, don't, because you do business in the real world, not in your head.
That said, I hope you make millions of dollars in real estate, I sincerely mean that, but don't do it in a fraudulent way, because you get what you put into this world, and it will come back to bite you in the a$$. Best of luck, Dave
Sounds like loan fraud. That kind of thing has happened a lot recently, that is why banks end up loaning @ 80-90% LTV only to forclose and realize they are upside down. 5k might seem innocent, but it leaves the lender holding the bag.
Andy
It's not fradulent, it's commonly done by realtors and mortgage people like myself.
In fact, if you learn your Fannie Mae regulations you find that even Fannie Mae allows for what we call a 3% seller consession. FHA allows 6%.
The whole purpose is for a buyer with very little cash to get the seller to pay for all or a part of the closing costs.
The net to the seller is that same, however, if the seller has any tax liablities from the sale, this increased seller consession increases that liability.
So, if the seller happens to be the owner occupier of that house in 2 of the past 5 years, it makes no difference to the seller, and it assists the sale taking place.
Of course, it means that the buyer is now financing more cost on his loan, but if he's cash tight, it a small consideration.
[ Edited by Eric_MA on Date 10/28/2003 ]
I have not developed a definitive opinion about the subject but the pro that I came up with is that the bank still has the property as collateral and remember it must appraise out first and I have seen the closing costs tacked onto the sales price - so what is the real difference?
Anyone?
The example that I started this topic with I've used the last three weeks; as a matter of fact, I just used it before 10:00am CST today on two props.
Let's do the math, ok?
$5,000 x 2 properties = $10,000.
I accounted for this in both properties when I had done their due diligence.
I was actually taught this technique three weeks ago by a realtor and a loan officer; since then, on the last four properties, I've used it and, as a result, we've put an additional 20K in our pockets.
I was just passing it along to you.
Thanks,
OTW
How does it affect the seller at tax time?
They'll pay the tax, or you can figure out the tax and give them that amount out of the $ that you get back from the inflation.
Thanks,
OTW
Eric
I think you are confused. I agree with what you are saying. If the difference of initially agreed purhcase and inflated purhcase is used for seller contribution to pay for the closing cost, it is totally legal and done all the time. (if the property is listed in MLS, you cannot go above the listed price though) What he is talking about here is that he has been getting a check back at the closing. That is totally illegal. This guy is commiting fraud.
I have been extreamly unhappy about some people who are commiting fraud. I am not an FBI agent, so I will not report on the people, but they need to understand that they maybe putting themselve and their families in jeopady. Is the money that important? Is it worth making money by comming fraud?
Fannie Mae, Freddi Mac, and other major lenders, a lot of state gornments, and feds are cracking down fraudulant REI practices, and making very tough for ethical RE investors to get mortgage loans. Look what happened in Texas, New York and Gergia. I am a mortgage broker as well. I get so upset, if I hear any mortgage brokers doing what considered illegal. Those people should be put in jail. I really dispite them, because they are making ethical morgage broker and RE investors like us look like total criminals.
I bought all the properties well under the asking price.
You're saying I'm committing fraud because you thought we jacked up the asking price, the value, what?
Please explain, as I'd like to understand, because so far the lending institutions that I've delt with have been fine with doing this.
Again, please explain your thoughts.
Thanks,
OTW
As long as the appraisal is factual/truthful and everyone is happy with the deal I couldn't care less but the bank may.
They still hold the property until the property is paid for so I don't personally see what the big deal is. There are always fine lines which never favor the little guy. You can tell the bank that you upped the asking price to pay for closing costs but not to do anything else because it may not be acceptable? I am not for fraud but that is a gray area for me.
I ran across an ad in my local paper for a property for $62K with a $20K credit at closing for repairs and it was listed by a a top rated RE company. I was surprised but I guarantee someone will find a lender for that! Maybe me!
being a realtor, in a sellers market right now, I agree that it is not uncommon to raise the price to cover a closing contribution from a seller to the buyer.
One way to know for sure if anything is fraud, is is it allowed to show on the HUD-1? If not some one (usually the lender) does not allow it, I have seen people do 100% financing (on a primary residence) get more closing help than was necessary and walk away with cash, but the majority of my experience has been that lenders won't allow this.[ Edited by chrisxg20636 on Date 10/28/2003 ]
Only and biggest problem here is that you are pocketing money that was supposed to go toward the purchase price of the house. The majority of mortgage programs allow 3% to 6% (of purhchase price) seller contribution to be paid toword the closing cost, but no lenders allow you to pocket the money. It has nothing to do with the FMV or the purchase price. Judge Judy once say, ignorance is not your defence. I think she is right.
O-T-W, can yousay F-R-A-U-D, or perhaps C-O-R-R-E-C-T-I-O-N-A-L F-A-C-I-L-I-T-Y. Dont drop the soap!
So, if I understand you correctly, I cannot put that money in my pocket, or poor a concrete drive way on one of our props or begin to build a spec house on a piece of property -which would employ quite a few people-, but I could put the money in my pocket if I went to a mortgage broker and refied or took a line of credit on the place to do the above?
Hmm. I know you don't make the rules, but it sure sounds to me like if I pay, I can take my money out of my property to do what I wanted to do originally.
I have a call into our lawyer to figure out what the law really is.
Pay to get money out... What'll they think of next? Taxing my income tax return?
Thanks,
OTW
http://www.frascona.com/resource/jag902fraud.htm
it's not illegal, it's called a seller concession..and it goes towards the buyers closing costs, you don't get a $5k check at closing.. goes towards closing costs, THAT is legal.
I'm not a lawyer and do not play one on the internet
MT
[addsig]
You're going to be paying that 5k back so all it really is is a small loan at you're mortgage rate of interest. If you goto a bank and get a line of credit and withdraw 5k from it and say "yeah I'm 5k richer", you're wrong. You still owe it back. And all you're doing is moving two years ahead of appreciation. You'll just gain no equity for the first year or two of owning the property, or at least most likely not enough to be able to pull it out of a refinance. Now if this were a rehab, it would be good to get the money for repairs, but if it's not, whats the point?
Apparently if I write in the contract that the seller's contribution is X for closing and various improvements, we're fine.
So, OTW will not be going to prison any time soon.
Do with this information as you will and have a nice day.
Thanks,
OTW
No offense to the loan brokers and Realtors who are ethical & educated. Unfortunately, you are getting bad advice from these nincompoops They're also collecting a fee for their efforts.
To get a 3%-6%(HUD) seller concession is perfectly legal-as long as it is disclosed. Money under the table is a RESPA violation and will get you mucho problemos. Instead of putting the $5K in your pocket, you should start be putting the money in your criminal defense fund. Can you say CLUB FED???
I think we all now know that it is considered illegal if not disclosed on the HUD-1.[ Edited by fmmp on Date 10/28/2003 ]
you guys just dont get it. sellers are allowed to pay usual and customary closing costs usually 3-6%. that is shown on the HUD 1. They are allowed to pay for improvements as well only if it shows on the hud and the checks are cut directly to the vendor doing the work. To the idiot that says he is a lender I doubt it because he would know that one of the documents you sign at closing is that there are "no outside agreements" ie "kickbacks" from the seller. IF IT ISNT ON THE HUD ITS ILLEGAL!!! GET A CLUE AND KNOW WHAT YOUR TALKING ABOUT!!!
Here's the bottom line:
If the lender is fine with it, it's legal.
I just got that from Carlton Sheets resource line (we bought his program, and it's worked well for us).
Also, John $Cash$ Locke had replied to my email, saying that it appeared like creative financing to him and that I should ask the lender to be sure.
So, at the very least, the big two agree: Lender must be ok with it.
Thanks to all of you, by the way, for helping me understand this.
Have a great day!
OTW:-D
I think the question is too generalized for a concrete answer. My answer would be "Maybe".
Let's exagerate a bit....
If you had a property that had a FMV of $100K and you, wrote it up for $200K and buttered up your appraiser and somehow got him to support that figure, and then you wanted a 80% LTV loan to put $60,000 in your pocket, then YES that is absolutly fraudulent.
On the other hand....If the same property was being sold for $60K and the appraisal was done independantly and unbiasedly, then you could write it up for $80K, include a $20,000 concession for repairs, vacancy, capital improvements, etc and no fraud has been committed.
The lender sees the appraisal, they see the offer, everything is in writing and signed and straight forward. They have an 80% LTV loan that is secure.
Everyone is happy.
thats the key, no lender will be "ok" with a kickback outside of closing i.e. not on the HUD1.
Thanks, hibby, you've always made sense to me.
OTW
I'm new to this site but not new to the lending industry or the law. I own a mortgage company and am also securities licensed so I am pretty up to speed on regulations and such. Many of these posts hit on the point but let me try to summarize. You can not “jack up” the sales price to “pocket” the difference/profit and have it paid to you outside the closing (POC). Every part of the transaction has to be disclosed on the HUD-1. If you “jack up” the sales price and have the seller pay you the difference in cash it is loan fraud. Don’t be confused and assume that just because you have done this that is it legal. I have seen too many closing attorneys and lenders do this only to get shut down or be forced to buy back the loan. Sure, you can take seller concessions for closing costs and fees but that would not go “in your pocket”, it would go towards the loan costs so why bother?
OTW, you commented on the fact that you have to pay to get your money out and unfortunately that is true. You can’t create money/equity here. It’s called seasoning and here in GA the new predatory lending laws address this as well a slew of other issues to “protect” consumers/sellers (do a Google search on flipping, loan fraud etc. and see what I am talking about). There is some discomfort out in the market with people profiting off the “misfortune” of others and reaping the benefits of a discounted purchase without the buyer putting anything into the deal. Traditional guidelines say you can’t do a cash-out refi or HELCO on a properties true appraised value for 6-12 months. If you refi before that you normally have to use the lower of the purchase price (plus repairs if any) or the appraised value. Now, as we all know there are some legitimate lenders who will do cash-out refis on the appraised value right away (I do them) – but we do so at a higher rate then you would get otherwise because there is more risk involved.
HIBBY76’s post is close, but if the property in was being sold for $60K and the appraisal was done independently and unbiased, then you could write it up for $80K, include a $20,000 concession for repairs, vacancy, capital improvements, etc and HIBBY76 says no fraud has been committed. True, if they are “real” concession…$20K is clear red flag to most lenders and 9 times out of 10 the $20K worth of would have to be done before closing and it would have to be proven that the seller did it and paid for it. If it is allowed after closing the lender will only cut a check for the concessions to a verified third party (or put them in escrow to be drawn on by the verified third party) who is going to do the work based on estimates given, so again it doesn’t go into the buyers pocket. Now, if you want some contractor to create false quotes etc. and just give you the money back you are in the same boat….fraud.
Bottom line…if you are trying to “create” money you flirting with danger and going to get caught…..if it looks like a duck, sounds like a duck and walks like a duck it’s probably a duck……
I am so happy to read two other Georgia mortgage brokers' comments that are against this illegal practice. Way to go, guys!
Seems to me you would now have extra liability when it comes to paying your property tax. why would you want to inflate your tax?
Property tax is nothing to do with inflated purchase price. Tax assesser's office is the one you should be worried about.
Quote:The net to the seller is that same, however, if the seller has any tax liablities from the sale, this increased seller consession increases that liability.
How does it affect the seller at tax time?
They'll pay the tax, or you can figure out the tax and give them that amount out of the $ that you get back from the inflation.I hope everyone is satisfied that any undisclosed side agreement, or seller rebate that is not reflected on the HUD-1, provides a basis for loan fraud.
Now let's address the open income tax questions still left in this thread.
If the seller concession is reflected on the HUD-1, then the seller's net proceeds from the sale are reduced by the amount of the concession. It is the seller's net proceeds that are used to calculate any taxable profit.
I, myself, used a $3500 seller concession to facilitate a sale and increased the sale price accordingly. My real estate sales agent even relisted the property in the MLS at the higher price at the lender's request to be in compliance with the lender's underwriting guidelines. Of course the property still had to appraise at the higher number for the loan to go through. My tax liability remained unchanged.
DaveT did you walk away at closing with $3500 or was that credited to the purchase somehow?
It was a concession to the buyer to cover closing costs. My original sale price was $88,500. The buyer agreed to full price but wanted the seller to pay $3500 toward closing costs. I agreed to contribute to the closing costs but countered with a higher sale price of $92K to cover the seller concession.
My net proceeds were essentially unchanged because the $3500 increase in the purchase price went to the buyer's side of the settlement statement and covered closing costs.
I say essentially unchanged, but in fact my real estate sales commission was slightly higher because of the higher sale price, but not enough to worry about.
Ummm, Hello? You just paid $5000 more for the house than you needed to. Do you think that $5000 just formed out of thin air?
That $5000 won't ever go away, if you keep the house for 1 month or 100 years and eventually resell it at whatever price, the $5000 (plus interest -can you say $10,000!!!) will come out of the selling price.
In my book that is just robbing Peter to pay Paul and is bad business anyway you look at it. We call that "Enron accounting or Enron realestate 101"
If you need to mortgage your self for the quick cash flow of $5000 you need to ask yourself what am I doing wrong. If you just need it short term there are better alternatives.
That techniques smacks of the no money down gurus who bankrupted thousands of realestate investors during the 80's.
In regard to what Eric_MA said, that is legal and happens everyday, it is just moving the money around to help a buyer with low downpayment.
However, the bad part of that is it throws off the comps in the MLS that I use to determine my resale price before I even buy a rehab property.
In the old days the listing price and the selling price were accurate, now with the practice of what we call here the "Buyers assistance program" the real selling prices are really not know.
Does anybody have a way of finding out the actual real selling price that is quick and easy, say when you are looking at 20-30 comps that sold during the last 3 years?
_________________
Mike - Denver, Colorado - "I had my hair cut twice and it is still too short!"
[ Edited by The-Rehabinator on Date 10/29/2003 ]
My real estate agent's comparable sales listings tell me the contract price AND the amount of any seller "subsidy" granted to the buyer.
Appears all the information you need is already captured in the MLS.
I must not know what I'm supposed to be looking at or know how to read it, or maybe not getting all the data?
I have: Price which is the listing price.
Sold Price: which is the price they agree upon.
Sold Loan Amount: which is minus down payments or buyers assistance money
Sale Concession: which is usually blank.
Any help?
[addsig]
Here's the key to whether any crime is being committed:
If any of the 3 players (seller, buyer or lender) is acting on false or misleading factual info, such as mis-stated purchase price, or inflated down payment figure...it's fraud against that player.
And if that player is the lender, and a HUD 1 form has been completed and submitted to the lender, with false info, it's federal crime.
There have been a number of actual criminal prosecutions on this very thing.
I read through this thread of buyer concessions and putting money in your pocket and I thought of this. Please let me know if something in this is incorrect.
If I am wholesaling properties that means I am finding them at a value and reselling them for a profit.
IE I find a house for 60k worth 80k. I buy it for 60k and a month later sell it for 80k. I pocket 20k (minus normal taxes for short term gains).
Now I think this relates very closely to what OTW is doing in that he is finding deals and making "extra" money out of it.
Ok, take the above sale where the wholeseller make 20k in a month and assume he already had a buyer lined up. His contract to the seller is 60k, his contract to the buyer is 80k, he made an instant 20k and just has to pay taxes on it.
What prevents Corporation A from being the first party in the above deal. And Me from being the second party in the above deal.
I look at the property and see that at 80k I can still cashflow it with rentals. Good deal I will take out an 80k mortgage for the house.
What if I owned Corporation A, the 20k cash I made on the resell is also mine.
If anything maybe this will provide a way for OTW to setup his deals such that they are not illegal.
my thoughts,
Chris
If a licensed appraiser says the property is worth 65k then its not inflating the price, even if the seller only wants to pocket 60k. To do what you are talking about you have to find a seller who is asking less than his house is worth.
I am having this problem right now. I am selling a property. The contract was for 100k the appraiser came back at 91k. A lender will give up to 91k on that property, what the seller and buyer do with that money is up to them within reason. There are ver few programs that let you borrow 103% of the value of homes on purchases.
So you can only wiggle as much as an appraiser will let you. If on the other hand you are somehow controling the appraiser with undo influence, then you are definitely going to jail.
I think that this is very common. The very first house that I purchased I had a carpet allowance from the seller. I don't believe that the price was inflated, however, we did not buy new carpets for 10 years.
More recently, I have gone over the asking price to get terms from the seller. I have asked the seller to pay an allowance for closing costs. We did not hide this from the lender. Some times it would be approved and sometimes not. I have had sellers not want to pay for all of the repairs needed for me to close. I have offered to split costs with seller and then raised the price to cover my half.
In all cases the sales price was supported by appraisals.
-Ed