I will be purchasing my friends SFH for 170k. It is appraised and the current market value is $210k. May I draft up a purchase agreement for 210k and have him cut me 40k at closing?
I would use the funds for drain tile, new roof, cosmetic things, and etc. He figured by the time he'd work with a realtor and have the issues addressed, he'd walk away with 180k max - so he figured he'd just pass it off for 170k to me. What are you thoughts? Is this legal? Will he have to pay a capital gains tax on the extra 40k?
Nice. But guess what, it's illegal. It's called mortgage fraud and was a popular fraud in the last housing crisis.
Cash-back schemes: Occur where the true price of a property is illegally inflated to provide cash-back to transaction participants, most often the borrowers, who receive a "rebate" which is not disclosed to the lender. As a result the lender lends too much, and the buyer pockets the overage or splits it with other participants, including the seller or the real estate agent. This scheme requires appraisal fraud to deceive the lender. "Get Rich Quick" real-estate gurus' courses frequently rely heavily on this mechanism for profitability.
I'm not a realtor or lawyer, but it sounds like you are venturing into shaky ground. If you are financing, generally, the bank has limits on how much seller assistance you as the buyer can get, which is a pain, but its the rules. I think on investment properties its 2%. Also, I'm assuming you will still have to come up with a down payment.
A better way to go, might be to have the seller agree to all those repairs in the contract & have them done before closing. Pay the $210k and then the seller can pay off the contractors.
I have had a seller give me cash at closing for repairs and such, similar to what you are suggesting, to do it I put it on an addendum, had them put a check in the lawyers escrow account & release it at closing. If they balked we would have turned the addendum over to the bank & that would have killed the deal, just some insurance. I don't think it was the best way to do business, but I wasn't going to buy the property with out certain repairs being done & the seller didn't want to get the repairs done & risk not having the property close.
Just my $0.02 worth of thoughts,.
Thanks! The best scenario would be to just purchase it outright for 170k and then get it appraised later on w/ the option to pull out equity?
Don't listen to Troy. He's just a fuddy duddy. This is totally legit. In fact, I say buy it for $500,000 and have your buddy cut you a check for the difference. You might have to share it with the title co and your broker....but make sure you keep it under the table. No one likes paperwork these days......keep with the paperless theme. It's better for the environment that way. If you have trouble getting the loan, you might want to add a few zeroes to your income on the application? Do you know any creative appraisers? These things are so subjective anyways. Sorry to get off topic, but you wouldn't by chance be able to recommend anyone that can roll back my odometer can you? My truck drove so much better 40,000 miles ago.
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