Does cash concession reduce Purchase Price?

Question

I've had a cash offer accepted on a duplex.  The inspection turned up some issues that I'd really like the seller to fix, but they are not willing to, and instead offered a price reduction.

However, I will likely be applying for delayed financing on this property.  My lender will lend up to the lesser of A.75% of LTV  and B.100% of purchase price (this is during the delayed finance time period, so within the first six months).  So if I get a price reduction, it will lower the amount that I can borrow against this house. Can I keep the sale price the original offered amount, and get a cash concession at closing, so I'm essentially walking away from the closing with the money in hand to pay for the repairs?  Would that money need to go into escrow to prove its only being used to pay for repairs, or can it come to me directly?

My lender said he thinks it is legit for me to get a check directly, but I'm wondering if anyone has done anything like this before, I really don't want to end up in jail for fraud :)

If this is legit, I'm wondering what's stopping anyone from scamming the system.

Say I want to pay 100k for a property.  I arrange for the seller to agree to a purchase price of 130k , with a 30k cash credit at closing.  Boom, now I can borrow 130 against the property instead of 100 (assuming it appraises high enough).  Doesn't seem like that should be possible.

Christopher Phillips · Answer

@Rivy S.

No. That's not how it works. Concessions can't exceed the added that way with the intention of pumping up the sales price. That would be considered mortgage fraud. And at the end of the day, if your sales price was pumped to $130K and it's really worth $100k, the appraisal should come in at $100K. The appraiser gets a copy of the contract and will clearly see the concession in there.

Andrew Postell · Answer

@Rivy S. it's not a very common tactic...I mean, how many people have enough money to buy with cash....but for those who do use it you can get more money back, quicker, and with a better rate.

So no, it does not matter what bank account it came from or goes to.  It just matters that a lien shows up on the deed of the property to refinance.

And you are very correct to think about the amount of the lien and it really has more to do with the appraisal amount.  You should always be qualified for an investment property (your lender should be using that rental income immediately to help you qualify) but if you just want an 80% loan...then what if your home appraises for $127k instead of $130k?  Normally that would mean you need to bring more to closing.  But there is something that lenders do behind the scenes that you normally don't see.  We normally call each lender and ask "Hey, what's the payoff for this loan?"  because we can't tell if you have paid it down, or maybe drawn more from it, so we have to ask (and we ask with a form).  So we would guide you to wait until that appraisal is completed so we can calculate your payoff so you don't bring any additional money to closing.  I mean, I guess you could just leave it but any money you bring to closing to pay off the loan...goes back to your LLC, so it's the same math but just more work.  So we just reduce the payoff amount to help prevent so much money going back and forth type of thing.

Hope that helps but feel free to ask anything additional. Thanks!

Rivy S. · Answer

@Andrew Postell wow that is great information.  I don't know much about the financial technicalities of an LLC-- like can I just give it money from my personal acccount to lend back to me? when I repay it from me to the LLC with the loan, can I put that money back in my personal account?

However, you've given me a lot to think about! I will do my research.  Thanks!

This sounds to me like an excellent way of doing a BRRR while skipping the seasoning, right? The only part is to be careful that the original loan from your LLC to yourself should be as close as possible to the final amount you'll  be approved to borrow from the bank minus closing costs of the loan?

Andrew Postell · Answer

@Rivy S. nice to meet a fellow Texan and I am glad I caught this post.  First, YOU SHOULD NOT BE USING DELAYED FINANCING!  (More on that in a moment).  But...if you were to use delayed financing, then answer would be YES, it would decrease your amount of money that you receive when you go back to refinance.  The delayed financing rule is that you can only receive back money you came out of pocket for.  So purchase price + closing costs...that you actually paid.

Now, the reason why you should not be doing delayed financing is the precise reasons you listed:  you can only receive the lower of 2 values.  And the other thing that most lenders don't tell you:  your rate is also higher!

The proper method of buying a property with cash is highlighted HERE.  Since I wrote that post several rule changes have occurred which allow us to get even MORE money now.  So now you can receive up to 85% of ARV.  The first two sections of the article describe the issues it sounds like you already know about so pay attention to the 3rd section.

Tag me with any other questions.  Thanks!

Christopher Phillips · Answer

@Rivy S.

Concessions only can cover the closing costs.

If you ask for a repair, that can only be handled as a credit.

What you're asking doesn't make sense. It's a cash transaction. Why would you offer more money just so he can give it back to you?

You offer your price and they give you a credit at closing. The credit is just accounting paperwork. At the end of the day you'll be wiring the net proceeds.

You offer $100k and say you want them to pay for a repair. The seller says no, but they'll give you a credit of $30k at closing. The net proceeds will be $70k.

You don't pump up the offer to $130K and ask for a credit. Then your net is $100k and the owner isn't really paying for anything. And you are still paying $100k for a house that needs $30k in repairs.

Most title places will tell you that they ignore credits and go by the sales price in the original contract. So, if the owner won't budge on the price, you offer $100k and request a credit for repairs. You pay your net proceeds, the sales transaction will be recorded at the contract price of $100K.

Then the question is how it will appraise. It is the lower of the sales price of $100k or the appraisal. When they go to do the delayed financing, they'll see that you paid $100k for a house based on the recorded price. When you go for delayed financing, they will request the settlement statement to show proof that it was an arms-length transaction and that you paid cash. They'll also want the source of the cash. It has to be cash. You can't have any form of financing to qualify.

When you go to get the financing, it will be the lower of the $100k or the appraisal at that time.

We can assume that the appraisal should come in higher that $100k due to the needed repairs. In your case, the $100k will the lower of the two amounts and that's what the delayed financing will be based on. And the lender will be willing to lend up to a certain % of that basis.

Rivy S. · Answer

@Christopher Phillips  Thanks for your response! I'm not sure  I follow though... Why would the appraiser see the credit, or the purchase amount altogether? The appraisal isn't happening in the  context of the purchase, which is being done with cash.  It's being done in the context of a delayed finance transaction, after I purchase and lightly renovate the property.  (Within six months, so delayed finance rather than cash out refinance)

Also, in my case the objective of the  concession is not to bump up the sales price, it's to cover a repair allowance that the sellers don't want to handle.  Does that change anything?

Any lenders or buyers out there that have done this before? The property is in Indianapolis btw.

Does cash concession reduce Purchase Price?

Most Popular Reply