Sellers cash-back repair money on *below market value* house

9 Replies

It's my understanding that using seller's cash-back is fraud when you are inflating the price beyond market value. Here's an example:

Scenario 1

  • FMV: $300,000
  • Sale Price on Contract: $350,000
  • Cash back from sellers for repairs: $50,000
  • Net to seller: $300,000

In Scenario 1, the buyer and seller are inflating the value of the house above FMV to cause the bank to lend extra money for repairs. In effect, this causes the bank to unknowingly lend more than 100% LTV and is clearly fraudulent.

But what if this transaction takes place below the market value, where the bank still enjoys a comfortable LTV? Example:

Scenario 2

  • FMV: $300,000
  • Sale Price on Contract: $240,000 (which is 80% LTV)
  • Cash back from sellers for repairs: $50,000
  • Net to seller: $190,000 (because they are motivated and don't want to do repairs!)

In this case, the seller is willing to walk away with $190,000. The buyers have a note for $240,000, but they also have $50,000 cash in their pocket for repairs. The bank is sitting on a nice 80% LTV loan.

Anyone ever tried anything like this? There are tons of Google results for Scenario 1 (clearly fraud) but I can't find anything about Scenario 2.

TL;DR: Has anyone bought a house below market value and used seller cash-back to pay for repairs?

cash back is given all the time repairs,closing costs etc It is the appraisal of the property that  the bank goes by and not the over inflated value of phantom cash back

Originally posted by @Account Closed :

cash back is given all the time repairs,closing costs etc It is the appraisal of the property that  the bank goes by and not the over inflated value of phantom cash back

Right, and that's the main thing I was trying to confirm -- if the entire closing still yields a final result that is below market value, the bank isn't lending "phantom" cash, they're lending against equity in the property.

I just wasn't sure if they would actually see it that way...

@Will Porter , Is there a bank you work with that will loan 100%LTV? Do you know a bank that will loan 100% of the purchase price? I may be missing the point, but unless this is a hard money lender providing the loan, most, if not all, banks will loan the lesser of cost (aka purchase price) or market value. In this case, if it is an investment purchase, the bank will loan you 80%(max 85%) of $240,000 or 192k.

How would you get the sellers' to give you the 50k at the closing table? 

These are just comments, based on my experience with banks. Cheers!

Stuart

Your loan will be whatever %LTV you are getting...based on the Lower of the purchase price, or the appraisal. You won't be borrowing 100% of the purchase price, regardless of the appraisal. There also will be a limit to then cash back. Get preapproved with a lenders, and ask that lender. Portfolio loans will be different thank conventional loans as as to the allowed cash back, And how it must be administered.

Originally posted by @Stuart Birdsong:

@Will Porter, Is there a bank you work with that will loan 100%LTV? Do you know a bank that will loan 100% of the purchase price? I may be missing the point, but unless this is a hard money lender providing the loan, most, if not all, banks will loan the lesser of cost (aka purchase price) or market value. In this case, if it is an investment purchase, the bank will loan you 80%(max 85%) of $240,000 or 192k.

How would you get the sellers' to give you the 50k at the closing table? 

These are just comments, based on my experience with banks. Cheers!

Stuart

Well the numbers in my example aren't real so don't focus on that, I was just asking about the concept. You would have to make it work within the lender's LTV requirements so you're right that they wouldn't be lending 100% LTV.

As for the reason why, it might be an extended family member, or some other side agreement that you have with the sellers, or whatever. Again it's about the concept.

I'm trying to think of other creative ways to fund rehabs without having to save up tons of cash.

Hi Will,

It appears you are a smart guy thinking too hard how to beat the system. Neither of your scenarios would work because, as somebody stated in one of the previous answers, banks appraise the properties and they will loan about 80% of lower amount. However, I do know of a potential bank that might loan 100%. The bank’s name is “The Owner”. Let’s use your example. Tell the owner that you will give him $200K for his property if he agrees to accept $1000 interest only payments for one year. Now you are controlling the property with $1000 monthly payments. If the owner does not go for the sale then switch the tactics and tell him that you will lease the property for one year with option to buy for $200K by making $1000 monthly lease payments. If you do not have refurbishment funds get a partner or better yet if you have experience you might get the owner to fund the repairs by offering the owner 50% of the profits. I used those funding methods myself so I know they work. Try it you’ll like it.

Good luck,

George