Single Family Purchase-cash on the side??

Question

I am about to purchase a new home without any realtors involved.  Its a neighbor a few streets over.  The gentleman has asked that we have a side deal, lower the sales price of the home for property tax purposes and then I'd give him say $50k in cash outside the real estate deal.  There mortage will still be well below the 80/20.  Sales price is currently $450k, but he wants it to be say $400k, I'd put down $150k, then give him $50k outside the deal.  He is willing to take on the credit risk of such a deal because he is having financial difficulty and may ultimately declare bankruptcy.  I don't beleive this is illegal but i'm wondering what the pitfalls might be?  Thanks.

Bill Gulley · Answer

Hi, Holy Cow Fraud Man! Do you think that because the LTV will be low enough not to require PMI makes it OK to deceive the lender as to what the deal really is?
          
          Now, with the penalties under RESPA be worth 50K, I don't think so.
          
          How were you going to pay the seller 50K, from matress money? If you write a check or take cash out, well, have you ever heard of a "large cash transaction report"?
          
          So your seller is taking bankruptcy, maybe within 120 days of the sale, I wonder if the property sale will be looked at to see if it was sold at market value? What's your seller planning on doing, with the money, padding his matress? If it's found through bankruptcy, he might go to jail and the question then becomes, where did you get it? I think they call it conspiracy, let's count the ways to commit fraud in/by:
          
          Real estate settlement, RESPA
          Bank fraud, maing false statements on a loan application...
          maybe the mail was used in performing the transaction- mail fraud
          Tax fraud (lowers the seller's taxable income)
          Bankruptcy fraud-they really don't like that one
          
          Have you ever heard of forensic accounting?  Bill, that fact that you posted this will be evidence of your prior knowledge!  Ooops, I gues my reply won't help either!
          
          I'd suggest you make the guy an offer to do the deal on the up and up or run, don't walk, the other way!  Just, IMO! Bill

Daniel Guillermo · Answer

I believe this still qualifies as mortgage fraud, but some of the more experienced investors could probably tell you for sure.

Also when you sell the home you will be responsible capital gains on $50k more than you should.  For example if you sell it for $500K you will pay capital gains on 100K instead of 50K profit.