Question - Cash Back at Settlement for Buyers

By
Services for Real Estate Pros with Auction Brokers & Investors United

Question: Cash Back at Closing

My buyer wants cash back at closing to renovate the property, which is fine by me because he's willing to pay me the difference in my tax liability. My question is how do I correctly and LEGALLY write it up into the purchase agreement so that I'm not committing fraud? Thanks.

How much does he want and how much are you willing to give back?

There are several ways to satisfy your buyer:

•1.      Give the buyer a check that will be due at a future date after the formal settlement. This could be consideration for completing needed work or reimbursement for closing cost.

•2.      The buyer can write a clause in the offer that states that the seller agrees to give the buyer $10,000 at time of settlement to complete the following deferred maintenances.....

•3.      Buyer can offer to paint the front porch (Called a "front porch clause") for $10,000, seller writes a check for $10,000 payable to buyer, and buyer endorses the check back to seller as a downpayment on the property. You should retain a photo copy of the check as proof of consideration.

You never want to do anything that is gray, marginal or could be interpreted as  illegal. 

There are many formulas that can be used to structure transactions legally and creatively; never do anything that is contrary to the law.  Always make full disclosures early in your negotiations and keep your word.

Charles Parrish

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Show All Comments
Rainer
129,600
Al Maxwell
Coldwell Banker - Marietta, GA
Real Estate Agent
Even with full disclosure, we're seeing lenders shy away from money going from the seller to the buyer. It has to be a reasonable amount of money and the check has to be made out to a thrird party vendor, in most cases...
Aug 19, 2007 11:31 AM #1
Rainmaker
164,701
Lori Lincoln
Serving Freetown/Asonet, Taunton, Rehoboth and more! - Taunton, MA
Your Local Housing Expert, Keller Williams Taunton

This has to be disclosed and spelled out in detail on the P&S, NOT an addendum... including a detailed summary of what the cash will be used for. You would be better of having it escrowed and dispersed to contractors. The banks don't like the cash-back thing.

Aug 19, 2007 12:17 PM #2
Rainmaker
591,130
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Charles,

How much is your buyer willing to pay if you have to spend 5 to 10 in the Federal Pen?

If this can be done legally there will be no tax consequences to the seller, if!

Call your Loan Originator and ask if he has a loan program that will allow cash back. If he has a program there will be restrictions on the percentage of allowable cash compared to the purchase price and/or the loan amount, there may also be a gross dollar restriction. There will probably be restrictions on what the money can be used for. Surprise, surprise the money needs to be used for the stated purpose. Some lender may require a 442 inspection (appraiser's supplemental report) before releasing the money.

In all cases the truth must be contained in the sales agreement, the escrow instructions, and on the HUD-1 to leave it out of any of them is to say good by to your career and possibly retirement to state or Federal prison.

There is no legal way for your suggestion #1 to be done, worse if the buyer gets that check they might cash it! They might go after you for an NSF check, your defense would be that it was part of a fraud scheme that didn't close? Ya, right! #2 might work if the lender allows, but the work must be done! The borrower signs all sorts of documents at closing allowing for quality control at a later date. #3 might work if the buyer is a licensed painter and $10,000.00 is in realistic range for the work. The job will probably have to be done and inspected before funding.

This nonsense has gone on for decades! Many TV real estate Gurus teach such fraud! People believe it and everyone knows someone who says they have done it.

Get involved if you want, but if in ‘s not on the sales agreement, the escrow instructions, and on the HUD-1, it's not legal! Maybe you'll get lucky, the first person to get caught is the mostly likely to deal his way out of trouble! Do you trust your buyer, the listing agent, the lender, the appraiser, the escrow officer, your broker, his partners, and the soon to be ex-spouse of any of them to take the fall for you?

Sleep well.

Bill

William J Archambault Jr

The Real Estate Investment Institute

First National Mortgage Sources

http://www.reii.org

http://www.williamjarchambaultjr.com

 

Aug 19, 2007 12:28 PM #3
Rainer
11,647
Gareth Bourriague
Benchmark Mortgage of Louisiana - Baton Rouge, LA
Benchmark Mortgage
As fas as my company is concerned (as well as every investor that I've dealt with), this is illegal.  People try to do this all the time, because they see it on infomercials - but it can't be done, at least not when a lender is involved.
Aug 19, 2007 12:47 PM #4
Rainer
45,886
Charles Parrish
Auction Brokers & Investors United - Baltimore, MD

I agree with most of the responses here.  It is important to make all DISCLOSURES.  it is not worth going to jail  for.

As we all know, sellers have always contributed to buyer's settlement cost.  It is done all the time with full disclosures.

My post was not intented to give bad information, only to inform and to stimulate.

Charlie

Aug 19, 2007 01:16 PM #5
Anonymous
Anonymous
Anonymous

Give the buyer some of your commission for the repairs. This does not have to be on the HUD unless used for settlement costs. Where did I get such an assertion?

http://www.gcaar.com/legalcorner/docs/rebates_closing_costs.pdf

 

Aug 30, 2007 11:36 AM #6
Rainer
143,777
Gary J. Rocks
Werner Realty - West Milford, NJ

Charles

That sound like it is illegal in New Jersey, Realtors cannot get involved in this transaction.

Aug 30, 2007 02:56 PM #7
Anonymous
Anonymous
Anonymous
Commission rebates are legal in most states; however, they are illegal in NJ -- but that might change. There is legislation pending in NJ that will allow cash back rebates. Read the verbiage.

(2) a real estate licensee may provide a seller or purchaser a

16 rebate of a portion of the commission paid to the licensee in a

17 transaction, so long as: the licensee and the seller or purchaser

18 contract for such a rebate in advance; and the licensee complies

19 with any State or federal requirements with respect to the disclosure

20 of the payment of the rebate. The rebate paid to the seller or

21 purchaser may be in the form of cash or other thing of value,

22 including, but not limited to, a gift certificate, and may be made at

23 or after the closing;
Aug 30, 2007 05:43 PM #8
Rainer
51,727
Diane Velikis
Coldwell & Banker Busch Real Estate - Luzerne, PA
Luzerne County Real Estate
A very good read with extremely good comments. I have never encountered this type of closing, but have heard about them. Now if I have a buyer who asks me about this I have an answer. Thanks for the info!
Sep 03, 2007 07:37 AM #9
Anonymous
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Rainer
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Charles Parrish

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