CASH BACK AT CLOSING

By Danielle Pierce

During 2007, a big to-do was made with regard to all the so-called foreclosure scams being perpetrated on unsuspecting homeowners. Additionally, it seemed as if nearly anyone could go out and buy property and receive tens of thousands of dollars back at the closing table. During the summer of 2007, several lending companies, appraisers, Realtors, and attorneys were actually arrested and charged with fraud. Given the tightened lending market that has arisen over the past 12 months, it seems as if cash back at closing is a thing of the past. This article will address the legal issues surrounding cash back at the closing table.


 
Interview with a Real Estate Attorney
I was able to interview a highly skilled and experienced real estate attorney with regard to this issue. In her opinion, cash back at closing is not illegal in and of itself. However, the amounts that lenders are allowing the buyers to receive have been severely restricted. In terms of the legality of the procedures, all funds must be accounted for on the HUD-1 (settlement statement) or it is deemed illegal. So, her advice to anyone buying property is to make sure that if the seller promises you a certain amount of funds for purchasing the property, you MUST make sure that it is fully disclosed on the settlement statement. If a buyer receives any funds outside of the closing table, he/she has just committed fraud.

Interview with a Rehab Lender
Per a conversation with a national rehab lender, cash back at closing is NOT illegal in all circumstances. In some cases, a buyer may be able to receive tax credits from the seller in the form of actual cash. Also, in his experience, the seller is usually allowed to pay closing costs associated with the buyer's loan. Typically, such seller credits are limited to 3-6% of the purchase price.

The upside of seller credits is that it makes it easier for sellers to unload property. The potential downside of seller credits, from a lending perspective, is that it dramatically increases the potential for loan default. Think of it this way, if a buyer is able to purchase a property and essentially bring no money to the closing table because the seller has agreed to pay all costs, that buyer has NO financial interest vested in the property. In the event of foreclosure or default, the buyer could be more likely to just abandon the property since he/she never had anything to lose in the first place.

The lender also pointed out that buyers should not be able to profit from simply acquiring a piece of property. Some investors are still advertising properties for sale with up to $50K back at closing. In a worst case scenario, an individual may be able to buy four properties and potentially receive $200K and walk completely away from all of the properties. After all, the individual already has $200K cash. Why worry about paying the mortgage? To further complicate matters, sometimes that lump sum of money that is offered back at closing is the result of an inflated appraisal. As an example, if a property that is worth only $200K is appraised to $250K, that $50K that the buyer has just received is the result of a fraudulent appraisal. So, when that buyer goes to refinance or sell the property, he/she is unable to do so once the true market value is uncovered.

To sum it up, the lender feels that cash back at closing can be instrumental in certain real estate transactions if used properly. However, care must be taken so that fraud is not unwittingly committed. In his advice, it is best to keep all transactions above board. Buyers should take care to only buy what they can comfortably afford and not enter into a transaction to buy a property for the sole purpose of making a profit.

Interview with a Conventional Lender
During the course of an interview with a conventional lender affiliated with one of the nation's largest banks, her responses to the cash back at closing issues essentially mirrored the responses above. In her experience, cash back at closing is limited to verified borrower expenses such as earnest money, builder deposits, upgrades, etc. She states that no other cash can be received as a result of the purchase. Additionally, the amount of seller credits is contingent upon the specific loan program for which a particular borrower is approved. As a result of the current market environment and tightened financing, she generally does not encourage her buyers to believe that they will get cash back at closing.

The Bottom Line
Offering cash or other incentives to a buyer in order to induce them to purchase a particular property can be perfectly legal. It is important, however, to make every effort to not cross the line from seller incentives to outright fraud. As stated above, buyers should not expect to make a profit upon the purchase of real estate. As with most things in life, including real estate, “if it sounds too good to be true, it probably is.”

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Danielle Pierce is an investor and licensed real estate agent with Williams Realty and Investments. She specializes in Time Management, Money Management, and Wealth Creation through multiple streams of income. She can be reached at 773-551-4769.