$10,000 at closing! ?? - Posted by Matt

Posted by GL(ON) on March 04, 2002 at 14:46:26:

It isn’t fraud. You aren’t defrauding anyone. It is a rule of the bank, not a law. They will waive the rule themselves in some cases.

I pointed out in my very first post that it involved fooling the bank. I wouldn’t want to do it myself, and in fact have never financed anything that way. But the question was how could it be done not whether it was legal. In fact it is legal, or at least not against the law. The bank might get sore if they found out but it is not fraud and they can’t send you to jail for it.

I also described the case of a building being bought cheap because it needs repair, and being financed for enough to complete the repairs. In that case you could do over finance the property with the full knowlege and approval of the bank.

$10,000 at closing! ?? - Posted by Matt

Posted by Matt on March 03, 2002 at 13:29:24:

I am looking at a small cute $50k house to buy and rent out. The seller agrees to me paying $25k down and the other $25k over five years at 8% interest. A friend of mine is telling my I should borrow $35k from the bank and pay the seller his $25k. Then rent it out to pay the mortgage payments and seller’s payments.

I would then be left with $10k. Is it that easy?

In Dolf DeRoos’ book “Real Estate Riches” he says this can be done, but it just sounds fishy and too good to be true to me…

(Please keep in mind if you think this is a dumb question I am probably too much of a beginner to be buying this property to begin with. lol )

I’d LOVE a response guys!

Re: $10,000 at closing! ?? - Posted by Jeff M

Posted by Jeff M on March 04, 2002 at 12:25:18:

I don’t know anything about this type of deal, but it seems to me that the seller might have a problem being put in “second” position behind the bank on his/her loan. I currently hold a mortgage on a property I recently sold, and, from my point of view, the only way I would do it was if I got a much higher than normal return on my money, since I would be in second place on a default. In my case, I negotiated a 10% rate for 10 years. Good luck to you!

K.I.S.S - Posted by CH

Posted by CH on March 04, 2002 at 08:21:28:

Hi Matt:

Based on your information, it looks like in five years your will own the house free and clear. If so, then you?re missing the primary benefit of investing in real estate. LEVERAGE. Put down 10-20% and get bank financing for the balance, take over his financing, or have the seller finance you; any combination will work. Thus, you will be offering this seller or another seller all cash and you should be able to find a property at 75% or less of FMV. Cash always speaks to sellers in distress. By doing this, you should have a GREAT monthly cash flow and some reasonable equity with an ROI above 50%. Keep buying properties this way and over time you will become a wealth man with both healthy passive income and equity build-up.

The key taking it to the next level once you get started is finding and using money partners. The two primary keys to success in this business is finding great deals and finding money partners. So, spend your time in these two areas.

I know there is no razzle-dazzle in this approach, but it?s really a simple game.

Finally, keep things legal. It’s hard to make money from jail!

Good Luck!

Re: $10,000 at closing! ?? - Posted by GL(ON)

Posted by GL(ON) on March 04, 2002 at 08:10:38:

You can get the extra money by getting the seller to go along with your plan, telling the bank you are paying cash down but really putting on a mortgage later. It is none of the bank’s business if you put on another mortgage later, it does not affect their mortgage at all. They don’t like to see someone buy a house without putting up a lot of cash, that’s all.

If you want to go into details here is one way the banks will go along with.

Suppose you buy a run down apartment house for $100,000 but you can prove by comparable properties and by the rent income, that it would really be worth $200,000 if it was in top shape?

It would be quite possible to get a $150,000 mortgage even though you are only paying $100,000. The $150,000 would be based on the $200,000 value when fixed up.

In this case they would not give you the whole thing at once, they would advance the money piecemeal as you showed that the repair work was done and the apartments rented.

If you did the repair work yourself for $20,000 you would wind up with a $200,000 building, $30,000 cash in your pocket and $50,000 equity.

This is how fortunes are made in real estate rehabs.

By the way this is how your house was financed when it was built. Builders borrow this way all the time, getting money advanced to them on a blanket mortgage as they build the houses and paying off when they sell the house.

Work it out with the seller - Posted by MJK

Posted by MJK on March 03, 2002 at 22:44:41:

One way I’ve heard about doing this is to ask the seller would he accept $27k for the property(first mortgage)? If he says yes tell him you’ll give him $35k for the property (first mortgage) but(put this in writing) he must give you $8000 back at closing.He gets an extra $2k so he should say yes.
Never done it but I heard its a technique some use.

Re: $10,000 at closing! ?? - Posted by CurtNY

Posted by CurtNY on March 03, 2002 at 21:36:43:

Its never that easy! Trust me if it was, everyone would be doing it. Most lenders won’t let you do this because you’re borrowering more than the purchase price. You can take GL advice and not tell them but that’s fraud, I believe the penalty is $10,000 and jail time (but I’m not 100% sure). Any how if you’re confortable with that then by all means, but not me. You need to find a lender thats ok with these terms, check your local brokers, but make sure they understand everything in the begining, many brokers will say anything to get you in the door then everything changes. Well just my two cents. Good luck


Yep… you can… - Posted by David Alexander

Posted by David Alexander on March 03, 2002 at 14:31:09:

Listen to what GL said…

As well as get the other 25k owed secured by another property (substitution of collateral)… that will solve your overfinance problem…

Becareful though that the income recieved will cover the debt service…

And not put the the extra into another property… put some of the money back for contigencies and the rainy days… you will have them…

David Alexander

Re: $10,000 at closing! ?? - Posted by GL(ON)

Posted by GL(ON) on March 03, 2002 at 14:14:58:

Yes it is that easy, almost.

Banks don’t like it when you over finance a property. One way to get around this is to not tell them you are going to do it, and register the 2nd mortgage the day after the deal closes. The other way is to say the excess money will be spent on fixing up the house, and therefore the value will be in the house.

The other thing is, it’s not “free” money, it’s borrowed money. Same as if you signed papers at a car dealer’s for a “free” car that you make payments on LOL. In other words you have to pay it back. The difference is that your tenants will pay it back for you and it means you will make a little less each month off the rent. You will also make money on appreciation if the house goes up over the years. And it will provide tax shelter. By the way speaking of tax shelters, the extra $10,000 is tax free because it is borrowed money, not profit. I love this business!

Do you see the difference between borrowing money to go in debt for cars, clothes,or furniture and going in debt to buy a house? One drags you down, the other lifts you up financially. So be careful if you get that $10,000 that you don’t use it to go deeper in debt for consumer goods, but use it for investment such as a down payment on another house.

Re: $10,000 at closing! ?? - Posted by Dave

Posted by Dave on March 04, 2002 at 09:21:26:

“If you did the repair work yourself for $20,000 you would wind up with a $200,000 building, $30,000 cash in your pocket and $50,000 equity.”

If you have to prove actual expenses to make those repairs, how is it possible to walk out with money?

I thought banks and lenders fund only the “actual” cost to make repairs…or do they give u the whole After repair value off the bat?


Re: $10,000 at closing! ?? - Posted by Matt

Posted by Matt on March 03, 2002 at 22:20:13:


What if I do what GL suggested and say the extra $10k is for repairs on the home? Will the bank check up on that? I really want to make this deal and use part of the $10k to help me buy more properties…

Also, here is the exerpt from dolf deroos’ book Real Estate Riches where he describes this technique…

“How about asking the seller to leave in 30 percent of the purchase at 6 percent interest per annum for five years? There is no law against that. If the bank agrees to an 80 percent mortgage, then you could even pocket 10 percent in cash, to use as the deposit on your next investment.”

Thanks for helping out a newbie!!


Re: Yep… you can… - Posted by Dave

Posted by Dave on March 03, 2002 at 14:45:56:

Could you please give some examples of subsitution of
collateral. There’s nothing that I own clear and free that’s worth that much.



Re: $10,000 at closing! ?? - Posted by Dave

Posted by Dave on March 03, 2002 at 14:30:52:

How can you record the second mortgage after closing?

Won’t the lender see the purchase agreement and
price @ 50,000?


Re: $10,000 at closing! ?? - Posted by GL(ON)

Posted by GL(ON) on March 04, 2002 at 14:52:30:

It doesn’t matter what the repairs cost. All they care about is that their loan is secured by a property of a certain value. If the value of the property after fix up is $200,000 and they will loan 80% of FMV then they will loan $160,000. It doesn’t matter if the repairs cost $10,000 or $1,000,000.

They know perfectly well that a contractor has to make a profit. If you are the contractor, you make the profit.

On the other hand if you spend way too much on repairs, tough noogies. They won’t lend you a dime extra, no not even if you go bankrupt. Many renovators have gone broke this way, they are a common source of don’t wanters trying to dump half finished projects.

Re: $10,000 at closing! ?? - Posted by Kristine-CA

Posted by Kristine-CA on March 04, 2002 at 09:55:12:

Matt: What would the appraisal price of this house be? The issue of fraud and the second mortgage is moot if the house if worth 75K and you are paying 50K. I can assure you that a bank would love to loan more than the purchase price if the appraisal is higher. If the house is a good value and you are eligible for a good conventional loan and the cash flow from rent is right, I would use use the bank loan to buy out the seller. Will he take a discount for cash?

An interesting discussion about financing and procuring cash, but we haven’t heard if this house is a deal or not.

Let us know what happens. Sincerely, Kristine

Re: $10,000 at closing! ?? - Posted by Nate(DC)

Posted by Nate(DC) on March 03, 2002 at 23:54:14:

Irrelevant WHY the owner is lending you $10K - if it’s not disclosed to the lender, it is fraud, plain and simple. The book is wrong if it suggests otherwise.

Re: $10,000 at closing! ?? - Posted by GL(ON)

Posted by GL(ON) on March 04, 2002 at 07:10:29:

You record all mortgages after closing.Second mortgages are always recorded after first mortgages. That is what makes them second mortgages. In this case you would not tell the bank about the second, you would show them the purchase agreement @$50,000 and tell them you were paying cash for the balance.

There are other ways of doing this that are not so sneaky, such as putting the second mortgage on some other property you own.

Re: $10,000 at closing! ?? - Posted by Matt

Posted by Matt on March 04, 2002 at 10:53:21:

the appraisal was for $54k.

Isn’t this fraud? - Posted by Dave

Posted by Dave on March 04, 2002 at 09:16:12:

If you agree with seller to a second mortgage, but on closing statement says cash…this is fraud isn’t it?
They will at least ask for proof of funds for the $25K cash transaction.

Please help i’m confused how this is possible.