Posted by DaveD (WI) on March 14, 2006 at 16:54:27:
Any time you have money passing back and forth under the table you are defrauding the lender, which is against federal law. Do the business right, instead of stupid.
You are attempting to use the wrong loan program if you have to do all this fancy dancing to get your rehab funded. Have your loan based on your needs, rather than a purchase price. You are thinking freddy mac guidelines, which won’t work for your deal. Get out of the retail side of lending, and seek out the commercial side.
Wouldn’t it just be easier seeking out a small local banker who will portfolio fund your loan request plus fix up costs all in the same loan? Your purchase and fix come out to about 77% LTV on your after repaired value. An easy loan I have gotten any day of the week. Short term financing of say six or seven months. This assumes you want to cash out to a retail buyer after your rehab is sold, of course.
Okay, I am ready to be blasted for this idea, and to be called immoral, unethical, and unscrupulous?but just in case it?s not that bad of an idea I thought I would get some feedback.
I have an opportunity to buy a house from a friend of mine, and we will close the deal FSBO with another friend handling all the paperwork. She wants out of the house because her father recently passed away, and left her a place to live, mortgage free. So we have settled on a price of $210,000 and with what I estimate to be around $15,000-$20,000 worth of remodeling this home should sell for $295-$300K. Kind of thin on the surface but it really is an easy remodel, and I am comfortable with my estimates on cost and market value after improvements?now for my questions. What would stop us (other than the unethical, immoral, unscrupulous stuff) from contracting to purchase for say $250,000 (appraisal should support this price), getting a loan of $230,000, paying my friend off the $210,000 we settled on?then having my friend give me the $20,000 difference to complete the rehab. She has lived in the house longer than 2 years, and would have less than $250,000 in capital gains so the additional taxes would be of no consequence. Why do this you ask? Well, I would need to obtain a second loan for the rehab which would drive my monthly payments and holding cost up where as this would just add a small amount to my monthly payment and the bank would have a better LTV so a more favorable rate than if I just financed 100%.
Hopefully that makes sense; in a nutshell I would be rolling the cost of the rehab in with the loan without asking the lender specifically for that, and probably have an easier time obtaining financing.
I don’t see why you would need to get a 2nd loan for the rehab. I routinely get loans for properties that are marked up and supported by appraisals, for rehab projects. The seller gets paid and the remaining funds are put into an account we can access by making requisitions with invoices from contractors and suppliers. If your lender won’t do that for you, get another that will. We’ve done this for years without any “backdoor” deals necessary.
Posted by Killer Joe on March 14, 2006 at 21:47:04:
Randall,
The basis cost of her house vs what she is selling it to you for is a tax free event and will keep her transaction with the fed tax people on the up and up. She didn’t write the rules, she’s just using them in her favor.
If your basis when you buy is recorded as $250K with the taxman, your basis when you sell will also have an artificial valuation. If you get caught on one, you will get caught on both evasion of tax episodes, imho. HTH
First off, your lender is going to ask you where the difference between the 250K purchase price and the 230K loan amount is going to come from. If you don’t have that 20K somewhere (and show up to the settlement table with it) then you have a problem. You’ll also have a problem if your friend suddenly “forgets” the details of the deal you have verbally worked out, leaving you with absolutely no recourse–since you have no legal contract specifying the “real” deal.
If you ask me, you are jumping through too many hoops for this thing–why don’t you simply go under contract for the 210K you have agreed to and get a HELOC to cover the rehab costs? It’s interest only, so your payments won’t get driven up any more than the equivalent 30 yr mortgage would for the difference.
Keep it simple–you are committing mortgage fraud on this thing as you have described it. There is a simpler, legal way to accomplish what you are trying to do.
Re: Pick this idea apart! - Posted by David Krulac
Posted by David Krulac on March 14, 2006 at 19:03:17:
as long as disclosed to lender, you should be ok. however may lenders have a limit on the amount of seller’s contribution, usually 3-6% of the sale price. On the $250k sale price the 6% would be $15k limit.
other options would be a loan to include the fix up like FHA 203K or similar conventional programs.
none of this is mortgage fraud because its disclosed to the lender and not under the table.
Joe’s right. Have the seller refund you the $20 as a ‘repair allowance’. For this small amount, you lender shouldn’t have a problem with it. Check with them to make sure.
Posted by Joe C. (AR) on March 14, 2006 at 16:59:47:
My understanding is it is not fraud, nor unethical, as long as you disclose to the lender before closing. This is done all the time, “carpet allowance”, “repair allowance” etc.
Just a thought
Joe C. (AR)