Cash back at closing - questions

Financing, Hard Money Lenders, Private Money
1

I have some questions about receiving cash back from the seller at closing…

Let’s say I have a property where the sellers agree to a $60K purchase price. The property needs $25K or so in repairs. Let’s assume that its current appraised value is $85K.

Would it be possible/legal for me to write up the contract at $85K, bring in new financing for $85K at closing, and have the sellers cut me a check for $25K? I have heard of “repair allowances” or “carpet allowances” from sellers, but I was not sure on exactly how it worked. If it is indeed possible to do, what are the tax implications? If you write it in the purchase agreement that the seller will give you money back at closing, will the lender still do the loan for $85K- since they will be aware that you are “overfinancing”?

Your insight is appreciated- please let me know if I need to provide further clarification.

2

I don’t know of any lenders who will allow this to happen. Cash back to the buyer at closing is not allowed and can only happen in two cases that I am aware of (but these cases do not give the buyer actual cash in hand):

  1. “Escrow holdback”- this occurs when there are major structural, environmental, or other problems with the home that were revealed in the appraisal that make the property unacceptable to the lender. These are things that if not repaired will cause the lender to deny the financing. In this case, sometimes the lender will allow an “escrow holdback” which means that the seller can allot money to the buyer for the purpose of fixing these problems which is held in an escrow account. The repairs usually have to be completed in a relatively short time frame and must be done by a licensed contractor who withdraws the funds as the project progresses.

  2. Rehab loan- generally cannot be done on an investment property. This is not technically cash back from the seller, but the lender will lend you money based on the as repaired value. The extra funds for the repairs or improvments, above and beyond acquisition cost, must be withdrawn from an escrow account by a licensed contractor who is doing the work, based on plans that are submitted prior to closing. Generally repairs/ construction must be completed in a maximum of 18 months.

I hope that helps!