Is this a great idea on contract, already been done, or illegal??

When purchasing a property with hard money, I have a friend that puts the home into contract at a certain purchase price than has the seller reimburse a certain amount of money to get to the actual price of the home. This reimbursement is explained to the sellers, and my investor friend has never had a problem writing the contract up in this manner.

He does this so that when he refinances soon after, appraisers will not be influenced by a previously low purchase price. Also, when he flips the home, his price is not scrutinized by buyers when he buys at 65-75% of the actual market value.

Are others doing this? Is this illegal, and if so why?

Sounds like fraud against the lender who refinances and the new buyers.

while I am skecptical of many schemes, I don’t really see a problem here. The actual finer detail of ANY real estate purchase contract are never disclosed in the public record; just the full (gross) sales price. The fact that there are some mutual agreed reimbursement, commissions, hold-backs, etc is not really an issue since no lender is involved and future lenders against the property are never privy to that info anyways.

When re-fi’ing a property, the burden is on the lender to establish the value of the property and the amount they are willing to lend against it. The value (either gross or net) of previous transactions of the subject property are not really of concern becuase the standard is to use comparable sales and a property can’t be a comp against itself. That would be a self-fulfilling exercise.

I disagree with BLL. Cash out refinance amount will be a percentage of the current appraised value. The lender may also have title seasoning requirements, but your purchase agreement with the former owner is irrelevant to the refinance lender.

Then why the deception? This isn’t a seller giveback for repairs. It is a deliberate attempt to inflate the actual sales price for a later refinance. Gregg tells us the point is to avoid scrutiny by buyers and to avoid influencing the appraiser.

BLL, maybe it is deceptive. But I dont think its malicious, or this technique takes advantage of anyone. The purchase price of 75% of FMV is artificially low to begin with. By having the purchase price at full market value, everyone wins: neighbors maintain their high values, and appraisers and potential buyers arent left scratching their heads as to why previous price was so low, and of course investor gets to refi w/ less hassle-nothing illegal or immoral in my opinion about this.

sounds to me like nothing more than cash back at closing.

i had a friend who also did this it worked great for a while the they knocked on his door and now his family visits him on tuesday and sundays this is morgtage fraud i would never do somthing that could land me in the graybar hotel just my opinion

I am going to have to call shananigans here.

Not saying that your friend isnt in jail or that you are lying, but I think your friend was doing something else to land himself in jail.

getting cash back at closing is not illegal in any way.

fraud is intentionally lying to the bank to obtain something to which one is not otherwise entitled, which is a crime.

look in finance hardmoney at thier responses any time you lie to a lender you are commiting fraud you inflate the purchase price to obtain more money then receive it back you just defrauded the lender and you broke the law you deserve to go to jail

My issue is not cash back from the initial sale. The investor, seller, and possibly the HML are colluding to create an inflated sales price for the purpose of allowing the investor to get more cash out during the later refi than he would otherwise or fooling potential buyers into thinking the price is higher than it was. The bank wouldn’t give as much had this deception not taken place. This would be fraud using Mark’s definition.

The investor is gaming the system instead of trying to find a lender that will do the deal without being fooled.