Hey all. This is my very first post on the forum although I’ve been studying the great info on this site for quite some time. I’ve been studying real estate investing for even longer and am ready to jump in. I have come across some investors in FL and I am unsure whether their set up is legal or not. Here is the best I make of it:
Let’s say we have a motivated seller with a home worth $200,000. They are willing to sell for $100,000.
I could come in and purchase for $100,000, then cash-out refi or do whatever I want with it as far as an exit strategy to get the cash.
What they’re company does instead is I come in with a loan of $200,000 although the sellers are only asking $100,000, and the remaining equity after closing costs is paid to them as a “consulting fee” (shows up on the HUD-1 Statement). Before closing, I’ll already have an agreement with their company stating what my “percentage” of the equity will be. They will then wire the funds into my LLC. (which their attorneys will set up for me although I’m unsure if this LLC is to be under their umbrella or not. It hasn’t been set up yet)
Is it legal for me to receive money in this fashion? Thank you for all the information and for your responses in advance.
If the seller is asking $100K, how are you going to get a loan for $200K? You would have to lie to your lender by dummying up the purchase contract to show an inflated purchase price. That’s fraud.
IT’S NOT FRAUD!! If the property is appraised for $200k you can purchase it for $200K and could probably get a loan for that, bottom line. It doesn’t matter what the seller lists it for. All you have to do is put it in the contract that you (or the LLC or whatever) receive $100k back at closing…done. I typically do it with a bit smaller numbers. Find a property worth $100k where the seller will accept $80k. Pay the full $100k and get $20k back at closing. There is no law that says you cannot get money back at closing!! There are rules that banks have that may make it difficult. For example, I think Fannie Mae only allows up to 10% of the closing price. If that’s the problem, find a hardmoney lender that can front you. Get your money out and then re-fi with a bank.
Banks are going to lend on the purchase price or the appraised value – whichever is LESS. If the purchase price is $100K and the appraised value is $200K, the LTV will be based on $100K. Changing the purchase contract to inflate the purchase price to $200K in order to get back $100K from the seller is loan fraud. In addition, the underwriting guidelines will probably require a seller credit to not exceed 6% of the purchase price.
I don’t think we are on the same page. I realize the banks will only lend you the purchase price or the appraised value, whichever is LESS…agreed.
My point, is that property appraises for $200k and you purchase at $200k. There is no “whichever is less” situation. The bank loans you $200k for the purchase of a property. If the seller has an outstanding mortgage for $100k and is willing to give up his/her equity of $100k, all you have to do is write-up the contract that you receive $100k at closing. The seller pays off the outstanding mortgage and you receive your money ($100k).
You are correct that most banks will not allow you to receive more than 6-10% of the purchase price at closing. This is where a hard money lender comes in. The hard money lender gives you the $200k to purchase the property (for a nominal fee - let’s say $10k). You purchase the property from the seller. That pays off the $100k mortgage. Now you go refinance for the full $200k and pay back the hard money lender. You’re left with ~$85-90k.
200k(hard money)-100k(seller mortgage)-10k(fee)-5k(closing cost)=85K
If this is fraud there would be tons of investors in prison!!
Non-owner occupied property and 100% LTV?
Seller credit of 50%?
Refi at 100% LTV?
In my experience, banks will require the buyer to have equity in the property in an origination loan and certainly one where the buyer is not occupying the property. In addition, they won’t refi for 100% of the property value. And who is going to issue a loan where there is a seller credit of 50%?
If the docs are dummied up and the bank doesn’t know what the true situation is, that’s a different story. But again, that’s fraud – both loan fraud and false information on the HUD-1 – also a crime. Just because it may be done doesn’t mean it’s legal. All it means is they haven’t been caught–yet.
Thank you two very much for your input. Your feedback has helped clear this up for me.
I guess we’ll agree to disagree.
Flipzahoy (nice name by the way) -
I hope you did learn at least one thing. There’s always more than one opinion…and neither may be right if you ask someone else.
Not illegal…but difficult to do the way that you are structuring the deal.
Sounds like you just want access to the $100K…what you do is simply refi with a mortgage company that allows no title seasoning. You can touch the funds with about 8.3/4%.
A consultanting fee is very hard to justify on a HUD-1. Most underwritters will stop right there.
I do rehabs and get cashback all the time. We add an addendum to the contract stating seller agrees to have closing agent deposit Xamount of $$ in buyers bank account as specified. I have a few closing agents that will do this.
Another approach is to buy with a no Prepay Penalty and then just refi it right away before 1st payment is due. And there are banks willing to cashout at 100% NOO, just gotta have the right agent to find the bank. It cost more, since your paying double closing cost but if numbers work its okay.
HML are great, they are fast and again, just refi to a normal loan.
Another approach is if you have a seller with cash on hand, have them bring a certified check to the close and give it to you after the close. Do not inform your broker. Just tell them your paying 200K. The seller can give you back 100K. Of course this will have tax ramifactions. The seller will be on record as selling for 200K and can affect captial gains. However, the seller can also 1099 it to you and then its income. In past, I have had them make check payable to my mgmt co and a mgmt fee so its income and recorded…
Many creative ways. but no bank will just agree to give cashback since you can just use it for whatever. They have rehab loans, same as HML but they all will escrow the funds and give you access to about 20% upfront and make draws as you show proof of completion of projects.
Ahh thanks again for the feedback. The party I was referring too just switched from doing the consulting fee (apparently they’re having the trouble you mentioned) to adding an addendum. I was looking to see if others were doing deals similar to this. I can’t thank you all enough. Best of luck