Posted by JPiper on October 26, 2000 at 24:05:40:
This is clearly not an arms length transaction. In actuality, there is a hidden contract between buyer and seller that remains undisclosed to lender. That contract is the agreement that the two parties will split the loan proceeds in some manner.
The result of this is that the borrower is able to obtain financing higher than the purchase price, thus putting cash back into his pocket.
The only reason for this tactic is that most lenders will only lend the lower of purchase price or appraised value. Further, the lender may require seasoning prior to doing a cash-out refi, not to mention that the terms of the cash-out refi may well be different than the terms for what appears to be a new purchase with a down payment.
Disclose this transaction to a lender and it will be turned down. Alternatively, buy a property and get an unseasoned refi based on appraised value, and observe the number of lenders that are willing to do this. There might be a few, but it will be few and far between.
The old rule of thumb, if it looks like a duck, walks like a duck…it’s probably a duck.