Re: Is this purchase agreement legal? Or fraud? - Posted by stevo
Posted by stevo on January 29, 2007 at 12:59:32:
There are several reasons they could be doing it this way. Most likely it’s because the bank they’re borrowing the money from may have LTV guidelines or maybe the property doesn’t cashflow well enough to support the amount of debt they want to carry. It’s also possible that they want to rehab the property and your payments ensure that it stays cash flow positive or even funds the rehabbing. They may even be doing it for tax reasons as they might want a higher basis if they’re banking on appreciation. More than likely it’s because they don’t have the down payment.
Lending guide lines have changed so much over the years that situations like this today are not looked at the same way they were 20 years ago. In residential lending, in the good ‘ole days the bankers wanted cash down so that buyers had a vested interest in the property. The lenders didn’t take too kindly to what they perceived as “weaker” borrowers trying to circumvent the system. Today, lenders tend to rely much more heavily on peoples’ credit ratings and character than they do collateral. As more people figure out that the banks need them as much as they need the banks, things have gotten more competitive.
Look at it from an outsider’s perspective. The whole lending system is really screwed up anyway. Property values are based on appraisals of like property and lenders lend based on appraised value. We all know that no two properties are alike and an appraiser’s opinion leaves much more lattitude than there probably should be. The appraiser for the last rental house I bought listed three comparables which were all about the same price. There was no information available about the interior layout or condition. What if one had a bathroom so small it was unusable or was in much worse condition? The appraiser has no idea. I would bet $100 that if the purchase price on my property was 20% higher that same appraiser could find three different subjects to justify the higher number. On top of that, it is pretty difficult to assign a value on an illiquid asset.
Commercial lending is also quite a bit different as people borrow money to make money. In a commercial loan, the bankers’ main priorities (in addition to having the loan paid back) is that the property will cashflow and that the loan to value is within guidelines to keep the regulators off of their backs. Many banks lend based on LTV instead of percentage down. With my bank, if you can buy something for 70% of appraised value, you can take 10% cash out and borrow 80% as long as the investment cashflows properly.
There’s really no buyer beware protection for commerical investors as there is for owner occupied. The way I look at it, if the commercial buyers have to look out for themselves, then it’s up to the bankers to do the same and it’s basically fair game.
Look at it from the buyer’s perspective and imagine it’s you trying to buy the property. Figure out their motivations. If by doing so you deem that their deal is a recipe for their financial disaster, then if your conscious bothers you, find another way to get it done. If you can make it pencil from their perspective, then don’t worry about it. Just worry about renegotiating your deal with the realtor so they don’t unfairly collect on the increased commission basis. A phone call to the accountant for any tax implications would be worthwhile as well.
Many of these deals are structured this way with the banker’s knowledge, most are not. It is the way business is done today.