Legal/Ethical ? Please! need help by noon Friday - Posted by Ray(OH)

Posted by Ray(OH) on October 30, 1998 at 06:56:51:

$300,000 extra to risk jail time doesn’t sound good to me!!!
Thanks Again

Legal/Ethical ? Please! need help by noon Friday - Posted by Ray(OH)

Posted by Ray(OH) on October 29, 1998 at 20:06:49:

We bought our first rehab! (yea!) Now we’re trying to flip it.
asking price= 17,000
purchase price= 14,000
rehab cost= 30,000
comps are 75k - 85k
(there are other costs involved, but my point here is that there is good money here)
We’re trying to flip it for 25k. We’ve had lots of calls and a couple of offers so far.
The first legitimate offer was from an investor for 18k. We told him that we’re getting lots of calls and wanted to wait because we think we can get closer to our asking price.(at 25k there is still good money on the other end)
He called back and offered 21k and my brother told him we had a tentative offer for more than that. He asked us to let him know one way or the other. A little while later he called and offered 22k if we signed by noon tomorrow. We told him we would call him by noon.
Here’s the legal/ethical question:
We met an agent at the property late today who said he would give us our 25k, but…
He would write the offer for 35k-40k and supply us with a HUD form instructing the escrow to pay “xxx” construction company 10k-15k for repairs. He said this is a common practice (sort of) and that it was completely legal (but straddling the line)
We have never heard of this before, however, there is a lot we’ve never heard of.
Is this a common practice?
Can we get in trouble for doing this?
Please help, we don’t want to miss the 22k offer at noon tomorrow if this is no good. But we have been unemployed for 5 months and could use the extra cash if it is indeed legal.
Thanks for your help
Ray and Darrell

Re: Legal/Ethical ? Please! need help by noon - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on October 30, 1998 at 09:22:57:

I’d take 22K any day, but I would try to make it a simultaneous closing. There are just too many extra closing costs that you’d pay on 2 transactions. With simultaneous, you can transfer some of the costs, in particularly, the title insurance premium can be transfered (at least in TX) from your seller to your buyer.

I’d try to give the seller anoher $500 non-refundable earnest money to extend the closing to match with the buyer’s date.

On the other hand, I don’t believe that cash closing with your buyer should take any longer than a week or so anyway, once you have all your title work done and ready. They should have the money available from the credit line or from some securities they’d sell, or some other liquid assets. If they need to qualify for a loan, I would not deal with them.

Once you know you can deliver the clear title I’d definitely try to get at least $1K or $2K earnest money non-refundable from a cash buyer.

One other thing about your 2nd offer with HUD loan at $25K. The mandatory closing costs paid by seller on behalf of buyer are quite high. So the difference in price is not worth the ifs and buts you have with this transaction. I hope the buyer would pay a commission, otherwise it’s a clear loser.

Re: Legal/Ethical ? Please! - Posted by JPiper

Posted by JPiper on October 30, 1998 at 01:44:15:

These tactics are legal if the lender is aware and approves. This is where your problem undoubtedly lies. Chances are the agent is not going to disclose all the details to the lender.

If the buyer is an owner occupant you might want to discuss the possibilities of an FHA 203K program with his agent. This allows this transaction to be done in a straightforward way.

If not, the $22K offer looks like a good deal. Take it and run. Make sure you’ve got some significant cash up front that is non-refundable if you’re doing a simultaneous closing.


Re: Legal/Ethical - Posted by Rob FL

Posted by Rob FL on October 29, 1998 at 21:55:45:

Call the agent tell him the situation and tell he needs to move now if he wants it, if he hesitates, then take the 22K.

Re: Legal/Ethical ? Please! - Posted by Ray(OH)

Posted by Ray(OH) on October 30, 1998 at 06:51:23:

Thanks, I really appreciate your quick reply. I didn’t think this guy was actually on the level, the way he explained it. I understood his explanation to be similar to an insurance company paying a customer to fix their smashed fender, but, wether or not they actually fix the fender is out of their control.
In either case, it seems to me that I would be throwing a bunch of bad Karma into the mix when I really need to be dealing in Good Karma.
(I’m not really a product of the 60’s, I just believe in “What goes around, comes around”:slight_smile:
Anyway, back to the 22k offer. We’re not doing a simultaneous close, should I still try to get a large non-refundable deposit, or was that just to help insure that we can close on OUR purchase?
Also, on a “wholesale-cash-as-is” purchase, is it normal to have a quick (10 day) escrow? This is the way it was explained to us when we bought the property.
Would we be out of line pushing for a 10 day escrow? (as opposed to 30)
Thanks Again,

Re: Legal/Ethical - Posted by Ray

Posted by Ray on October 29, 1998 at 23:49:16:

Thanks Rob,

I was worried that I wasn’t being clear, my question is this:

We’re asking 25k, the agent said his buyer will pay us our asking price of 25k, but he will “inflate” the price on the purchase contract to 35k-40k to provide his buyer with 10k-15k towards the rehab. (he said the actual amount will depend on how his, slightly, “vision impaired” appraiser writes his appraisal) He said he will provide the proper forms instructing the escrow company to distribute 25k to us and the remaining 10k-15k to “some other company” for repairs.

Is it legal to inflate the purchase price like that to get rehab funds???
Thanks again Rob

Re: Legal/Ethical - Posted by Rob FL

Posted by Rob FL on October 30, 1998 at 06:18:57:

I am not a lawyer. Unless the lender is fully aware of the situation, it sounds like loan fraud to me. If this were a federally backed lender, this would probably constitute a felony. Also, I don’t like to LIE to anyone. Hmmmm…$3,000 extra to risk jail time doesn’t sound good to me. But, like I said I am not a lawyer.