Repair credits:Are they legal? - Posted by IB (NJ)

Posted by GL on June 30, 2001 at 07:45:33:

I will hold a second. As far as expenses go we can discuss that if you are serious. I have income statements made up by the management company’s accountant.

Repair credits:Are they legal? - Posted by IB (NJ)

Posted by IB (NJ) on June 29, 2001 at 07:36:45:

I just got an offer on one of my house mailed to me by a potential buyer. In it he offers a price $2k above my asking and a $32k repair credit.

Now I’m not even considering the offer because it works out to be much too low. But it has me wondering if this ‘repair credit’ thing legal?

Your thoughts?

Re: Repair credits:Are they legal? - Posted by TomK

Posted by TomK on June 29, 2001 at 10:35:59:

I sold a house on a lease option and the agreement was the tenant would do the repairs for a $5,000 credit. When they went to get a loan, the bank did not like this clause in the lease. I had to remove it, but I could pay them for the work, since the work was finished before they actually moved in. They worked for their down payment. Is this legal? or Lender Fraud? It was the loan processors idea.

Yes - but lenders don’t often allow them. - Posted by Kim (FL)

Posted by Kim (FL) on June 29, 2001 at 08:33:05:

Legal? yes. Allowed? Not often. Most mortgage companies won’t allow the buyer to walk away with cash. The thought process (which makes sense) is that people who walk away with cash haven’t had to invest much risk into the property. People that don’t have a vested interest (i.e. risk in the form of money lost typically) in the property are much more likely to let it go into foreclosure. It would be easy to walk away with some cash and be happy (if they weren’t worried about their credit). The investors that do let you have repair credits typically require the title agent to keep it in escrow and pay once receipts are presented proving that repairs are made.

Now - people work “around” that all the time (which is lender fraud) by doing creative things at closing. Some example of those things (I don’t suggest this, I’m just getting specific for you) are showing repairs being paid to their cousin Billy Bob and then Billy Bob gets the check and gives it to the person for which it was intended. Or they have a seperate addendum that the lender doesn’t see and after the closing (or “under the table”) the seller cuts a seperate check to the buyer. The house would have to appraise for the higher amount without the repairs being made, of course.

Hope my opinion helps!


Re: Repair credits:Are they legal? - Posted by SueC

Posted by SueC on June 29, 2001 at 08:23:59:

As long as the deal is above-board and disclosed up front it’s legal. It’s the under-the-table give backs that are done without the lender’s knowledge that are fraudulent.

Perfectly legal and used to be done all the time. - Posted by GL

Posted by GL on June 29, 2001 at 07:59:27:

I know of one case where an investor bought a commercial property from a bank, he froze out all other potential bidders by offering full asking price then added a clause giving him back $25000 for repairs. The bank took his offer and during the processing of the deal, asked his permission to change the wording so as to eliminate the clause and reduce the the price accordingly! He actually bought the place for less than another investor offered, because his original offer was for more money.

This was before the mortgage blood bath of the early 90’s. Since then they are much leerier of such “creative” tricks.

Re: Repair credits:Are they legal? - Posted by JT - IN

Posted by JT - IN on June 29, 2001 at 12:30:02:

Sounds like a good idea on the surface, but fraught with many potential pitfalls. As far as the legality of getting the funds to the buyer, no problem, good idea there. Where the potential problems begin, is that you have now taken on an independent contractor or possibly an employee, to do this work, depending upon your arrangement with this buyer. At the very least, you will need to 1099 them, for the $$$ paid for work performed. Possibly, if deemed an employee, depending upon your control over their work environment and schedule, you may be required to file and pay withholding and matching taxes. (But unlikely here, mostly illustrating the point and possibilities).

Now, the minute that you do not send a 1099, and/or other witholding taxes, you are performing an illegal act, at that point. The $$$ you paid the buyer, is taxable to them, and deductible to you, assuming you file the 1099; which is not optional, on amounts in excess of $ 600.00; unless this buyer would happen to be a corporation.

Just one of the many things to be aware of here…


Re: Repair credits:Are they legal? - Posted by Tom

Posted by Tom on June 29, 2001 at 11:45:34:

This sounds legal to me.

But, remember that the loan processor works on commission. The fact that he reccommends a course of action doesn’t make it legal.

Re: Perfectly legal and still done all the time. - Posted by TD

Posted by TD on June 29, 2001 at 14:09:43:

Sounds like Raymond Aaron, a noted Canadian “buy and hold” guru.

It’ll still work to provide either nothing down or cash back on deals here in Ontario, Canada, although
the caveat is that you have to have a RE lawyer who will be able to make the necessary adjustments at closing to appease the lender who often balks at such arrangements.

Best way to go around this is to ensure that you put your “abatement” clause, as Aaron calls it, on a separate sheet of paper from your contract, known in these parts as a Schedule or Addendum.

That way whomever you choose to close your deal and/or fund it can, um, file that sheet of paper accordingly when needed. Nothing illegal or immoral or shady - just that in so long as all parties involved know what’s really going on with the deal upfront, you should be OK.

As my recollection goes, that property that Aaron did this on was approximately $CDN 1.6 million, so the $25K didn’t jeopardize the lender’s security in any manner what so ever. Try that amount on a $100K home, and see what happens :slight_smile:

BTW, Grant - did you ever sell that six-plex in Cobourg (or somewhere out your way) last year? If the no money down offer still exists, let me know, and I might (finally) be in a position to take you up seriously on it.

Still got it. - Posted by GL

Posted by GL on June 29, 2001 at 17:45:25:

It’s in the hands of a management company. I get a little cash every month with no work and no hassles.

I will still sell it for no down payment, at a price that will break even or give a small positive cash flow.

If you leave it in the hands of the management company, you will have no work, no worry, no down payment and no payments to make. I don’t know how a real estate investment can be easier yet no one has taken me up on this offer. I used to amuse myself by offering it to real estate wannabee’s just to see the look on their faces and hear their excuses for not taking it LOL. This confirmed a theory of mine, that this is the only business where people rush to buy at high prices and run away when there is a bargain sale LOL LOL LOL. Since real estate prices started climbing a few years ago it is no fun, people don’t think real estate is stinko anymore LOL.

Re: Still got it. - Posted by TD

Posted by TD on June 29, 2001 at 18:03:14:

Yep - I thought that was the case.

Couple of Q’s - how much is the mgmt co charging for maintenance/rent collection, etc.

And - will you hold a VTB 2nd to facilitate the no down on this?

I’ve still got your contact info somewhere, Grant - and I’ll give you a call within the week to discuss.

Talk to you soon.