As your Legal & Policy Contributor, I recently had the pleasure of listening to an incredibly informative segment on the Shortterm Show podcast, hosted by the insightful Avery Carl. You can find the full discussion here:
In this episode, Avery expertly guided a conversation with the highly knowledgeable commercial real estate attorney Carrie Rosati, delving into some of the more questionable “hacks” circulating in the real estate investing world. In particular, their discussion around seller concessions, starting around the 29-minute mark of the video, caught my attention due to its significant legal implications.
Understanding Permissible Seller Concessions
As the esteemed commercial real estate attorney Carrie Rosati clearly explained in her discussion with the astute Avery Carl, there are typically limits on the amount of money a seller can contribute back to a buyer for closing costs, prepaids, and similar expenses. These limits generally range from 2% to 6% of the purchase price, depending on the type of loan. This framework is in place to ensure the integrity of the transaction and prevent artificial inflation of property values.
The Temptation of the “Cash Back Hack”
However, a trend has emerged where investors are exploring ways to obtain significantly more cash back than these limits allow. The strategy, as described in the podcast, involves offering the seller the asking price (e.g., $500,000) but then separately arranging for a much larger sum (e.g., $100,000) to be paid back to the buyer at closing. Crucially, this extra cash back agreement is deliberately kept hidden from the lender. Often, this payment is structured through a separate LLC, making it appear as a transaction with an unrelated entity.
Expert Legal Opinion: This is Mortgage Fraud
Carrie Rosati’s assessment of this practice was unequivocal: “This is so not a gray area. This is this is clear mortgage fraud.” This strong statement from such a seasoned legal professional should serve as a serious warning to anyone considering such a tactic.
As Ms. Rosati expertly elaborated, this scheme involves “artificially inflating the value of the property” to obtain a larger loan amount than would be justified by the true transaction price. Lenders rely on loan-to-value ratios, and this practice undermines that fundamental principle. Furthermore, she pointed out that borrowers typically represent to the lender that they have disclosed all terms of the purchase agreement and that the stated purchase price is the actual price being paid. By concealing a separate agreement for a substantial cash back, these representations become false.
Why This Matters: Echoes of the 2008 Crisis
Avery Carl astutely connected this practice to the conditions that contributed to the 2008 financial crisis. Inflating property values and obtaining loans based on these inflated figures creates a scenario where “the bank has 10 $500,000 loans out on what are essentially $400,000 properties.” This overleveraging leaves lenders with insufficient collateral to secure their loans. Should borrowers default, the bank cannot recover the full loan amount, potentially leading to significant financial instability – a situation no one wants to revisit.
Severe Consequences: Federal Crimes
The implications of engaging in such a scheme are far beyond simply having your loan called. As the highly experienced Carrie Rosati emphasized, “These are the kinds of things the government investigates. And you don’t want to be in that position. It’s a It’s a really bad idea.” She further clarified that mortgage fraud is not just a state crime but also a federal offense, carrying potentially severe penalties, including hefty fines and even imprisonment.
A Word of Caution and Advice
While the allure of extra cash back might be tempting, especially for investors looking to maximize their returns or stretch their budgets, it is crucial to understand the significant legal risks involved. As Ms. Rosati wisely advises, “If you think you’ve got if you think you’ve you’ve figured something out before you before you sign on the dotted line and you put yourself at risk, call a lawyer, pay him for an hour time of consultation, ask him the question.”
It is always better to seek professional legal counsel before engaging in any transaction that might skirt legal boundaries. Transparency and honesty with your lender are paramount. Trying to deceive them for short-term gain can lead to severe long-term consequences. Remember, the goal is to build sustainable wealth through sound investment strategies, not to jeopardize your financial future with risky and illegal schemes.
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