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 a recent discussion, Avery Carl and commercial real estate attorney Carrie Rosati explored some of the riskier “hacks” in real estate investing. One particular point, around the 29-minute mark, focused on seller concessions. As the Legal & Policy Contributor, this part of their conversation grabbed my attention due to its serious legal implications.
Understanding the Limits of Seller Concessions
Commercial real estate attorney Carrie Rosati clearly explained to Avery Carl that there are usually limits on how much money a seller can give back to a buyer for expenses like closing costs and prepaid items. These limits typically range from 2% to 6% of the property’s price, and the exact percentage depends on the type of loan. This system is in place to protect the fairness of the deal and prevent artificially inflated property values.
The Dangerous “Cash Back Hack”
However, some investors are trying to get significantly more cash back than these rules allow. The podcast described a strategy where a buyer offers the seller the asking price (for example, $500,000) but secretly arranges for a much larger amount (like $100,000) to be paid back at closing. This secret cash back agreement is hidden from the lender, often by using a separate LLC to make it look like a deal with an unrelated company.
Legal Expert Warns: This Is Clearly Mortgage Fraud
Carrie Rosati didn’t mince words: “This is so not a gray area. This is this is clear mortgage fraud.” This strong warning from a seasoned legal expert should make anyone considering this tactic think twice.
As Ms. Rosati expertly explained, this scheme works by “artificially inflating the value of the property” to get a bigger loan than the property is actually worth. Lenders rely on loan-to-value ratios (the amount of the loan compared to the property’s value), and this practice undermines that basic principle. She also pointed out that borrowers usually tell the lender they’ve disclosed all parts of the purchase agreement and that the stated price is the real price. By hiding a separate agreement for a large cash back, these statements become false.
Why This Matters: A Reminder of the 2008 Crisis
Avery Carl wisely connected this practice to the issues that contributed to the 2008 financial crisis. When property values are inflated, and loans are based on these inflated numbers, it creates a situation where “the bank has 10 $500,000 loans out on what are essentially $400,000 properties.” This excessive borrowing means lenders don’t have enough security if borrowers can’t repay their loans. If many borrowers default, the bank can’t recover the full loan amount, which can lead to significant financial instability – something we definitely want to avoid repeating.
Serious Consequences: Federal Crimes
The risks of engaging in such a scheme go far beyond just having your loan called back. 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 isn’t just a state crime; it’s also a federal offense, which can lead to severe penalties, including large fines and even jail time.
A Word of Caution and Wise Advice
While the idea of extra cash back might seem appealing, especially for investors trying to maximize returns or manage their budget, it’s essential to understand the significant legal dangers involved. 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’s always best to seek professional legal advice before entering any transaction that might be legally questionable. Being open and honest with your lender is crucial. Trying to deceive them for a short-term gain can have severe long-term consequences. Remember, the goal is to build lasting wealth through smart and ethical investment strategies, not to endanger your financial future with risky and illegal schemes.
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