Q: I have a property that is worth $500,000 that I am selling for $300,000. I know it is worth $500,000 because I had it appraised recently at that value. A buyer wants to pay me $400,000 and then have me give him $100,000 back after the closing.
Is this legal? Thank you.
A: If your property is truly worth $500,000, you should get paid that amount and any contract to sell the property should accurately reflect what you are getting paid for it.
To answer your question, giving $100,000 to your buyer after the closing may be illegal on many fronts. If your buyer is obtaining a loan to buy the property, you may be participating in a fraud against the lender by structuring the transaction to deceive the lender into believing that the buyer is putting money down for the purchase when the buyer is actually getting money back after the closing.
It may also be illegal under the laws of your state and under your local municipal codes that require you to accurately reflect the sales price for any property sold by you.
By claiming that the property is actually worth $500,000, and that the sales price is $400,000, your buyer can get an 80 percent first mortgage on the property. That means the buyer won’t pay private mortgage insurance (PMI), which can be quite expensive.
But if you then give the buyer another $100,000 out of the proceeds, cash that the lender doesn’t know about, you’re really telling me that the property is only worth $300,000, while the bank thinks it’s worth $400,000 or even $500,000. That’s fraud, and it could be considered mortgage fraud. And since you’re knowingly participating, you could be on the hook as an accomplice to a fraud, should someone decide to pursue it.
Now I have some questions for you. If your property is truly worth $500,000, why are you selling it for $300,000? Is there no one else willing to buy your property for maybe $400,000 or $450,000?
Think about it: If your property was really worth $500,000, you’d be selling it for $500,000 not $300,000.
That makes me wonder whether your appraisal is valid. Perhaps you have a bad appraisal. Or if you received the appraisal from the buyer, perhaps the appraiser is in cahoots with your buyer or his lender (after all, it’s the buyer’s lender who hires the appraiser), or the appraiser is using data that is several years old. Or, could something else be going on here?
Before you do anything other than try to sell your property for the most money you can get for it and structure the transaction to reflect what you are actually doing, you should consult with a good real estate attorney, who can further explain why this plan probably isn’t in your best interests.