Recently I was involved in a transaction where the buyer did not have any cash, but desperately needed to buy a home. The buyer had some credit issues and could only get a loan for 85% of the purchase price. So, I searched my local MLS for properties with sellers offering a second mortgage. Within days we found the home my buyer wanted and wrote a contract.
We wrote the contract with 85% bank financing with the seller taking back a note for the other 15%. The contract also was written with the seller paying all of the buyer's closing costs. Remember, this buyer had NO CASH to bring to the closing table. In order to cover the closing costs and give the seller a fair price, we raised the sales price of the home.
When the appraisal was done, the value of the property was less than the price on the contract. At this point, the buyer had less than 2 weeks to move and was going to be living on the street. The buyer needed about $7,000.00 to close on the sale of this house with no possibility of getting this money. I explained to the loan officer the situation and asked if there was anything we could do.
At this point the loan officer suggested that the seller and buyer enter into a promissory note agreement for the additional $7,000.00. I was also told by the loan officer that the loan would not go through if the lender knew about the promissory note. So, it was suggested by this loan officer that the seller would give the buyer $7,000.00 and the promissory note would be done after closing!
In the state of Missouri this is called Loan Fraud. The penalties for this are stiff! So, there was no way I was going to allow this to happen. I could loose my license and face fines and jail time. I am not a lawyer, but I was sure this was wrong. We had to figure out another way, and quick. Time was running out for my buyer.
I finally negotiated with the seller to allow the buyer to lease the property until we resolved the financing issue. The buyer moved into the home and it took two more weeks to finalize the closing details.
What ended up happening?
In order to get the loan to go through, we had to lower the sales price equal to the appraisal. That made the seller's net almost $7,000.00 less and he would not accept that. So, to make the deal happen for this buyer, both brokers involved lowered their commissions. That still was not enough. So, next I convinced the title company to reduce their fees by half! Problem solved. The buyer ended up bring a small amount of cash to closing because the lender would not lower their fees. But, everything was done legally. The seller got a fair price and the buyer was happy.
I made less money, the listing broker made less money, and the title company made less money. But the important thing was that this buyer now has a place to live. I can not reveal many details about this buyer. If I could, you'd understand the reasons most parties involved were willing to reduce their fees. I'm not saying fees can always be reduced like this. But in some circumstances they can.
There is always a right way and a wrong way to do anything. If you are ever involved in a real estate transaction and someone suggests a loan outside of closing, don't do it! They may tell you they do it all the time. This does not make it legal or right. There are ways to be creative in a real estate transaction that are legal. If you are unsure of something that is being proposed when financing real estate, ask an attorney! Most lawyers will offer a free consultation, so ask questions if in doubt.