Dear Monty: Is a cash kickback legal?
By Richard Montgomery
Reader Question: A seller and I agree on two-hundred thousand dollars for a home. I want to install a thirty-five hundred dollar heat pump. Is it legal for the seller and I agree to raise the price a like amount and the seller brings thirty-five hundred dollars to closing? Another option would be the seller installs the heat pump. If this is permissible, can this same scenario apply to any home upgrade or repairs like a new roof, paint, carpeting or more? Also, why does my agent seem uncomfortable with this development?
Monty’s Answer: If you are paying cash for the house, whatever you and the seller agree to is acceptable. If there is a mortgage loan required, depending on the status of the financing, and without knowing all the transaction details, renegotiating becomes more difficult. If the two of you have already amended the purchase agreement orally, your agent can reduce it to writing. There are some reasons your agent may be reluctant to recommend this contract modification.
What could go wrong?
- Your agent may be concerned this step may disqualify you for the loan because your payment would go up slightly. It would not be unusual for both of you to decide it is easier if the lender adds the cash. Depending upon the amount of your down payment, your credit history, what type of mortgage you are applying for, the location of the home and other factors, the agent’s concern may be real.
- The heat pump installation may be a factor. Complaints from the buyer after closing when the seller was responsible for repairs and replacements are common. Cheap components, poor workmanship, and incomplete installation are the main objections. The practical solution to eliminate installation complaints is to escrow the funds, and the buyer is in charge of the repair after the closing.
- Is the lender going to sell the loan to Freddie Mac? Or is the lender going to make a portfolio investment, where they keep the loan in-house? The lender has more flexibility on a portfolio loan, but some loans or lenders require completions of repairs or improvements before closing if the cost appears on the settlement statement, according to Brannon Bartley of citywide home loans in Scottsdale, AZ.
- If the appraiser has already rendered a value changing out an existing component may not warrant a value adjustment. Additionally, if you are applying for a small down payment loan, the lender may also resist increasing the property value.
Plan ahead to avoid an unexpected outcome
A loan increases transactional complexity. Consider speaking directly with your lender with your agent present. With the new HUD statements, the $3,500.00 cost of the heat pump may find its way into the closing documents. Your lender should be able to tell you what they will require facilitating your agreement with the seller. Your agent will be charged with much of the legwork if you and your lender can agree on the course of action. The “who, what, why, when and where” decisions with your lender must be included in any new contingency added to the purchase agreement.
Why all this extra work?
Many states require disclosure of material adverse conditions to all parties in a real estate transaction. The lender is a party to the transaction. In Wisconsin the legal definition of an adverse material fact is:
“ An adverse fact that a party indicates is of such significance or that is generally recognized by a competent licensee as being of such significance to a reasonable party that it affects or would affect the party’s decision to enter into a contract or agreement concerning a transaction or affects or would affect the party’s decision about the terms of such a contract or agreement.”
The contract language is designed to minimize any party to a transaction from being unfairly treated. Parties to a real estate transaction can be taken advantage of through; errors, omissions, misleading or incorrect statements, “side letters” or other agreements outside the transaction. A party (or parties) may not realize they were unfairly treated for months, years, or ever.
Another option to consider
Apply for a loan that includes funds to pay for future work. This type of loan features an “as is” and “as completed ” appraisal. Funds are escrowed for the future work and paid out on completion of the work after closing. An HUD 203k loan is an example of a loan designed for fix-up transactions.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”