Hypothetical situation here....

Seller is selling house for $300k. Can buyer and seller agree to sale price of $320k, and the seller then "gift" the buyer back $20k after the sale.

Thinking in terms of friends/family scenario here. If the buyers wanted to have some cash on hand following the sale of the house. I think it would make sense to do this...you're essentially financing an extra $20k over 30 years. Adding maybe an additional $100 per month on your mortgage.

Is this fraud lol?

I don't think the mortgage lender would allow it as it would amount to a fraudulent sales price.  If they did, you would also have the IRS maximum annual gift amount to contend with.  I think that limit is $15,000 - meaning any gift over this amount is automatically taxed as income.

posted by Dr Winston O'Boogie

I don't think the mortgage lender would allow it.  If they did, you would also have the IRS maximum annual gift amount to contend with.  I think that limit is $15,000 - meaning any gift over this amount is automatically taxed as income.

Okay. Lets say $315k then. Seller wants to sell house for $300k. Buyer would like to offer $315k so they can be gifted $15k from the seller.

How would mortgage lender know if that information isn't disclosed? 

May be shady, but is it legal?

not legal because you'd have to get an appraiser to sign off that the house is worth the fugaze price.

posted by birddog23

Okay. Lets say $315k then. Seller wants to sell house for $300k. Buyer would like to offer $315k so they can be gifted $15k from the seller.

How would mortgage lender know if that information isn't disclosed? 

May be shady, but is it legal?

The appraiser used by the mortgage lender would know.

I believe this was relatively common pre-2008 meltdown.  Basically, buyer would request "cash back".  Or buyer would request seller pay all closing costs.  Done because buyer either didn't have enough for a down payment, or was tapped and needed money for repairs, etc..

Don't think it matters to appraisal because the house is worth what it's worth. The main issue now is it doesn't work with tighter lending standards because you're essentially talking like 0% or negative equity. 

In this case, good luck finding a bank to lend more than $300k if that's the market value.  It's only possible if the home appraises above the agreed upon price.  Appraisers now will usually not value it above the agreed purchase price. 

In the friend/family scenario, you might explore seller financing.  No idea if a partial financing is possible, and generally they tell you not to lend money to family or friends that you want back!

If you want to get a little creative, you structure a rent-to-buy deal where they pay you rent for a year or two.  There's a pre-agreed purchase price (which means you could be at risk for a decline in market value), and then the buyer can use that equity built up with rent as a down payment.

You can also potentially "gift" someone money to make the downpayment.  Just be aware of any tax implications and, again, consider if the money will ever actually be re-paid.

is there not a term for when your mortgage is worth more than the house? i feel like in 2008 we had an issue about this and the lehman brothers got in some hot water. 

posted by j_crazy

is there not a term for when your mortgage is worth more than the house? i feel like in 2008 we had an issue about this and the lehman brothers got in some hot water. 

Underwater

Yes, Lehmen got terminated.

If the house appraises for $320k, do it under the table, but keep deposits under $10k.  You don't have to report to IRS anything under $10k.  

Who on earth cares if it is legal?  You think the government asks your permission to take and hide money from you?  There are LOTS of ways to do this. 

posted by ernest_t_bass

If the house appraises for $320k, do it under the table, but keep deposits under $10k.  You don't have to report to IRS anything under $10k.  

Who on earth cares if it is legal?  You think the government asks your permission to take and hide money from you?  There are LOTS of ways to do this. 

posted by ernest_t_bass

If the house appraises for $320k, do it under the table, but keep deposits under $10k.  You don't have to report to IRS anything under $10k.  

Who on earth cares if it is legal?  You think the government asks your permission to take and hide money from you?  There are LOTS of ways to do this. 

Great advice when you’ve got no skin in the game.  If the poor dude gets audited, the “government taxes me without my permission” excuse won’t go far.

posted by ernest_t_bass

If the house appraises for $320k, do it under the table, but keep deposits under $10k.  You don't have to report to IRS anything under $10k.  

Who on earth cares if it is legal?  You think the government asks your permission to take and hide money from you?  There are LOTS of ways to do this. 

posted by ernest_t_bass

If the house appraises for $320k, do it under the table, but keep deposits under $10k.  You don't have to report to IRS anything under $10k.  

Who on earth cares if it is legal?  You think the government asks your permission to take and hide money from you?  There are LOTS of ways to do this. 

Thank you...thats the scenario I was thinking of but worded it poorly in my post.

posted by birddog23

Thank you...thats the scenario I was thinking of but worded it poorly in my post.

For what it’s worth, this is horrible advice you’ve been given.  

federal prisons are full of people who think the same way. 

Okay - house comes back appraised for $320k.

Agree on sale price of $310k (between seller and buyer, handshake agreement). But go through with the actual sale price of $320k.

After the whole process, original seller gifts buyer $10k.

This is illegal?

posted by birddog23

Okay - house comes back appraised for $320k.

Agree on sale price of $310k (between seller and buyer, handshake agreement). But go through with the actual sale price of $320k.

After the whole process, original seller gifts buyer $10k.

This is illegal?

Why would the seller agree to it unless they’re maybe your family? 

I don't understand why the seller is taking on $10k (or $20k) in reported income, only to not have that income...

posted by Laley23

I don't understand why the seller is taking on $10k (or $20k) in reported income, only to not have that income...

There is capital gains exclusion on home sale up to $500k for a married couple.  So likely no taxable income in this case.

But seems silly to mess around with when you can gift $16k tax free.

posted by birddog23

Okay - house comes back appraised for $320k.

Agree on sale price of $310k (between seller and buyer, handshake agreement). But go through with the actual sale price of $320k.

After the whole process, original seller gifts buyer $10k.

This is illegal?

You don't "gift" cash in a home sale.  There are cases where seller provides cash back, usually to cover closing costs ($5-$6k for the buyer in most areas for $300k house).

I think normally you would already have a contract in place before the appraisal, and after 2008 it's unlikely to be appraised at a value above the net of cash price.

Like I said before, if you don't really intend for this to be a gift then you need to explore "rent to own" options.  This might also allow you to keep your existing [presumably better rate] mortgage in place while you rent it out.  That potentially is an issue for you getting a mortgage on a new home.  And it comes with a host of liabilities.  And a "rent to own" contract could be a violation of your mortgage agreement, even if unlikely you'd have to talk to a real estate attorney.

So let's say you rent at $3k per month. Again, I don't know the finer points but then after two years you give credit for 90% of the rent as a downpayment/equity (i.e. you charged a 10% interest rate).  Then they pay the agreed purchase price (in 2 years) of $320k.  Hopefully it appraises for that - then they have $65k in equity which is just enough for 20% downpayment.

Don't feel like crunching the numbers to see how that shakes out for buyer and seller.  I think the 10% + $20k would mostly cover your real estate taxes and interest over the 2 years.  Buyer is paying like $1k extra per month to put $2k in rent toward a downpayment (so "saves" them $24k over 2 years building equity instead of paying rent).

posted by kizer permanente

Why would the seller agree to it unless they’re maybe your family? 

posted by birddog23

It is family

Well, you’re soliciting advice.  I assume you’ll do that with a CPA or lawyer you know.  Just don’t go the “fuck the IRS, they’ll never find out” route.  That’s the WRONG path to go.