Credit Back From Sellers, is it a Panacea?

Home : Blogs : Randy L. Prothero - Hawaii REALTOR® (808) 384-5645 : Hawaii Randy's Blog

Credit Back From Sellers, is it a Panacea?

This is becoming a standard practice among many agents and buyers. I have been seeing more and more of this practice. Some think it is a panacea, is it really?

Let me describe what I am talking about.

The buyer offers more than asking price for the home and requests the seller give them a credit of up to $15,000 in credit.

I have heard of much higher amounts from others in our business. I have read here in the blogs that in some parts of the country their have been mortgage scams where they over inflate the sales price by a large sum and with the help of an appraiser and a loan officer get a huge credit back to the buyer. That is fraud and highly illegal. I am not talking about that. I have not even seen or heard of it in the course of doing business.

There are some pluses and minuses.

On the plus side:

The buyers can purchase with less cash
To utilize their money for moving, etc.
It may allow them to close on a home they wouldn't have been able to.
May allow them to qualify for a more attractive loan

On the minus side:

The purchase price is being inflated.
The chances of the home appraising, gets much tougher
The buyer enters the home with equity burned up
The monthly mortgage payments will be increased
Some loans will not allow large credits
The chances of falling out of escrow are increased (making the offers much weaker to the seller).

I have seen a few offers that to me are pie in the sky at best. Let's start with a premise. I do not under price my listings. There are not thousands of dollars laying around. Secondly if the buyer makes a fair price offer and then wants a large credit back; you need to ask the question: Why do you feel entitled to the seller's equity?

Palace Sign I have read and heard the phrase the greedy sellers. Buyers and agents like to use this phrase for those sellers who are not willing to accept offers structured the way the buyers and their agent wants it.

The seller is entitled to exactly what someone is willing to pay for their home. To want the most money possible for your home is natural. Why wouldn't they consider the buyer greedy if they want to collect some of the seller's earned equity?

There are sellers who do not price their home correctly. Many of them believe their home is worth more than all others in the neighborhood. They believe they own a palace. Is this greedy? I am not so sure I would call it that. It may be a little naive. Sometimes it is because their agents inflate the value of their home: Overpricing is a Terrible Practice by Some Agents to Steal Listings?

I know everyone in our business deals with this on an almost daily basis. What are you thoughts and experiences in this area? Our market in Hawaii is still strong, so I am sure that those in other parts of the country are dealing with this on a much bigger scale.

--------------------------------------------------------------------------------------------------------

Randy L. Prothero, REALTOR®, ABR, AHWD, CRS, e-PRO, GRI, SFR

Century 21 Liberty Homes

Randy Prothero is well established as an expert in working with military / VA clients and first time home buyers. His home seller's (listing) campaign is one of the most aggressive marketing programs in the area.

Based out of Mililani, Hawaii. Randy services the island of Oahu (Honolulu County) and the Leeward Regional Chairman of the Honolulu Board of Realtors. To improve overall professionalism in his area Randy also offers classes for real estate agents.

www.HawaiiRandy.com * Oahu (Honolulu County) Property Search * Hawaii Military Relocations

Posted by Randy L. Prothero - Hawaii REALTOR® (808) 384-5645 on 05/22/2007 03:18 PM

Comments (27)

real estate, mortgage credits, mortgage, seller credits, hawaii, mililani, 96789, century 21, liberty homes

Originally posted at: Hawaii Randy's Real Estate Opinions: Credit Back From Sellers, is it a Panacea?

Generate short URL

This post has been included in Hawaii Real Estate News

27 Comments on Credit Back From Sellers, is it a Panacea?

MAY

2007

Someone approached me from the Florida market and offered me an investment home. It sounded as you have described. I did decline the offer, it sounded very fishy. Thanks,

Very informative. Thanks for sharing that.

Jeff- If it sounds fishy it almost always is.

Tim & Pam - Thank you

Randy, In my market is normal for the seller to contribute 3 to 6% towards the buyer's closing costs. Almost all of my deals have seller contributions in them. But since that is normal in my market MOST of the comps also have a seller contribution already in them. So if everything is selling at $200,000 you can be sure that in most cases the seller is really only getting $190,000. The true market value would still be $200,000. This is one of the reasons why it is so important that we are experts in our particular markets. A REALTOR(R) who took a listing in my area that did not know this could very easily over price of counsel a seller incorrectly.

Cask back at closing in any amount needs to be approved by the lender(in writing).

I have run into this problem more times than I can count. Most agents I deal with, being an appraiser, are more than happy to help me. Most agents disclose the amount of seller concessions in their mls, if not, they always disclose the amount, when I call and ask. Lately, I have ran into some nasty agents, that refuse to disclose the amount, or they insist they had nothing to do with the sale, even though they were the listing agent. Today, I had an agent tell me it is none of my business, and he will not help me. Is this normal? Why would an agent not want to disclose seller consessions? I was under the impression, I was doing my job, following up on data, now I'm feeling a little different.

I believe there are other "common offers" coming in as well. How about the low balls and still asking for credit back????

In my market, anything not disclosed to the lender, and anything over 6% to cc or repairs is a red flag. Title companies will report to lenders and the Commissioner.

I am a big fan of seller credit but I always do my homework first to make sure about the appraisal. If it looks like it might not appraise if the purchase price is higher (due to seller credit) then I will write the language into the contract to cover the results of the appraisal. If not, I dont want my buyers getting stuck with paying for an appraisal on a property they cant afford. If a property has been on the market for 60 days plus, the sellers seem very willing to give a credit (especially when the property is sitting vacant). The main reason I am going this route is because 95% of my buyers are all military and they cannot afford closing costs. They have no problem making the monthly mortgage payment but it is closing costs that kill them. Another route we take is to work with the lender on his end to see how he can work in some of the closing costs into the loan. Sometimes it takes a little from the seller and a little from the buyers end to come to a happy medium.

Bryant - Very good points. The lender approval is important. I have received offers in the past where the lender said no.

Sally - I have an offer in hand that is both a stupid low ball and is asking for credit. I wonder when my client rejects it, if they will call them the greedy sellers.

Jim - They should be reported if they are not playing by the rules. Anything not included in the loan approval letter to me is also a red flag.

David - 70% of my buyers are military and they never have much in closing costs. Almost all of them use their VA benefit and the closing costs are generally close to the earnest money deposit.

Also the VA appraisals are generally conservative, not leaving a lot of room to play. My loan officers also pick up the non-allowables so as to make our offers stronger.

Hasn't the subprime market meltdown pretty much put the kabosh on this kind of transaction?

Carol -Apparently not from some of the responses.

I write a lot of contracts with seller contribution - and lender approval is usually not an issue - what is the issue here - is making sure the seller's agent understands how it works - Randy - this was a great explanation thanks for taking the time to put it together.

Randy, Seller Paid Costs is something I see all the time, BUT cash back at closing is something that the Lender I work for will NOT approve. We will also not approve repair credits on the HUD-1. It they want these things then they will have to go to some other Lender for the Loan. We don't get into playing those games.

Randy-I talked to one of the loan officers that jacks up the interest rates so there is money there to pay closing costs. That is one of MY LAST CHOICES to have my buyers do....pay a higher interest rate so they can have money for closing. I will exhaust other options first before letting them pay the higher rate but as a last choice, I will let them do it if they are comfortable.

Forgot to ask....what the heck is a panacea? Sounds like an intestinal sickness!

MAY

2007

Thesa - Communication is the key on any non standard offer. I write a cover letter introducing my clients and explaining the key points of the contract and follow up with a phone call to the other agent.

George - I just had one where my buyer was getting back cash and the lender did not allow it. He got prepaid condo maintenance fees instead.

David - I have been very lucky. My loan officers seem to be able to put the loans together without having to jump through many hoops and without putting a big squeeze on the sellers. I am amazed many times by what comes at me from other agents.

David - :)

Randy,

My market is like BB's. We have an over-supply and most of the sellers are happy to assist the buyers with their closing costs and sometimes down payment as well (for FHA) in order to get their house sold. As long as it is on the HUD and all parties have full disclosure, I'm okay with it.

Thanks for the post.

Lucky :)

Lucky - Each market is different. The problem we are in here is that the market is much stronger. The buyers may offer an inflated price and ask for credit. The home now does not appraise. I have had a couple recently where we accepted the offer only after we countered to address what happens if it does not appraise.

Randy, I work not far from Bryant and yes, this is common in Central Florida. The lenders allow the seller to contribute up to 6% toward the buyer's closing costs. But your concerns are legitimate. I had a closing not long ago (my listing) like this and to top it off, the buyers were sub-prime. I couldn't believe how much the monthly payment was. They paid full price, in order to get the 6% back. I have actually worried about those folks, even though it wasn't my buyer. I'm fairly certain they're going to lose that house.

Two things here. Offering 50k under and asking for boo koo bunches for credit besides is one thing...asking for some credit for some closing costs are another. But to flat out TELL your client that they should ask for it because the lender is saying the client has to come in with a bunch of money on a VA loan is another. It's the same as a conventional fixed ....The buyer wants the seller to pay down their points, AND pay for their closing costs AND give a low ball offer besides.

I represent BOTH seller's and buyer's and I always tell the buyer...you can try with this offer and if they don't like it hopefully they will counter us.....They have the right to accept, reject, counter or flat out ignore. I am seeing a lot of buyers (actually it's their agents) requesting this that and the other...only to get a "you can cancel if you like"....what part of signing as As Is do they not understand? Bottom line, I do what my client wants (with loads of input from me) not what I want.

Lisa - The fact that they may be candidates to lose that home is very disturbing.

Sally - I agree, many of the weirdest offers I have seen were instigated by their agents. You know immediately by what the other agents is saying.

Is that a picture of King Kamaia Maia? (No idea how to spell it.

We see this all the time and it is very common in Florida.Most deals now a days are asking for closing costs. Our friend the lenders call this creative financing. The problem is the property has to appraise at the inflated price and the seller usually pays the compensation on the gross price and IRS rules make them also pay the tax on the gross.

Neal - There are definitely issues created by some of these deal.

I am not sure if it is King Kamehameha. It probably is.

MAY

2007

Randy,

Like I said..this is a regular occurrence here as BB also stated and I see it more in the lower price ranges...most is mid 300's or lower...I don't get why the banks can't just lend them the true value instead of all this blowing the price up to give back..just offer to pay the costs for the buyer themselves instead of always asking the sellers...to me it is a stupid method..but I am not a lender.

MAY

2007

Neal - What ever it takes to make it happen I guess.

This blog does not allow anonymous comments

Randy L. Prothero - Hawaii REALTOR® (808) 384-5645

Mililani, HI

More about me…

Century 21 Liberty Homes

Address: 95-221 Kipapa Dr., E3, Mililani, HI, 96789

Cell Phone: (808) 384-5645

Email Me

Listings

Links

Archives

Find HI real estate agents and Mililani real estate on ActiveRain.

Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.