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Are You Committing Fraud with Seller Paid Concessions?

You might be closer then you think...or want to believe. The way that you structure Seller Paid Concessions might be considered an attempt to defraud the lender and artificially inflate the value of the property. I'm sure that most of you (us) have had the opportunity to seal the deal by getting a seller to agree to cover the allowable seller paid concessions in order to close on a home. This happens every day. It is legal, or it wouldn't be allowed. It is done by Realtors and Mortgage Brokers. It is in the guidelines of most lenders, including FannieMae and the FHA.

However, if you are increasing the sales price above what it has been listed for, you are treading on thin ice and had better be careful. Especially if it has been on the market for several months with price reductions and no offers. Here's why.

This is a public post as I believe that all parties need to be aware of the problem and possible solutions.

I attended a Fraud class last year as part of my continuing education in Oregon. The instructor was Richard Hagar, SRA. While he spoke on a lot during the 6 hour class, a HOT topic was the 3-6% seller paid concessions allowed by many lenders. 90% of the class was loan officers and it got ugly. Why? Because we were all guilty AND we had been led to believe that what we were doing was ok by our lenders. What he said upset most of us, and we doubted him, until the Asst. Attorney General for Oregon, Tim Spencer, got up and confirmed what he said.

Fraud can be defined in the Real Estate transaction as the "failure to disclose....anything" This goes for options, fees, rates, problems with the property... It revolves around the intent of the involved parties. It can be a State of Federal crime.

Here's where it gets ugly. If the money crosses a state line it becomes a Federal offense. This means if the lender is based in another state, if the underwriting is done in another state, if the funds come from another state... it has crossed state lines. My guess is that 90% of all transactions fall under the jurisdiction of the FBI, not just our State government.

The FBI is using the Rico Act, Title 18, US Code, Sections 1956 to enforce this. This is the statute that covers Laundering of monetary instruments. (i) to conceal or disguise the nature, the location, the source, the ownership, or the control of the proceeds. RICO was used by the Feds to bring down the mob in the 1930's and they are using it today to clean up the real estate industry.

An aspect of RICO deals with Layered Transactions. This is when layers are added on top of the list price to cover:

Down Payments
Loan Fees
Increased commissions for the agent
Cash to the buyer before and/or after closing

UPDATE: Ed Rybczynski - Mortgage Fraud Speaker & Expert AR member and Fraud Expert has sent me the following definition of a Layered Transaction.

Larry
Thanks for the mention in your post. I was very aware of the practice detailed, but wasn't aware of the term "layered transaction." Essentially, a first contract is written at the legitimate selling price while a second contract at a higher price appears upon the completion of the appraisal. The difference migrates in one form or another back to the buyer. The appraiser is intimidated into rendering a higher than realistic valuation.

Your definition of fraud was right on target and I thought the entire post was very accurate and appropriate.

So what the heck does all of this have to do with Seller Paid Concessions? Here is a simplified home sale. It doesn't include all of the costs and fees and is merely for illustration purposes, so lighten up!

Normal Transaction	Layered/Gift Transaction
List/Sales Price	$100,000	New Sales Price	$103,000
Closing costs	$ 3,000	3% Seller Paid Concessions	$ 3,000
Loan	$100,000	New Loan	$103,000
Proceeds to Seller - Net	$100,000	Proceeds to Seller - Net	$100,000

In the Normal Transaction, the buyer paid for his/her own closing costs. In the Layered Transaction, the purchase price was increased to cover the closing costs giving the seller the same net.

Our response was "SO WHAT!!" As long as the property value justifies it what's the problem? Again, this is where we need to be upfront and honest with our intent.

If the above scenario had been listed for $103,000 for 6 months with no offers and then reduced to $100,000 for another 3 months and finally received an offer at the $100,000 revised list price...with a later addendum asking the seller to cover the buyers closing costs, and increasing the sales price back to $103,000 you've probably committed fraud.

Here's why. If the property had not been able to sell for 6 months at $103,000 or for 3 months at $100,000, why is it all of a sudden worth $103,000? If you can truly point to increasing property values or multiple offers you are ok. If the only reason was to cover the buyers closing costs, you have artificially inflated the market value of the property.

This revised market value then becomes a comparable sale for "like" properties and artificially inflate their value as well. If done often enough, you have an over-inflated market with unrealistic values. Sound familiar?

(UPDATE: I've received a lot of feedback. 3% is an allowable increase in a property value, so let's say that the appraiser had to really stretch values to get there and used 15% adjustments on his/her comparables, or that the Seller Paid Concessions were 6% which are within SubPrime guidelines and outside of acceptable appraisal increases.

Also, the reason that this is such an issue is that it is the buyer who is paying the concessions when the selling price is increased over what the seller is actually willing to receive and not the seller. This alone is an attempt to fraud the lender by a strict reading of underwriting guidelines and the RICO statutes. Since it is an acceptable lender guideline, there is grace.)

So what should we do? Should we abandon Seller Paid Concessions? Should we never accept an offer with them? By all means NO!! But, use your head.

I had a met with Richard and asked him a few questions. My understanding of our conversation led me to believe that:

If the Sellers had left the List Price at $103,000 and offered to pay up to $3,000 of the Buyers Closing costs then it would have been ok.
It might be acceptable if the Buyers Agent would have come in with an initial offer of $103,000 with the Seller to pay $3,000 of the Buyers closing costs.
It would have been most appropriate for the Buyers agent to come in with an offer of $100,000 with the Seller to pay up to $3000 of the Buyers closing costs.

My advice to Listing Agents and Sellers is to have a good sit-down and discuss the type of buyer who would be interested in the property and have a clear understanding of how seller paid concessions can be used. Just as you increase the price the Seller wants in order to cover your commission and closing costs, have a conversation about covering Seller Concessions.

Not all borrowers who want Seller Concessions are broke or bad risks. Here's a few legitimate reasons for Seller Paid Concessions:

Borrower is short on cash to close, but meets the underwriting guidelines for their loan.
Repairs need to be done on the property and the borrower wants to use their own cash for repair or remodel work.
Borrowers money is tied up in another property that hasn't closed yet.
Borrower is using their own funds for an investment that provides a greater rate of return.
Borrower wants to use Seller Concessions to buy down the interest rate on their loan.

My advice to Sellers is to be open minded about all offers. Ask questions about why Seller Paid Concessions are needed. If you do accept an offer with Seller Paid Concessions, especially if it to cover closing costs on a 100% offer, make sure that you get a true Credit Approval. See my blog on this.

My advice to Buyers Agents is to make sure that your initial offer includes Seller Paid Concessionsif that is the direction that your buyer needs to go. Whether to cover closing costs or to buy down the rate, use Seller Paid Concessions appropriately. Don't bargain down the price even further on a slow mover and then ask for concessions (unless you are now back to the current list price).

My advice to Lenders is to know your guidelines, don't coerce your appraiser, don't be backed into a corner by a Realtor or Buyer. Educate your client and Realtor on how to best structure an offer to be legal and in everyone's best interests.

My advice to Buyers is to work with a qualified lender and Realtor who can help you get the best long term deal which includes a good price on your new home and the best loan/rate for your situation.

UPDATE: Here's a remark from an AR mortgage fraud expert:

"Larry

An outstanding post for any number of reasons. I hope that it's content is being read by many and accepted as factual. "

05/28/2007

by Ed Rybczynski - Mortgage Fraud Speaker & Expert

Licensed in: OR, WA

Larry Morris is a Certified Mortgage Planning Specialist with American Nationwide Mortgage Company in Newberg, Oregon. He specializes in USDA Guaranteed Rural Home Loans, FHA Purchase and Refinance, FHA 203k Rehab loans, Sect 184 Native American loans, Hobby Farm loans and conforming purchase and refinances in the states of Oregon and Washington.

He can be reached at 503-421-0096, or larry@PDX-Mortgage.com.

www.PDX-Mortgage.com

OR License ML-3259
WA License WA-510-LO-51175

APR rates are subject to change based on lender's normal credit guidelines and market conditions.

HUD

Posted by Larry Morris, Oregon Mortgages on 05/27/2007 11:57 PM

Comments (75)

Fraud in the ActiveRain Channel

seller paid concessions, fraud

Originally posted at: Oregon Mortgage News: Are You Committing Fraud with Seller Paid Concessions?

This post has been included in Oregon Information
Post is included in group: Oregon Realtors and other Real Estate Professionals
Post is included in group: Moving to Oregon
Post is included in group: Mortgage, Foreclosure & Elder Abuse Housing Fraud
Post is included in group: Christian Mortgage and Real Estate Professionals

75 Comments on Are You Committing Fraud with Seller Paid Concessions?

MAY

2007

Thank you for a thoughtful post!! We are need to be aware of this.

Thanks Melanie. It's a very grey area with serious ramifications.

MAY

2007

Thanks for the post....I don't know about you but everytime I walk out of one of my CE classes, especially the one's dealing with such issues I feel like the weight of the world is on my shoulders!!!

Cheers,
Uzi Husain
Arizona Realtor, serving Goodyear & The Phoenix metropolitan area

I think that if the MLS listing is not changed then there is no harm. Every day there are cases of the sales price is greater than the list price.

It seems many real estate people find themselves tempted to dance around in areas that either border on the illegal or the unethical. They become narcissistic for that period, yet I'll bet all of them would be quick to call another agents hand for doing the same thing.

One guy has secretly owned a house so he thinks he can call himself a first time home buyer. How's he think that? Another tries to bring in the buyer, seller, agents, etc., to tinker with the sales price so that some fees can be financed. And there's always the temptation to give some of your commission to the nice lady down the street who said, "If I get you a big sale rather than give it to my sister who's an agent, will you pay me something for it?"

It amazes me that we even need to discuss and warn our colleagues about the consequences of violations of law and ethics. And that we need to do it over and over again.

We will never have a pure and credible profession that we can be proud of until we figure out how to rid ourselves of these problem agents.

Nah, Seller paid concessions are fine. Now what Redfin is trying to pull, that is Mortgage fraud.

Jim

http://www.realestatewebmasters.com/blogs/james-boyer/morristown-real-estate.html

I am glad I am an inspector. I have enough things to worry about in my field and at least that is not one of them. Real estate is so much more complex than the average person thinks.

I know all of this, but the List Price is the suggested price. Here in Colorado, we have a field of entry in the MLS that shows Seller paid concessions and there are strict guidelines we must follow.

I don't think your example would be viewed the same way if the Buyer DIDN'T need any seller paid concessions and asked for 3,000 off the purchase price. For that matter, what the if the buyer were a cash buyer and low balled by 20% and the Seller took it. Does that mean the house wasn't "worth" what it was listed for the past three months?

If the government wanted to be REALLY strict about the appraised value of properties, then the appraisers should not be allowed to see the contract so that they would have to do some real work and arrive at a value without "suggestion" from the lender or the real estate agents. But that would involve lots of work...

Very good and thoughtful post. As Realtors, we all need to attend our education classes and heighten our awareness of such issues.

You have raised some issues that I have had concerns about. Fortunately our market is a little stronger than most and I have not seen as much of this.

BUSTED!!!

I believe the most important point of your post is in regards to disclosure. If LOs are open and upfront with clients, I believe a lot of potential fraud will be eliminated. I would have liked to have been in that class when all the LOs got heated.....and for their sake, I'm glad they've been straightened out.

- Tchaka

This is an interesting post. I surely don't follow the logic the government is using to consider this fraud. First of all, the home in question would have to appraise for $103,000 in order to get the loan. That would mean that there are enough comparable properties at or above the necessary value. And this house would not be setting a new high value, it would simply be confirming the already known values. I know in our MLS we are supposed to put in seller concessions, which the appraisers take into account when doing appraisals. So if a home sells for $103,000 with $3000 in concessions, the appraisers count this as a $100,000 sale when using it as a comparable so that it doesn't artificially inflate prices.

What happens with this scenario? What if the average time on market is six months, but the seller needs to sell in a hurry and purposely lists their home under market value. It still takes 3 months to sell. They get an offer at the list price but decide to bump up the price to cover closing costs. Would this be fraud?

On the other side, if a seller does have to sell quickly and they price their property below market to sell it, are they artifically lowering the market value of all the competing homes? Is this seller defrauding all the mortgage companies that just financed homes in the area at the higher market value?

I think real fraud has obvious intent. Where is the intent in this situation?

Very good post! It brings up an important topic that we all need to be mindful of - even if I don't think it makes much sense. Just to be clear - I don't mean that you don't make sense - I mean the rules don't make sense.

Uzi - Yes, I agree. CE is good, but we walk out realizing how much more we can learn.

Don - I agree. It depends on the circumstances. Seller Concessions aren't the issue, it's how they are misused.

Bill - It's not just our profession. They is just as much fraud with Medical, Legal, Financial Planning, Insiurance...

James - Ignorance is bliss

Steven - Amen Brother.

Lani - You bring up good points. It is never an issue if the sales price is lower then the list price, but that also affects the future comps just as much. Not allowing the appraise to see the purchase agreement would alos affect your paycheck. What if they came in $200,000 lower then your seller was willing to sell for or $20,000 more then your buyer could get financing for. The appraiser needs to see the purchase agreement and all addendums so taht they can make a fair assessment. Most appraiser I know and work with, especially in ORegon where there aren't a lot of track homes work their fannies off.

Teri - Yes, we should go to learn and not just get our credits...

Randy - You do deal with a different market then most of us,

Craig - I believe it gets even more complicated! I see the government's side because if it's going for $100k and you raise it to $103k, you're manipulating the market. In any case other than a distress situation, you're manipulating and that constitutes fraud. On the other side of the coin, appraising is an art, not a science and there is an allowable leeway. 3% leeway isn't out of whack, so by that token, that $100k home might really be worth $103k.

Where I think it gets more complicated is in your notion that appraisers will take the seller concessions into account when appraising. That may be so, but most realtors don't take that into consideration when pricing homes. Does every MLS even give that info? So if some realtors don't know and they're pricing based on sales price alone, they are manipulating the market.

I wouldn't make a big deal over a few dollars here and there - because I accept that there's leeway needed. What I don't stand for is when the numbers are highly manipulated.

- Tchaka

Tchaka - Yes, it was kind of fun. The interesting thing is taht we were all doing what our lenders were telling us was ok.

Craig and Amber - Good point. That's assuming that the Realtor and Appraiser both do their jobs as well and disclose that seller concessions were involved. The scenarios taht the Feds seem to be goimng after are the overt ones where the intent was to defraud the system for personal gain. But he also pointed out how what we all do on a daily basis can feed the beast just as well. And yes, when a seller sells under market value it affects market value for the future, not the past. An appraisal is good forever. It is a reflection of the market value at a certain point in time. As long as the appraisal was solid it would pass scruitiny.

In your first scenario it would probably still be ok because it is under market value and still under the origional list price...and fully disclosed.

In your second scenario, they have a good reason for selling under market value and that is there decision. I agree, there is no intent and no fraud. It's not a black and white rule which makes it even harder...

Tchaka - good points and thanks. Yes, 3% is an allowable leeway, so the issue becomes more how the concessions are written. Are they added on several weeks after the original contract and then increasing the price higher then what it was unable to sell for for months? Also, how tight are the comps? Are they less then 5% or greater then 15%? A creative appraiser can always find value... That doens't make it valid.

Larry

An outstanding post for any number of reasons. I hope that it's content is being read by many and accepted as factual.

Larry- this has been going on for so long that it seems almost an accepted standard of practice. The obvious danger is in taking those baby steps...more and more manipulation of the price until it is truly full blown FRAUD. If the line isn't drawn, regardless of appraisals or any other method of determining value, by avoiding this practice altogether, I can see it spiraling out of control. And have. Great reminder.

So many details to think about. It's funny how you can end up at the same place but depending on the route you take, it might be legal one way and illegal the other.

I have a seller now that I wonder if....... thanks for the post! I plan to pass it on!

I'm sure all of the hard working appraisers out there will appreciate your post. Great job!

Just be careful with all your dealings. If the goverment has time for this go ahead. Great Post.

The easy way to avoid fraud is to make sure the actual lender knows everything - that nothing is hidden in an addendum or not disclosed.

Excellent post - thank you for sharing!

My thought is on the portion of "money crossing state lines." In most cases you are dealing with banks in another state. Even if you are dealing with a 'local' bank it is very possible that this banks home offices or loan servicing offices are in a different state. And as more of the larger banks buy up the smaller ones this will become even more of an issue.

Thanks again! Great information.

What surprises me is the number of realtors that aren't knowledgable in this area.

Most set up the deal before talking to me about how best to structure it for the client. Some even break the rules and send in fraud contracts unknowingly

This is a hot topic these days. I'm being cautious about price reductions these days. Most sellers are willing to help some with buyer closings costs BUT if they reduce the price too much that ability disappears then we are stuck because we can't raise the price back up to allow the concession.

Larry, Very good point. I think the key is to have the seller concessions in the initial offer and make sure they are in the contract not a separate addendum. That way the lender and appraiser know exactly what's going on. In my market almost every deal has seller concessions of 3 to 5%. Since this is the norm it is in the market value and is something I discuss with sellers at time of listing. Also, I use range pricing on my listings say.. $$199,000 to $219,000 instead of just listing at $209,000. By listing this way we are giving room for concessions at the top end of the range. This of course assumes that the property is not priced above recent comps.

Good info Larry. Thanks for sharing.

Ed - Thanks. Can I add your remarks to the body?

Laurie - Very good point, but please don't throw the baby out with the bath water. Seller Paid Concessions are not the problem, the abuse of them are.

Tim - very true. It's what differentiates the professional from the ordinary...

Charlene - Thanks for the comment

Diane - I don't know how they do it. In our industry they are probably held to the highest standard and are paid the least. They receive criticism from all of us if they don't hit the mark and feel held hostage since we are responsible for their paychecks.

Frank. The FBI has made this a priority. They have hired at least 50 new agents. Congress is making this a priority and just might take away many of the tools that we have come to rely on to get borrowers approved. This affect all of our paychecks.

Harper Team - That is certainly the place to start, but not necessarily bullet-proof.

Carol S - That's what makes this so serious. Sate laws can be as simple as a slap on the wrist. Fed charges can be Bubba time in a Fed prison. Not good.

Tom - EXACTLY!!! We need to visit offices and give talks on how to correctly structure deals. I've had too many "old school" Realtors who bargain down the price and then ask for concessions. It just makes it a whole lot harder...

Carol W - That's exactly why you should be up front with your need for concessions or your desire to help a borrower with concessions. You can always put in with a counter offer that the sellers price reduction will be in liu of any Seller Paid Concessions. This might bring it out earlier.

Bryant - Excellent points!!

Interesting points...

I think that this is definitely one of those grey areas where we have to figure out which way is up.

I think seller concessions are becoming more and more popular - there are even bank-based loans like the MyCommunity program which rely on seller concessions to work properly for the borrower.

Larry - a most impressive topic that needs to be covered. In fact, I'm negotiating on a deal right now where it's an Ameridream program for a smaller house I have listed. They want to offer the price that we HAD it listed at before dropping it a week ago. In return they want 3% for down payment assistance (FHA and all) and closing costs of about $3,100 on a $110,000 house to be paid for by the Seller.

Now, in my opinion, since an appraiser has access to the MLS and knows where the values are and have been and since it is a FHA loan and since it is all fully disclosed from the get go then it shouldn't be considered loan fraud. Am I right about that?

I just don't know how this could be construed as doing anything wrong since all parties are aware of every detail. No back-door checks from the seller. No forgivable loans. No monkey business what-so-ever.

David - Correct. There is a need for Seller Concessions, but a wrong way to use them.

Chris - I am not an expert or an attorney. Since the reduction was 3 weeks ago you shouldn't have a problem. It's when a stagnant property is all of a sudden sold for much more then it's apparant worth was a day or so earlier.

Larry

Feel free to use my comments any way you see fit.

Hate to disagree with you and the assistant states attorney dude, but I've had properties that have gone up in price for other reasons other than covering closing costs. Am I committing loan fraud because the guy finished the garage that he was building?

If the seller is willing to help the buyer and the seller being willing makes his house worth the 3% more and the comparable properties can justify the final sales price, then it should be cool. In other words, negotiations are not just a one way street with the direction being down.

If you're buyer needs me to help with the closing costs, then he's not as strong a buyer as one who didn't need the help. Why can't I demand a higher sales price? This is the flip side of a cash buyer getting a better deal because selling to him is a sure bet.

As long as I provide all of the available documentation and hide nothing from my lender, then I'm safe. This is not loan fraud! Way too many people are trying to freak people out and make them think that they are doing something wrong. As long as you aren't hiding something and are being forthright and honest, then you should be cool as far as fraud goes. I wrote about something similar on a post called the pleasure of self Flagellation

Bob Mitchell

ValueList Real Estate Services, Inc.

Thanks for this. I can see how this could be a problem. In real estate, and in other aspects of life. we must listen to our inner voice. If it feels wrong, or if you have to ask yourself if it is right. it probally should.

This is a very good post. I am new and have so much to learn.

All of the "creative loan" info floating around only adds to the confusion for those of us who are learning. Who can we trust to give us the correct information?

This abuse is a classic case of 'give them an inch and they'll take a mile'. (sorry, my parents said that all the time:) ) Unfortunately we will end up with more laws and regulations that make it harder and add to the confusion and fear.

I looked up RICOAct on Findlaw. Consequences are ugly. I'm not interested in going there.

oops, all I was going to say was good post. :)

Bob M - It's not me you're disagreeing with. In your situations you're probably ok. Where it becomes a problem is the situations I described. A stagnant property that was obviously not moving or values being stretched beyond acceptable values. You're right, full disclosure helps. The isuues still remains is it the seller who is paying the borrowers closing costs, or the borrower with a higher loan. This isn't a case of parnoia, but fact. Your choice to roll the dice. As long as you aren't pushing the envelope you should have nothing to worry about.

Bob V - Thank for the comment. I agree. That's basically what teh Asst. State Atty General said.

Doreen - Thanks for your comments

Thanks Larry for a great post. This has been a hot topic in Southwest Missouri of late.

Larry,

To avoid anyone taking offence, I want to clarify my comment about 'who can we trust'.

What I mean is, because of the confusion, there are many people who are giving wrong information because they've been led to believe some things that are not true. I think most people would not even consider doing something if they know it's wrong. Helping the seller and buyer is the goal. It can be hard for the Realtors, appraisers, clients to know where the line is.

This post helps clarify a lot for me. Sometimes I should skip the comments.

Thanks.

Great post! Realtors need to be aware that one way of negotiating a deal does not fit all houses.....

Jack

Debbie - Thanks for your comment

Doreen - I agree. That's why the class was so upset. We were led to believe by our lenders that this was ok. Many Realtors were writing contracts this way or it was being suggested by seasoned loan officers. Out of ignorance we felt that we were operating in our clients best interests. But again, the Seller Paid Concessions weren't the issue. It was constantly pushing the envelope in value to make it work.

Jack - or all borrowers

May be it's late or I am really tired. I didn't quite get what you were saying in the beginning and then went through a list of ok ways. They last one seemed to be what you were saying was wrong....I'm going to reread it in the morning.

Christy - Please do reread it. Seller Paid Concessions are not illegal, just the way some (including me) have done it in the past.

Thanks for the feedback Larry. I won't retain you as counsel, however. :)

The key is I always try to stay on the straight and narrow. Disclose everything!

MAY

2007

That's the best tact.

Excellent information.

Carolin Benjamin
Bob and Carolin Benjamin
The Benjamin Team
Keller Williams Integrity First Realty
Gold Canyon Arizona

Larry all good, the seller paid must be part of the HUD 1 and you are clean....and nothing hidden from the lender so everyone has eyes wide open. An 8 x 10 does not seem to be great accomodations to me. Nice post.

Bob & Carolyn - Thanks

Gary - Not sure I get the "8x10" reference. It needs to be more than just on the HUD1. If you are still doing some of the things mention above (post and comments) then you are still at risk. The main issue is taht for seller paid concessions to be truly seller paid, the price cannot be artifically inflated post initial agreement to cover buyers closing costs. If you doubt this talk with the state appraisal board and see what their thoughts are.

Larry, think of Oz or Shawshank Redemption or The Green Mile.....all of those have 8x10s featured prominently. :-)

- Tchaka

Thanks - the brain is fireing a little slow today.

Here's another thought to throw out there. Just because you have put everything up front and doisclosed it on teh Purchase Agreement, listed it on the HUD1 and the lender has funded it doesn't alleviate your responsibility. If it later is deemed fraudulent you will be put through the ringer.

Thanks for this post, it is sad to see that others are doing that, although I know they are.

MAY

2007

A well written and educational post. Thanks.

the concession has NOTHING to do with the appraisaed value

YOU do need the value to be there in order to get that concession though

DOMINICK GACCINO

First Suffolk Mortgage Corp

Great post! It looks like you stired as much controversy here as this topic did in your class. My fiancé just finished her Real Estate course and filled me in on this last night. So my understanding is that you can not make one offer then come back and make a higher offer to cover cost. You can make one offer higher than asking price to cover cost as long as the appraisal covers the offer price. Only problem with that is the chance the buyer could get burned if the contract is not read or worded correctly. Lastly, you never ask an appraiser to inflate anything.That is flat out fraud. BTW I thought we did loans to cover at least 105%. If you can cover the payment on a 100% purchase, whats an extra 5%?

alender does not determine market value, buyers and sellers do.

an appraisal does not establish market value, it is an opinion used by a lender to justify the loan.

all terms of the purchase need to clearly be stated on the contract.

maybe fha needs to be indicted, not only will the guidelines allow for a 6% sellers concession you may also use a non profit for costs. are their guidelines perpetuating the problem?

Maybe the answer is to disclose the sales price and the concessions in all references so that we can all determine the net price since that's the most honest.

That way if someone sees a home that sold for $430k with $18k in concessions, s/he will see it as a $412k net transaction.

An argument can be made that that's a better indicator of market value.

- Tchaka

JUN

2007

I am an appraiser dealing with this issue. Many appraisers are not handling the concessions correctly on the report. I recently did one appraisal in a condo conversion. There was another appraiser that had been doing the bulk of the appraisals for the project. My appraisal came in below value and all hell broke loose! The builder had one of their rookies examine my appraisal for 4 hours trying to figure out what I did wrong to not come in at value. They questioned me about my sales concession adjustments. I explained how they were to be handled. They decided to have their appraiser do an appraisal. Of course that appraiser came in at value. I reviewed their appraisal and they had mishandled the sales concession. They did not minus off the full concession from each comp. They did a balance of the concession the subject had against the comp's concession. For example: Subject has a 10K concession. Comp 1 has a 10K concession. What is the adjustment on comp 1? It is a -10K not 0!!! This appraiser did the whole project like that. I called that appraiser and they said that is what they were told to do by the senior appraiser in their office! I have heard of many other appraisers handling it this way also. It is a confusing issue for many appraisers.

The big question is....If the property is foreclosed upon will they get back the concessions? Concessions are not real property.

JUN

2007

Andrew - I still believe that most are doing ir out of ignorance, not malice

Wayne - Thanks

Dominick - I'm sorry, but you are incorrect. The concessions SHOULD NOT have anything to do with teh appraised value. Unfortunately, too many professionals and lender AE's tell us to just bump up the loan or purchase price to cover concessions.

Larry - good summary. There are a few lenders who will go 105%. Homecomings used to go 107%. These are different. They are saying that they will loan up to 5% (or 7%) above the selling price or appraised value to cover closing costs.

Jay - I agree that a lender doesn't determine market value, but they do have rules to follow. Also you are right an appraisal doesn't determine market value. I've seen enough lenders throw appraisals out the window and offer a lower value. The FHA doesn't need to be indited. Just the Realtors and LO's that write or allow for fraudulent purchase agreements. Again, the concessions are not the issue. The way they are sold are.

Tchaka - That's probably a fair assessment.

Rae - Thank you for your input. Join AR if you haven't already.

JUN

2007

Larry great post. I am saving this for further review. This is important information for all to understand.

Thanks Ashley

JUN

2007

There are so many reasona why a purchase price could legitimately go up, even with a seller credit. Hot market, newly paved streets, new mall or popular store opening up, announced expansion of a university, buyer asking for a longer escrow, new work done on the house, maybe the seller just "fells like its worth more", or wants to recoup from a price reduction that the seller feels he was pressured into, I can go on and on. The reality is that the government guys are black and white types, and see everything through the world of right and wrong, rather than how the world really works between people just trying to do the best they can to make their way in this world.

I agree with much of what you say. The issue is when the intent, or the way the contract is written, is no longer reflective of current and actual market value.

MAR

2008

Some key elements are being glossed over here...they are..."intimidating the appraiser" and not disclosing material facts. As long as you don't do one of those things , this is a legitimate business practice. If you're hiding things, if you're putting a gun to your appraiser's head...then yeah, you're probably committing loan fraud. But if everything is disclosed and no pressure to hype the appraisal to an unreasonable amount is made, then it's simply renegotiating a business transaction. Happens all of the time!

Bob Mitchell

ValueList Real Estate Services, Inc.

Bob - I would agree. Full disclosure needs to happen. The issue, is that it is a very grey area. What you might not feel as pressure, the appraiser might feel as being backed into a corner. But, if the adjustment on the comps are low, the value supports it, and the lender allows it, then it will probably fly.

I like your scenario in my other post. Life happens. What we need to get away from is the hiding the need to have the seller pay concessions until after the offer is accepted.

Hello Larry -

Excellent post. I have a friend that is an appraiser and loan officer who went to a similar class with Tim Spencer. He said that LOs had the same reaction as you stated (especially after going over the fines for such incendences).

Tchaka wrote the following:

On the other side of the coin, appraising is an art, not a science and there is an allowable leeway. 3% leeway isn't out of whack, so by that token, that $100k home might really be worth $103k.

Now, the Oregon ACLB (appraiser's board) sent out a letter last year that said in short: Realtors are not required to disclose concessions to the public, but we appraisers are required to ask. This means that if the concession information is not disclosed to us (which is not required) then we have to make the assumption that there were no concessions. Imagine report after report with 3% concessions that were not confirmed for the sales comparison adjustments. Compounded over time, it does make a difference. It will falsely increase values.

RMLS has this dandy private remarks area where Realtors can go in after the sale closes and type in any concession information, short sale, etc. I can't tell you how much this helps everybody because I don't have to hold up an appraisal waiting for a call-back from a Realtor regarding concessions.

... It occurred to me that I wrote a post on this very subject a while back. Here is the link to the post with the letter from the ACLB.

DEC

Your blog is insightful. My blog ask the question, what are reasonable examples of sales concessions used across the US? Can anyone including yourself help answer my post? I have been getting the welcome to ActiveRain post but no answers....

Thanks.

http://activerain.com/blogsview/853308/Sales-ConcessionsWhat-types-are-best-and-novel-to-home-purchasers

Welcome to AR, Teresa! A good friend of mine happens to be named Teressa Thompson.

IMO, a reasonable amount of concession is enough to cover most of your closing costs - reasonably. I generally use a 2% rule (1.8% on high priced homes). This percentage increases significantly for lower priced homes. Ie, you might have $6k in costs for a $100k purchase and $8k in costs for a $300k purchase. Both are reasonable, but as you can see one is 6% and the other is just under 3%. Most of the homes I finance are in the $300-700k range hence my lower percentages. You also have to take into consideration how high the costs are in your state. A $450k purchase will have higher closing costs in DC than in VA, so it's reasonable to have slightly more in concessions.

One very important bit provided by this blog is that you anticipate any seller concessions ahead of time and negotiate them during the purchase. Do NOT go back and try to raise the selling price. A good underwriter will toss that out (or reduce the loan amount)....not to mention that it is fraudulent.

Sara - Nit sure how I let your comment slide by, but I did and I apologize. Thanks for the expert comment. Realtors really need to have the discussion about concessions with their clients prior to listing. Even if they are pricing based on the foreknowledge that they will be offering concessions, it's above board. Seller Concessions are not the issue. They are a legal tool to help facilitate the sale of a property.

Teresa - I'll comment on your post.

Tchaka - good points.

JAN

I see those sales contracts all the time. Appraisal reports disclose sales prices and listing prices and listing history. I have seen this in conventional and FHA. I do not understand, if this is a real problem, why underwriting or QC does pick up on this.

I have not had one of my originators tell me there was a problem.

I would not revise the listing price to attempt to fool anybody, however three to six percent usually is not a problem.

Thank you for your information

NOV

Thank you very much for posting this piece, it has opened my eyes to what had possibly taken place back in 2005.

An FNMA by Wells Fargo, infact. The appraisal is completely fraudulent and also mentions a contract price 2k higher than the contract. The appraisal mentions the property listed for 13 days, and realtor recommended paying another 2k over the contract for a total of 4k above the listing.

The GFE showed $3,267 Seller-paid//$356.00 Borrower-paid. $3623.20 Total with $1,750 POC.

The next day, a new GFE was issued by the same agent from a different address. The revised GFE listed $3623.20 Borrower-paid//$0 Seller-paid and $5,000 POC?

The % rate was locked on the original GFE and did not expire. But on the revised GFE, the % lock-in was removed. The "Amount Financed" was lowered and the APR, Finance Charge, Total of Payments, and Monthly Payment were increased.

No other terms of the loan had changed, including taxes, interest, borrower's credit, etc.

Remember the name Wells Fargo.