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Cash back at closing - is it legal - and a new twist...

By Alex Charfen

Services for Real Estate Pros with Charfen Institute

August 02, 2007 12:24 AM

With the new Florida market being as challenging as it is, Cadey and I have seen a recent increase in buyers trying to get cash back at closing on our listings. The methods for this have been many up to and including the suggestion by one mortgage broker that we actually write his client a check the day after closing and sign a separate contract to this effect sot that his client could get good conventional financing. If we had received this request in writing I assure you it would have been reported.

As a member of the Master Brokers Forum (http://www.masterbrokersforum.com/) in South Florida Cadey was recently invited to an enlightening and informative symposium on mortgage fraud. There was an FBI agent on the panel and she made one thing unequivocally clear - the ONLY way anyone can get cash back at closing is if everything is declared on the HUD and disclosed to all parties.

This is the first litmus test for legality - if the cash back is not on the closing statement (HUD1), it is absolutely illegal and a fraudulent transaction. The FBI agent further made it clear that in these cases they are going after licenses, assets and personal freedom of the Realtors, Title Agents, Mortgage Brokers, and individuals involved.

Beware this is not the only test for legality. Some devious individuals have come up with a new and clever way to try to outsmart the system however it is absolutely illegal also and needs to be watched out for. The purchasing party will record an encumbrance or notice of interest against the seller's deed for what appears to be a third party and this will be paid off at closing by the title agent on the HUD. This may seem like a great way to cheat the system, get cash and no one is the wiser - wrong! Since the buyer had no legitimate claim to the property the encumbrance on title is fraudulent and the closing is illegal even though the funds are on the HUD.

When in doubt as to what is legal in a closing - or if you are approached with a scenario you have not experienced before -- consult a well respected and experienced title attorney. In South East Florida we rely on Dan Jacobsen who owns Lexant Title (http://www.lexanttitle.com/). He also happened to be on the panel about mortgage fraud.

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Al Maxwell

Keller Williams - Marietta, GA

Real Estate Agent

Good point. Make sure it's in the contract and the Hud!!!!

Aug 02, 2007 12:28 AM

Matthew J Blum - (retired from the business)

Palm Beach Gardens, FL

Great post. I have a very good client who has financed many properties through me. He is now in the process of selling one and he informed that the buyer's mortgage broker asked him play with numbers because his client did not qualify for the mortgage so they needed his help in a very dirty way. I asked him is it on the HUD? If it is not on the paper walk away...

By the way this piece really should be a feature

Aug 02, 2007 12:31 AM

Andrew Trevino

ADT Real Estate - Wilkes Barre, PA

Wilkes-Barre Homes For Sale

Isn't it amazing that, even with all of the scrutiny real estate transactions are undergoing, people are still willing to take the risks of losing it all for the almighty dollar? It's a shame!! Thanks for the post.

Aug 02, 2007 12:32 AM

William Collins

ERA Queen City Realty - Scotch Plains, NJ

Property and Asset Management

Alex,

Thanks for the post. I was at a closing where the buyer's attorney advised the seller's attorney and all parties to concede to cash-back to the buyer, off of the RESPA. Needless to say, the seller's attorney packed up and left, as did everyone else. Buyer's attorney came to his senses and we closed with everything in order and on the RESPA.

Aug 02, 2007 12:37 AM

Lenn Harley

Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA

Real Estate Broker - Virginia & Maryland

http://www.dllr.state.md.us/license/real_est/renews.htm#rebates

This link is to Maryland License LAW on the subject.

The FBI agent is not informed or looking for a crime that hasn't happened. Or, Florida law may be different from Maryland law.

Most of the objection to rebates to buyers and sellers is from agents and brokers attempting to keep commissions as they have always been.

Aug 02, 2007 12:41 AM

Dan Forbes

Bradenton, FL

I too have been approached by mortgage brokers to participate in what amounts to be mortage fraud. One wanted me to raise the sale price so the seller could give money to the buyer in the form of a check at closing. The buyer would use these funds for his downpayment. It would not show up on the HUD-1.

Aug 02, 2007 01:10 AM

Susan Trombley

Trombley Real Estate - Wake Forest, NC

Broker/Realtor, Raleigh, Cary, Wake Forest, Youngs

Run if it is not on the HUD-1 also run if the mortgage lender does not agree to it. Then they have no idea it is happening. Call the mortgage person and see what they know.

But Run Run Run. your livelyhood is not worth loosing your license for one transaction.

Aug 02, 2007 01:27 AM

Kelly Sibilsky

Licensed Through Referral Connection, LTD. - Lake Zurich, IL

Luckily, our contract was changed recently to include a paragraph that addresses the closing cost credit so it's a no-brainer. If it's not on the contract, then it's not legal!

Oh, and ALWAYS, ALWAYS call the buyer's lender to see what amount they will allow. And include the statement "property must appraise for full purchase price" on the contract as well.

Another thing I offer when representing a buyer who is asking for a closing cost credit - is for the commission to be on the seller's net, not the full purchase price. Anyone else doing that?

Aug 02, 2007 01:43 AM

Anonymous

This is to clarify. Seller concessions are required to be shown on HUD-1; however, service providers; such as, real estate brokers are allowed to give rebates or gifts after settlement per RESPA. Also, Dept of Justice has indicated that such rebates are protected by the Sherman act. Florida law just requires disclosure to all parties (not approval) and does not require such rebates to show on the HUD-1.

Aug 03, 2007 10:00 AM

Anonymous

Yeah, the title again is misleading "cash back at closing" is legal, mortgage fraud is not. I wish people would stop listening to Ralph Roberts. They are trying to create confusion between mortgage fraud and broker rebates...again.

Aug 03, 2007 10:05 AM

#10

Anonymous

Blogger

The FBI is alluding to "seller" cash back, not cash-back rebates from service providers like brokers.

Aug 03, 2007 10:38 AM

#11

Alex Charfen

Charfen Institute - Austin, TX

Exactly, as I stated in my post -- any cash back has to be on the HUD. Thanks Blogger.

Aug 03, 2007 12:19 PM

Anonymous

Blogger

Yea, but commission rebates from buyer brokers to buyers don't necessarily have to be on the HUD. Read Lenn's quote from the Maryland RE Commission's website. This can equate to thousands of dollars back to the buyer.

Aug 04, 2007 01:10 AM

#13

Anonymous

This is non-sense.

The problem is with the mortgage loan officer, they shop for appraisers "to make value" or pressure them by promising future business or they do not inform the lender about all the concessions even when they are informed. They will say "I did not see that document". This is nothing new, yet the lenders have done nothing about this huge problem even though it has been around for 20-30+ years. The lenders have created this problem. "Cash back at closing is not the problem, it is the lender or .... in Florida, it is a complete mess caused by the politicians. Market is pancaking because hurricane insurance premiums are skyrocketing and the property taxes spike once the property is transferred and reassessed (2-3 times its current assesssment) yet the realtors and loan officers do not disclose this to the actual lender or to the out of state purchaser. After buyer moves in, their mortgage payment is recalculated to account for the massive increase in their monthly payment. Buyers simply walk away from the mortgage leaving the lender holding the bag. Until FL politicians fix this, the market will continue to fall in FL.

Aug 04, 2007 12:49 PM

#14

Anonymous

Here is the real scam that is going on here with these blogs that advertise "cash back at closing" as they are creating confusion for both the real estate agent and the consumer.

Here are two scams:

1) Home buyer is looking to buy a home, real estate agent shows several homes to the buyer. Buyer inquires about getting cash back from the real estate broker's commission, unscrupulous real estate agent lies to buyer and says, "hey, cash back at closing is illegal", unsuspecting consumer assumes real estate agent is truthful since home buyer rarely buys a home and trusts the "friendly" unscrupulous real estate agent.

2) Home buyer works with a real estate agent that is advertising buyer rebates. At settlement, lender or builder says they will not allow rebate towards closing costs on the HUD-1 settlement statement. Unscrupulous real estate agent tells buyer, "sorry, but cash back after closing is illegal", unscrupulous real estate broker keeps the "unearned fees" rather than sending rebate check to buyer after settlement.

Be careful, last year, real estate agents have tried to redefine "mortgage fraud" as "cash back at closing" to create confusion over buyer rebates so that they do not have to compete on commissions. It is a total smokescreen, the DOJ needs to investigate this because they have worked hard to educate the consumer about broker rebates to buyers.

Aug 04, 2007 02:51 PM

#15

Anonymous

Blogger

Pursuant to my understanding of FL law, unilateral disclosure to all interested parties (buyer, seller, lender) is the only requirement in order to give a buyer or a seller cash back from the real estate broker's commission. This can equate to thousands of dollars. There is no HUD-1 disclosure requirement. If the lender truly objects to said rebate, then they ought not fund the loan. However, if they simply don't understand the rebate, then they should do their homework on the issue in lieu of arbitrarily objecting to it. The USDOJ is spending a ton of our tax dollars fighting to allow broker-to-buyer rebates. The lending industry doesn't need to trample these rights.

Aug 06, 2007 01:18 AM

#16

Anonymous

Blogger

Here is an article regarding illegal seller-to-buyer cash back at closing schemes.

http://realtytimes.com/rtapages/20070806_illegalflipping.htm

A seller cannot kick back funds to the buyer outside of the settlement process. This is strictly illegal.

However, consumers [home buyers & sellers] should not allow that illegal activity to be construed in the same manner as a Broker-to-buyer commission cash back rebate at or after closing. Thisis perfectly legal. The very same department-- USDOJ-- that has pursued the illegal scheme in the aforementioned article is the same department that has been fighting vehemently to protect and allow real estate commission cash back rebates. These are two different types of cash back.

Aug 06, 2007 04:47 AM

#17

Tony and Suzanne Marriott, Associate Brokers

Serving the Greater Phoenix and Scottsdale Metropolitan Area - Scottsdale, AZ

Coldwell Banker Realty

If you have to ask whether or not it should be disclosed, it's always wiser to disclose. That avoids any issues after the fact.

Jul 19, 2010 12:02 PM