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Court Ethics Panel Renders Seller Concessions Unethical

Saturday I received a call from a panic stricken agent, claiming that her customer would not be able to make an offer on one of my lisitings. She went on to stay that she had just received a call from the buyer's attorney, one with whom she has worked with on numerous occasions. He told her that he would not be doing anymore real estate transactions involving "seller concessions". Judges Apparently, on December 18, 2006 a court ethics panel deemd the act of participation to be "deceitful" and has informed the New Jersey Bar Association that it disapproves of the practice. She went on to say that two lawyers had been fined $50,000 each.

The core of the issue appears to be the secondary market. Complaints of the arrangement, not being included in the original contract, but in the form of addendums (never seen buyer secondary purchaser) and not being disclosed by the broker or primary lender, leaves those buying in the secondary market, in the dark.

I am not sure what that means for pending transactions, schedule to close within the next two weeks. there has been no official word from our local Realtor board other than they are seeking clarification.

Just another obstacle added to a host of challenges, already in the marketplace. Making homeownership less attainable for many potential buyers. Home This would take a huge chunk out of my articles, " Real Estate Oppotunities Abound For Buyers" and "Financing Your First Home May Be Easier Than You Think". One would think that the court's ethics panel and the investors in the secondary market, would see merit in the independent appraisal, confirming value.

I do not have a law degree, but I would think that a more practical approach would be the implementation of a mandatory disclosure statement. Issued by the buyer and seller to the primary lender about the presence or absence of a seller concession. In my opinion that would eliminate the stigma of "deceit", provide for disclosure and allow buyers and sellers to have a say so in the financial arrangements for their transaction.

Are you in a state where this type of transaction has been singled out for discontinuance?

What say ye on the subject?

Posted by William Collins, Broker Associate on 12/26/2006 04:43 AM

Comments (34)

new jersey real estate, scotch plains, plainfield, attorneys, buyers, sellers, realtors, secondary markets, lenders, mortgage companies, westfield

Originally posted at: Central New Jersey Real Estate: Court Ethics Panel Renders Seller Concessions Unethical

This post has been included in New Jersey Information

34 Comments on Court Ethics Panel Renders Seller Concessions Unethical

DEC

2006

William, this is news to me. And a great post, by the way.

Seller concessions have been a common practice for years. I think your solution is MUCH more practical. Who, I wonder was the horsepower behind this piece of jurisprudence. Certainly not a real estate professional.

Mark,

Thanks for stopping by. I am not sure why this issue was brought before the courts. What difference does it make to the secondary market investor, whether there is a seller's concession. I was always under the impression that value and loan to value ratios were of importance. Certainly the independent appraisal confirms value and without the correct ratios the loan would not be approved.

Will,

Are you sure the attorney meant the verbage of the way the offer was written?

Hi William, That is very interesting. I believe all sellers concessions should be on the face of the contract and not on the addendum. Addendums have a funny way of not getting circulated. Unfortunately seller concessions is a major area for mortgage fraud. If there have been concessions and they were not disclosed to the purchaser on the secondary market, then it is fraud. Just like the primary lender the purchaser of the loan has the right to know the true financial picture of the borrower.

However I do agree there is a another solution than just prohibiting these concessions. Not quite sure how they plan on doing that but anyway as long as the concessions are within the allowed limits 3% or 6%, on the face of the contract, approved by the Lender and on the HUD1, then really the disclosure to the secondary market is the lender's issue.

Bryant,

Thanks for stopping by. I was under the impression that the primary lender had the responsibilty for disclosure.

It's going to be a rough road if this becomes standard. sounds to me like the courts sticking their noses where they're not needed! and it's something that will disproportionately affect first time buyers and buyers on the credit edge. i agree that loan fraud is too rampant, but harming buyers and sellers doesn't cure it. as long as it's on the main contract and agreed to, what's the problem?

Seller concessions are an issue because they inflate the value of the property. In most cases, it is not a real seller concession, but the lender is actually financing those concessions as part of the mortgage. Typical example: House is on the market for $300,000. Buyer has no money for the closing costs, so all parties bump the purchase price to $309,000. Now the seller "gives" the concession of 3% or $9,000 to the buyer so the don't have to "pay" closing costs. Of course they are paying it as part of a slightly higher mortgage and the seller still makes the same amount of money as originally desired. The lenders are concerned because the home isn't really worth $309,000. It was worth $300,000, regardless of the appraisal coming in at $309k. Lenders lend money because the funds are secured by the value of the home. If that value is artificial or inflated, it poses more risk for the lenders.

This has really become a big issue due to the housing market and all of the McMansion developers offering these crazy incentives such as free cars and flat screen televisions. We all know the cost of these "incentives" are built into the price of the home. Ultimately, the lenders do not want to be the one holding the bag if these loans go bad and they certainly don't want to be financing a car along with the house.

It appears to be a knee-jerk reaction to a few bad deals that probably got all the publicity. Almost all mortgage programs have rules regarding a seller concession and many home buyers would never have the opportunity to own a home with the help of the seller. I think that the problem arises from loan officers issuing pre-approvals that are not valid. They check income and credit and don't make sure the client has enough money to close the loan. In this case a seller concession is thrown in at the last minute and that is where the disaster begins.

Done properly a buyer should present the agent with a pre-qualification letter that states that they need the help of the seller and the amount of help they need. This will alow for a fair and equitable negotiation with full disclosure that benefits both parties.

As I said earlier this sounds like someone is trying to do the right thing to protect buyers and sellers. The right thing is for agents and loan officers to do their homework upfront to make sure the deal works from the start.

Excellent post. Thank you.

Are we confusing "Cash Back" instead of "Sellers Concessions"?

Hey William, I agree the disclosure is the responsibility of the primary lender. And assuming the concession was handled legally from the get go i.e. on the HUD, I'm not quite sure why the secondary purchaser would not be aware of it. In my market almost all deals have seller concessions.

William.... I concur with Scott Daniels at first. I am in New Jersey also and I have 3 purchase transactions closing in the next 2 weeks. I haven't heard from anyone.

In regards to Bryants comment.... maybe I am not fulling understanding the problem when you mention secondary market.When the lender sells the loan to an investor? In either case...this would only be a problem if they the realtors didn't disclose anything. In regards to the settlement statement, this has to be approved by all lenders prior to funding anyhow....

I will be back because I want to go over 2 other things mentioned on here... from Russell.

Wow..our seller concessions are always disclosed right on the purchase agreement...

How can that be illegal??? Has NAR come out anything on this yet? legal summary?

Thanks

Monika

Seller concessions are perfectly fine if 1) they are disclosed and 2) they meet the guidelines set forth by the lender. Usually cannot exceed 3 to 6% of the sales price depending on the CLTV and must cover non-recurring closing costs. Any extra left over should be coming off the value of the home. I use them all the time. Elimination of them would definitely hurt less wealthy buyers.

The problem is that a lot of the concessions are being abused and hidden. You see a lot of the "get cash back outside of closing" scams going on.

The main issue for the lenders is that they don't want to lend on properties with overly inflated values and if any concessions are being given, the lenders want to know about it.

Thanks everyone for offering your thoughts on the issue. I have sinced learned that the following statement was posted to the New Jersey Law Journal website. "In response to numerous inquiries concerning "seller's concessions," the Advisory Committee on Professional Ethics says Opinion 710 does not implicate a contract of sale that explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs or expenses related to the sale that would otherwise be absorbed by the buyer".

I have also learned that the southern New Jersey MLS system "TREND" has two new fields, one to indicate whether there was a seller concession and the other to reflect the corresponding dollar amount.

As John Klassen indicated it appears to be a knee jerk reaction to a few bad deals and to make matters worse, there are lawyers who have stated in writing that they will not perform ANY closings with "Seller Concessions". Title companies and some attorneys are doing business as usual. The New Jersey Association of Realtors is working to get further clarification.

William. I hope you don't mind but my husband, Broker Bryant, pretty much speaks my mind on these topics. That being the case I am just going to park and watch the discussions on this post. Wouldn't want you to have hear things twice. :) TLW...ROAR!

In my area, the seller contributions can go on either the main contract or the addendum. However, the appraiser won't do the final appraisal without a full contract in hand, and the appraisers must put in the appraisal how much the seller is giving back to the buyer. With that, they are justifying that the value is not inflated with the concenssions, and that's it's a win-win for both buyer and seller, and the mortgage company.

In my area the seller's concession is on the offer most of the time. This is the first time I am hearing of this ruling and I would think if this is true it would affect concession sales in other states.

DEC

2006

Seller concessions are alive and well in Nevada. I'll have to keep an eye on this to see if our state legislators make any changes in the 2007 session.

JAN

2007

Clearly all concession need to be, and for the most part are, disclosed on the HUD 1. So the buyer and original lender are not being deceitful unless they do something "off the sheet".

As to the Secondary Market not bothering to get the facts before purchasing loans...that should not fall on the buyer or penalize consumers at all. They just need to put in better systems so they know what they are buying.

I am not aware of the Court Decision you are referencing. As far as I know, seller concessions are allowed subject to certain guidelines involving LTV ratios.

What should be outlawed, IMHO, are undisclosed bonuses to seller agents. Talk about the underbelly of the real estate industry. And there are tons of Realtors who don't feel such bonuses need to be disclosed up front.

JAN

2007

Attorneys be a-wary! That seems to be the message behind Opinion 710 of the Ethics Committee appointed by the highest court of NJ. Great job by the real estate professionals and attorneys seeking immediate clarification and insight. The Committee issued a clarifying statement as Bill pointed out seemingly calming the waters by stating that concessions are valid so long as they are "legitimate and legal costs." The real estate transaction is a complicated affair requiring the highest standards of care by an attorney. Let the Opinion, despite its shortcomings, remind us that as real estate attorneys in NJ, we are at the forefront of protecting our clients and preventing fraud and deceit to the public.

Stefan,

Here in New Jersey bonuses are recorded on the HUD 1, as part of the compensation paid by the seller.

JAN

2007

I didn't follow the part where you said "(never seen buyer secondary purchaser)", but I think the fine was for allowing the concessions to be on the side and not disclosed on the HUD1. That has always been illegal. But the seller concessions as they are normally disclosed should still be fine.

But thanks for highlighting a possible new trend.

I can see how courts might see seller concessions as a problem. In part, they mess up all of NAR's numbers as they do not get included when calculating the market's direction.

JAN

2007

Apparently after the holidays the Ethics Committee issued this "clarridication."

NOTICE TO THE BAR

Clarification of Advisory Committee on Professional Ethics Opinion 710

In response to numerous inquiries concerning "seller's concessions," the Advisory Committee on Professional Ethics hereby clarifies Opinion 710, "Misrepresenting Purchase Price or Other Material Fact Regarding a Real Estate Transaction." The Opinion is based upon the particular facts submitted by the inquirer and recited in the Opinion. It addresses fictional and deceptive increases in purchase prices unrelated to the actual circumstances or costs of closing, and contrary to the expectations of the lender or the ultimate holder of the mortgage. As stated in the Opinion, a prohibited transaction is one that is not premised on "a legitimate charge against the seller on account of any actual costs assumed by it and otherwise payable by the buyer." Accordingly, the Opinion does not implicate a contract of sale that explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs or expenses related to the sale, which would otherwise be absorbed by the buyer, such as actual closing costs.

Melville D. Miller, Jr., Esq., Chair
Advisory Committee on Professional Ethics
Dated: December 22, 2006

Sarika,

Thanks or stooping by. I did post this clarification on 12/26/06.

APR

2007

Hi all, I have read all the comments and I still do not understand where NJ stands on the issue of "Seller Concessions." I am not in the legal profession, so if anybody is kind enough to explain to me in plain simple terms, would very much appreciate.

I am currently in the process of purchasing a home in NJ. In the original contract, I did not ask for seller to pay for "closing cost" because I did not know that there is such a thing. Later on, I spoke with my bank and found out about the closing cost and I nearly fell off the chair. The bank (very reputable bank, never have a history of selling their mortgages) checked my credits and said they can also lend me the money for all closing costs up to 3% of the purchasing price provided the appraisal comes back covering it. I instantly feel like there is hope afterall.

So I contacted my attorney and told him to put in extra 3% in the purchasing price. He outright refused and said it is illegal since it is not in the original contract and he said he will not even put it in an addendum. I fel like I have asked him to do something very illegal. I called the bank and verify, they say it is perfectly legal and they do it everyday. Even my real estate agent, who has more than 20 years of experience, said that it is legal.

Now I am back to step one, not knowing where to come up with the money for closing. A couple of my friends are in the same situation and possibly have to abandon the deal because of the tremendous closing costs associated with it.

So, if someone can tell me is it totally impossible for me ask for a seller concession if the bank agrees to it? And if I ask the attorney to put it in the addendum in the contract and make it very clear how much is the purchasing price and how much is used for closing costs, that's still forbidden?

Would very much appreciate some professional comments.

APR

2007

Anthony,

Thanks for stopping by and reading the post with all of its comments. Opinion 710 clearly states that "the Opinion does not implicate a contract of sale that explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs or expenses related to the sale, which would otherwise be absorbed by the buyer, such as actual closing closing costs." Additionally it states "a prohibited transaction is one that is not premised on "a legitimate charge against the seller on account of any actual costs assumed by it and otherwise payable by the buyer."

I don't understand why the closing costs were not included in the contract, prior to submission to the seller. The contract is a function of your needs, expressed by you to your real estate agent and loan officer. The preferable approach is to have the request as a part of the original contract. However, there is nothing that precludes the request from being proposed to the seller, post contract signing. Most attorneys that understand Opinion 710, understand that the intent is to prevent fraud and deception. The question for your attorney is, "where is the fraud or deception in your request?

William - very interesting blog. i'm new, and these are blogs i need to be reading......thanks.! ron

Thanks William for your response

The reason why it is not in the original sales contract is because I thought I have enough money to cover the closing cost. However, when the "estimated" figures comes in from the bank, I was in shock. I asked the bank what can I do, they say they will be more than glad to lend me the money towards "closing" costs because I have excellent credits, but no cash back, which is fine by me since that was not my intention anyway.

I called the attorney in regards to that, he said it is not in the original contract, which he is correct, and he cannot put it in the addendum to the contract because that would mean that he knowingly participate in a "fraud & deception" as outline by the real estate board ethics commission (reasons that I still cannot understand pertaining to the selling of mortgage etc.).

So is there anyway that I can get a response from the ethics committee stating that it is "ok" to have an addendum attached to my original contract explicitly stating that the "extra" money from the bank ($xxx amount) is for closing costs (including all fees, pre-tax etc.) with no cash back.

The bank whom I spoke with again yesterday is still confused by what I told them. I spoke with the underwriter and he said that he has never heard of such a thing and if it is indeed illegal, 1/2 their transactions will fall through.

Thanks again for your quick response and anybody's comments or advice will be truly be appreciated.

Anthony,

The ethics committee will no get involved in individual transactions. It is incumbent upon your attorney to explain to your satisfaction how your request demonstrates fraud pertinent to Opinion 710. Short of your attorney's ability to interpret the opinion appropriately, there are attorneys who would conduct the closing with the concession. Your agent and loan officer should be able to refer you to a competent attorney who understands the ruling.

MAY

2007

I'm not an attorney, and not from NJ. However, I attended a fraud class last year where this subject was discussed. The issue isn't so much the timing of the seller concession as much as it is increasing teh sales price to cover the concessions. The question becomes was the house worth it or does it artifically inflate the value which then becomes a comparable sale for future homes.

OCT

2007

I think this is more about the undisclosed seller concessions on the back-end of the deal, and those concessions that exceed industry guidelines of no more than 6%.

Larry, you hit the nail right on the head...an inflated purchase price may get used in future appraisals creating a whole market that is over-inflated.

NOV

2007

I am not a lawyer either and this is coming up in my current deal. I'm a buyer getting seller concessions, and the seller's lawyer recently brought this up. He said that the concessions can't be used for taxes or Escrows. Is that correct?

JUL

2008

I'm attemping to purchase a home here in Florida @ $129,000.00 the balance to close is $8,530.00.

My realator asked the seller to provide a total of 10% seller concessions which will include 7% down

payment assisstance through Ameridream and 3% towards closing costs. The bank in return offered 5% in

seller concessions. My question is, should I counter offer with 7.5% seller concessions, including 4.5% down

payment assistance through Ameridream and 3% towards closing costs?

Please help me asap!

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