Cash Back to Buyers

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IrvineRenter_IHB

IrvineRenter_IHB

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Years ago lenders did not finance deals that had cash back to a buyer at close. If there was any such money available, they simply lowered the loan amount to reduce their exposure. Now with realtors like Zip Realty which promises a 2% kickback and other seller financing arrangements, these cash back deals are very common. As downpayments return to the market as lenders look to reduce risk, and as more cash back fraud deals get exposed, it is my opinion that cash back to buyers will disappear. This will make it much more difficult for people to go out and furnish a house or do improvements at move in. In short, people will need more savings to finish the transaction and make the house a home.

What kind of cash back deals are you seeing in the market?

What do you think the future holds for these kinds of arrangements?
 
Great little post over at BMIT about a cash back conversation between an agent and a reader Kate.

http://bubbletracking.blogspot.com/2007/06/whats-wrong-with-little-cash-back.html

Agent: Hi Kate! This is Agent. Remember the house you saw in Sherman Oaks on Sunday?

Me: I saw lots of houses Sunday....

Agent: Oh, of course! Well this one was priced at $825k and we had a long talk about how you thought it was worth closer to $725k?

Me: Oh yes, the one that needed a new kitchen? In Sherman Oaks?

Agent: Yes! Well, would you consider maybe $760k?

Me: Honestly I've been down this road before and I prefer that there be a price reduction before a I write my offer.

Agent: Well, they already have one offer but I happen to know that the prospective buyer has made an offer on another bank-owned foreclosure property.

Me: . . .

Agent: So would you be willing to write an offer at $760k?

Me: But I already told you I don't think the property is worth that so...

Agent: Well, I could get the house appraised at $800k and you could get cash back you know for your closing costs or whatever and ....

Me: Let me make sure I understand you.

Agent: Okay.

Me: You want me to write an offer for $800k on your listing?

Agent: Yes. But you will get cash back so it will only be $760k and ...

Me: Let me finish.

Agent: Okay.

Me: You want me to write an offer for $800k, and take back about $40k, so I am giving the seller only $760k.

Agent: Yes! Yes!

Me: But I pay 5% commission on that higher sales price?

Agent: Well... yes but you are getting cash back for your closing costs and improvements...

Me: Again, I am paying 5% commission on $800k instead of $760k, and my property tax basis will be $800k instead of $760k?

Agent: Well, the property tax is only 1.25%

Me: Every year.

Agent: Right.

Me: Okay, so I am paying higher commissions on the sale and higher taxes every single year, for the privilege of getting a $40k loan?

Agent: ....

Me: Why would I do that? I have good credit and I do not need a loan. Also, I think it's a fraud on the market.

Agent: It's not fraud. Let me tell you how it works!

Me: Trust me, I know how it works: You get a bigger commission and you get to delay the inevitable price crash in your little pocket neighborhood. The sales data for the area will reflect artificially high prices so honest people with decent incomes and good credit scores who used to be able to afford the area no longer can. And what do I get? A $40k loan that I don't want or need. As a bonus, I will not only pay interest on this wholly unnecessary $40k loan but I will pay an additional $2,000 sales commission to you and my agent up front because that $40k is being treated like purchase money. But that's not all! No! I will also have to pay an additional $500 in property taxes every year I own the house because the records will reflect an artifically high purchase price.

Agent: ....

Me: Call me if the seller lowers the price.

Agent: Okay, when do you want to see the house again? Friday? Does that work for you?

Me: Are they lowering the price on Friday?

Agent: No.

Me: ...

Agent: Hello?

Me: I'm sorry. I'm really busy. I have to go.

I hate to say it. But... if people are willing to make 800K decisions on some future hope of resale or refinance without considering financial advice, main stream media, or common sense. I'm sure they'd be willing to take 1M out at 100% financing with 200K back. Would you rather buy a 800K house or an 800K house and get 200K back. What a deal! What a country!

/sigh
 
You know what they say about the genie and the bottle.... Mortgage investors would have to suffer a bloodbath before there were strong enough laws and enforcement limiting cash back. Bear Stearns is not even close to enough. It would require serious losses at pension funds and other sympathetic faces of the investors, big enough to cause cutbacks in a few million regular people's pensions, to jolt Congress and law enforcement agencies to make fraudulent cash back too difficult more most home buyers. Without strong laws and enforcement, lenders are going to simply be defrauded if they make loans conditional on a limit on cash back.
 
Darin,

That is classic! "Buy More to SAVE more and get MORE money back!" <nod nod nod>.

So awsome, yet so fundementally wrong. It just reaffirms that I think alot of real estate agents are no better than used car salesman.

-bix
 
It just depends on how the money is "acquired".

Cash back can be financed through many different ways. I'm taking this as the house is being sold as a 1st and 2nd with the total being 800k. One of the other ways is to evaluate the house at 760k then have a HELOC of 40k attached to the original loan, again for a total of 800k. It is still fraud because the house is NOT worth the extra 40k and the loan agnecy is essentially taking the adjusters "word" for it.

good luck

-bix
 
heres another take on "Cash Back", but secondhand. my friends put an offer down on a house in orange. its in the hills near anhills where sometimes there will be a small HOA for just a block or cluster of homes. the HOA agreed amongst themselves that if anyone were to sell, they would encourage buyers to do the cash back financing so the basis on any sales in the neighborhood would be propped up. of course this info came from the broker so maybe he was the one encouraging it and just passing the blame off on the HOA. in any case, cash back sounds like broker and other owners in neighborhood win, buyer losses.
 
I would drop any realtor that recommended this today in a heartbeat. Back in 2004-2005, the seller had the advantage so they could demand this. But in today's market, not to mention it being borderline fraudulent, the realtor would clearly not be looking out for your best interest in doing a "cash back" transaction.
 
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