OFFPLAN NEWS

(31.05.2007 )
English property Cash Back At Settlement Is Legal, But Be Careful

What's the legal method of passing money from the seller to the buyer in a real estate transaction?
As many real estate markets have transitioned to a buyers market, the practice of seller subsidies has returned with a vengeance. Each time this topic comes up, I receive emails questioning the practice of the seller helping the buyer with closing costs or cash back as being a violation of the Real Estate Settlement Procedures Act, which was passed into law in 1975.
The Act regulates various practices in the industry, including provision of "timely disclosures of the nature and costs of the real estate settlement process," according to background information from the U.S. Treasury Department. "The act also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts."
Usually, the "kick-backs" the law is attempting to prevent are those between real estate professionals that could increase the settlement costs for both buyers and sellers. So when you start talking about seller subsidies, while it would seem that RESPA would have no say on the matter, because it doesn't necessarily involve the "professionals," there's a right way and a wrong way to get money from the seller to the buyer. The right way, helps many buyers purchase a home they otherwise could not afford. The wrong way could send people to jail for up to 30 years, as well as cost you your livelihood (as a professional) and $1 million, according to federal law.
So what's the legal method of passing money from the seller to the buyer in a real estate transaction?
DignityMortgage.com has a very clear explanation of how this could happen: "Borrow some of the cash proceeds that the seller has received -- but outside of the purchase closing. The purchase closing should be kept completely above board. The seller loan should not be part of the purchase contract or agreement in any way. It is a totally separate transaction."
"As long as the appraisal report is legal (not pushed) and supports the contract price, then there should be no problem with the purchase. The seller loan does not have to be included in the RESPA (and thus set off red flags with the lender), because it is not part of the purchase transaction," according to an information piece on the site.
The reason this is acceptable, while other methods of doing the same thing could bring in a federal investigation, is that the borrower is borrowing money from the seller -- just the way he would borrow money with a home equity loan or line of credit. It's just set up as a separate transaction -- not part of the original purchase transaction.
In addition -- it all has to be above board. It can't be a hidden loan, for instance, that would stretch the borrower so much that he could not afford the purchase mortgage. This is a complicated procedure, so be sure to talk with the settlement attorney about how to put this secondary transaction together to comply with RESPA and the purchase loan program.
Keeping track of what's legal vs. what's illegal is a difficult task. For instance, when is it okay for a title company to provide a luncheon for Realtors and when is it illegal?
Consider this Q&A from Realtor.org on the topic:
"Question: When a title company hosts an agent luncheon at an open house, they are providing food in hopes of meeting agents -- just as Realtors hold open houses. Doesn't this need to be looked at in a much more practical way and allowed under RESPA?"
"Answer: If a real estate agent requested that a title company pay for a lunch that the real estate agent was hosting, and the title company agreed, the payment would be a thing of value for, or in the hopes of, the referral of settlement service business. If, however, the title company paid for the lunch, but attended the open house and gave a brief presentation, or prominently displayed a sign indicating the title company's name and distributed brochures about the title company during the open house, there is a reasonable argument that this activity is a form of advertising and therefore acceptable under Section 8(c)(2). Again, real estate agents should apply a rule of reason. If these activities and materials are present, a casual lunch of sandwiches for $200 likely would be acceptable. A catered lunch by an expensive restaurant at a cost of $800, however, would more likely be viewed as a referral fee."
As you can see -- it's not that the individual act is illegal, it's the intent and the way it's presented that matters. For a test on your RESPA knowledge, take this online quiz at Realtor Magazine.

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