‘Kickback’ plan could land buyer in legal trouble

Lenders often are wary when a buyer hopes to get cash from the seller after the transaction closes.

Q. I would like to buy a home now because prices and interest rates are so low, but I barely would have enough cash for a down payment, and would have no money to buy furniture or make improvements after I move in. One seller suggested I pay him $10,000 over his asking price, which he would then quietly reimburse me after the loan was approved and the sale closed. This seems like a good plan to me, because it would give me $10,000 in “breathing room” to get started. What do you think of this idea?

A. It’s not a very good plan, for a variety of reasons.

For starters, the bank you choose to finance the purchase with will have the legal right to know every detail about the deal. Telling a loan officer or mortgage broker about what is essentially a kickback scheme certainly wouldn’t help your chances of gaining loan approval, but failing to disclose the arrangement could be considered a mortgage fraud that could land you in jail.

Even if you tried to fool the bank, the appraiser it hires is going to check how much similar properties in the same area have fetched, and likely will determine that the price you are offering to pay is about $10,000 too high. The bank would then automatically reject your application or demand you rework the deal.

And, of course, there’s no easy way to guarantee that the seller would indeed give you the $10,000 he promised, even if you can find a lender willing to finance the transaction.

One legitimate alternative here would be to ask the seller to reduce his asking price by $10,000. An even better idea would be to ask him to pay for some or all of your closing costs, which would reduce your out-of-pocket cash needed to close the transaction and thus give you a bit more of a financial cushion after you move in.

Sellers in many markets today are offering to help pay a buyer’s closing costs, especially if sales in the area are slow or the sellers already have agreed to purchase a new home of their own. If you put all of the details of the offer in writing, the lender will be able to judge your creditworthiness based on all the facts, and you won’t have to worry about doing anything that’s illegal or unethical. And if the bank turns you down, consider it a sign that you should look for a less-expensive property or perhaps even postpone your home-buying plans until you have saved more money.

Q. We spent about $7,000 earlier this year to install new cabinets, fixtures and flooring in our kitchen. Can we deduct this amount when we fill out our next tax return?

A. Sorry, but the answer is no. The Internal Revenue Service generally does not allow write-offs for home improvements, although exceptions can be made if the work is done for a legitimate medical reason — like adding grab bars and wheelchair ramps to accommodate an owner who recently has become disabled.

Although you cannot deduct the $7,000 cost of your new cabinets and other work on your next tax return, you can add the amount to the “tax basis” of your home to reduce any taxes you may owe on the profit when you eventually sell.

Q. We signed a contract to purchase a home about four weeks ago. Last week, while the sellers were at work, their water heater broke and flooded the tile floor in their basement. The sellers have agreed to replace the heater and repair the damage, but we would rather cancel the deal and look for another house. Can we?

A. That’s a difficult question. Real estate law in most states allows a buyer to cancel a sale and get the deposit back if the physical condition of the property has “materially” changed since the purchase offer was first signed. This discourages sellers from letting the home deteriorate before the sale officially closes, and also protects a buyer if the home is seriously damaged or destroyed by a fire or other peril.

Your situation is a bit different, because the damage caused by the blown water heater apparently wasn’t too severe and the sellers have agreed to replace the appliance and fix the tile floor. Talk about your options with your real estate agent or, better yet, a real estate attorney.

Even though you might not be able to cancel the sale, you at least can demand that the repairs are made to your satisfaction.

Real estate trivia: The National Association of Realtors spent about $8.9 million on federal races in the 2010 election cycle, according to the nonprofit Center for Responsive Politics. That was about $500,000 more than was spent by the powerful National Rifle Association.

Ÿ For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405.

© 2012, Cowles Syndicate Inc.