Is it legal and ethical to pay the asking price but have an agreed upon amount escrowed back to me?

June 28, 2016

Every state has a penalty for falsifying information when recording a deed. The law has a loophole that creates an ethical question. Read on..

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Reader Question: I want to hide the real purchase price. I want to pay cash for a house in a very cold market. The house will need work to be livable for me, and I’d like to save money to pay for that work. While I have the advantage as a cash buyer, I hate to strong arm the seller to a lower price since that will affect the comps for the rest of my potential neighbors as well as the “sold” history of the house I buy.  Is it legal AND ethical to pay the asking price but have an agreed upon amount escrowed back to me for my use of upgrading flooring, kitchen, etc., to MY particular tastes and needs? Thanks so much. Mitch B.

Monty’s Answer: When you are a cash buyer you eliminate all the regulation from the mortgage financing process. It is typical for the purchaser and seller to negotiate for a credit or an escrow allowance for a repair or replacement found during the inspection in relatively small dollar amounts. These costs will not have a significant impact on value for most homes. It is not clear in your question the extent and cost of your particular tastes and needs as a percentage of the value of the home. Replacing all the floor coverings, upgrading the kitchen, bathrooms and more could be a substantial investment. My opinion changes if you are talking about large sums of money.

A theoretical example

If the house is $180,000 and you want $5,000 cash back at closing, it is less than .03% of the value. If you could negotiate a $50,000 reduction and wanted all of it escrowed for your remodeling, it is almost thirty percent of the value. The larger the amount of the unreported cash back, the more misleading the property is as a comparable sale. It would not take many altered transactions to influence a neighborhood.

Each state maintains accurate property records in the public record for valuation and taxation purposes. Every state imposes penalties for falsifying these records. In some states, it is a misdemeanor while it is a felony in other states. The state is looking for people who under-report price to avoid taxation, rather than for people over-reporting price.

In Wisconsin, the County Register of Deeds office is responsible for recording deeds. Simultaneously, a completed transfer return form accompanies the deed. This form states it is a crime to falsify information. In speaking with the Register of Deeds office in Brown County, they are not responsible for verifying the information provided on the deed or the transfer return form. In fact, state law requires that forms completed correctly must be recorded.

According to a title company I spoke with, Wisconsin Title companies accept the price written in the purchase contract as the sale price, regardless of any credits negotiated between the buyer and the seller that also appear in the contract. In polling another title company in the State of New York, they also accept the sale price written in the purchase agreement.

We have a gray area in the law. When the title company and the register of deeds both accept the purchase price written in the contract, there is no compliance support in place to verify. Is it right to report the sale for $180,000, when with the seller credit, the actual price is $130,000?

The ethics

While protecting your neighbors is a pure motive, you would unwittingly be hurting your neighbors, and yourself. If every cash buyer began including a significant escrow credit or cash back payment in real estate contracts, it would cause people to discredit comparables. You may unwittingly overpay for a home.

It is unclear whether concealing the seller’s payment for the improvement costs would benefit you in a future sale. An appraiser or a real estate agent may contact a party to a contract to clear up inconsistencies and may ask for improvement invoices or original documents.

Another potential consequence in structuring the transaction as you envision is you expose yourself to future litigation by the person to whom you sell the home. If they learned of the credit and felt financially damaged, they may have a case.

Seek legal advice in the state the property is located from a competent real estate attorney before proceeding. I believe that when seller credits reach 15-20 percent of the asset’s value, it is unethical to report the gross sale price.