Buyer wants to make a short term loan to a seller to close a house?

Question

Greetings BiggerPockets community!

I have what I believe to be a rather strange situation on my hands. I am in the process of purchasing a primary residence for myself and my significant other. We are doing a 203k streamlined renovation loan. This is the second 203k loan I will have done and I thought it was going to go a lot smoother than the first which was a full 203k (about 75k in repairs).

Anyway, the problem is this: We are supposed to close tomorrow and the financing is not ready yet due to the construction side of the loan being backed up. The seller doesn't want to give us an extension to close the loan. Her initial rider on any extension was that she wanted to keep her appliances. This sounded odd to me as I have met her a few times during inspections and such. I had to go over to the house anyway to do a lead based paint test for the construction department, so I asked her, "Is doing this test even going to matter? Are we going to extend this thing?"

This is where she started to really lay it all on me. She needs cash by Friday. Now, I know you are probably thinking--How does not extending the purchase agreement get her money by Friday? She wants to be free of the purchase agreement so she can start hawking her appliances and other odds and ends. She claims she has already exhausted all her options for personal loans. She has taken out a few payday loans to make some repairs on the house that I asked her to make as a condition of the sale. OK...so now that I know what she needs I am in solution mode. I hate the idea of me giving her a personal loan. There is no other way to get the deal done and not have me out of pocket any more money (assuming I can get my personal loan back).

My question is: is it possible for the buyer to make a personal loan to the seller to be paid out of the seller's funds at closing? She already said she would accept and extension agreement that included her paying me $2500 in closing costs. But what happens if the loan doesn't close for whatever reason?

Should I just let this one go? I like the house and the neighborhood. There is nothing out there like the house today, but that doesn't mean there won't be tomorrow. And I know they are sunk costs, but of course all the time and money I already have wrapped up in the place.

Thanks in advance for any advice!

Coire Fox · Answer

@Kyle GreggYou are right. It isn't my job. I think that if I go back to them with that, this deal won't get closed. The seller isn't rational. Why would I want to loan money to someone who isn't rational??!?!

I think I will just tell the seller that my lawyer said I can get in big trouble for lending her money. I will ask her to sign the extension, give me a $2500 credit toward closing costs, and let her keep her appliances. That way I'm not giving her money out of pocket, but she can still get her cash by Friday (hopefully), and I'm not out more cash to buy appliances.

Wayne Brooks · Answer

So take the appliances out of the contract, and reduce the purchase price by that much?  Don't know what a changed purchase price will do to your loan approval process though.  FHA will get "hinky" with any "side" dealings between you and the seller.

Coire Fox · Answer

Ashly B.They are ~1 year old Samsung stainless steel appliances. I am not currently getting any credits at closing. I think you are correct that FHA limits seller contributions to actual costs up to 6%. We will be well under that for $2500.

Derek Daun · Answer

Tell her you'll buy the appliances from her if she signs an extension that lowers the price the amount you're paying for them.

Ashly B. · Answer

Ahh I see it was a rider on the *extension*. Tough situation, especially if you really want the house but I'd still pass on loaning her money. This is business for you, don't make it personal.

Ashly B. · Answer

Newbie here so maybe I'm missing something but if the appliances aren't part of the purchase, why can't she sell them now?

I definitely wouldn't be lending any money to someone who recently took out a payday loan and is still short on cash. Red flags all over it.

Jon Holdman · Answer

Are these high-end appliances that have been just recently installed?  If not, there's no way she's getting $2500 selling them.

Based on what you've said, no way would I loan her money.

Are you already getting any credits from the seller at closing?  FHA will (I think) limit your credits to the actual costs.  I sold a house where we agreed to a 3% credit.  But actual costs were less than that, and we only had to give them credit for the actual costs.

You could say "no" to doing anything, let the contract fall apart, then write a new offer at a lower price.   IDK if that would mess up the loan application that's already in progress, though.  Or if she would consider your new contract at all.  She might just wise up and come to the conclusion that doing the extension is the best way to be rid of the property.

Kyle Gregg · Answer

Tell your agent to relay that message. Make them actually work for their money.

Coire Fox · Answer

@Wayne BrooksHA! We were typing that at the same time. Essentially the same solution, but if she credits me at closing I don't have to be out that cash and won't affect the underwriting (I think?), vs reducing the purchase price which would only affect my loan amount and would have a bigger impact on underwriting.

Thanks for all the candor, @Kyle Gregg @Michael Olesky! You definitely have pushed me away from making the loan to her. I felt like it was a questionable idea at best. Hopefully it works out!

Kyle Gregg · Answer

As much as it sounds cold, that's not your problem. You're purchasing real estate, not paying for juniors college tuition. Separate yourself for the seller and her issues, that's not your job to figure out. The agents should be the middle man for all communication. THATS THEIR JOB! From the sound of it, your job is done (getting the contractors situated and sorting out the loan documents..etc). Its time for the loan officers and agents to step up and close this deal.

Buyer wants to make a short term loan to a seller to close a house?

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