Sellers cash-back repair money on *below market value* house

[Will Porter]

It's my understanding that using seller's cash-back is fraud when you are inflating the price beyond market value. Here's an example:

Scenario 1

• FMV: $300,000
• Sale Price on Contract: $350,000
• Cash back from sellers for repairs: $50,000
• Net to seller: $300,000

In Scenario 1, the buyer and seller are inflating the value of the house above FMV to cause the bank to lend extra money for repairs. In effect, this causes the bank to unknowingly lend more than 100% LTV and is clearly fraudulent.

But what if this transaction takes place below the market value, where the bank still enjoys a comfortable LTV? Example:

Scenario 2

• FMV: $300,000
• Sale Price on Contract: $240,000 (which is 80% LTV)
• Cash back from sellers for repairs: $50,000
• Net to seller: $190,000 (because they are motivated and don't want to do repairs!)

In this case, the seller is willing to walk away with $190,000. The buyers have a note for $240,000, but they also have $50,000 cash in their pocket for repairs. The bank is sitting on a nice 80% LTV loan.

Anyone ever tried anything like this? There are tons of Google results for Scenario 1 (clearly fraud) but I can't find anything about Scenario 2.

TL;DR: Has anyone bought a house below market value and used seller cash-back to pay for repairs?