Subvention technique?

Question

Hello everyone!

I am looking at a great house that needs a lot of work (this would be my personal house).  Financing is the struggle.

I heard about the subvention technique in Canada and would like to know if this is applicable here.

The selling price of the house is 145K.  The repair costs are 50K approximately.  I would like the seller to sell me the house at 145K, but give me the 50K after the transaction is closed to finance the repairs.  The repair subvention would be a separate contract between the seller and I.

The house would cost me 95K in reality (145K-50K) and I would have the money to do the repairs without going through 203k loan.

Have you already done something similar?

Thanks!

Guylaine

Guylaine Dore · Answer

@Roy N. @Bill Gulley

Hello to you both,

thank you very much for taking the time to respond such in details to my question.  Don't worry, I am not going to use this technique.  I am a very straight forward person and do not want anything to do with fraud!

Have a nice evening!

Roy N. · Answer

@Guylaine Dore

The process you are describing would constitute mortgage fraud in Canada as well.

While it it possible to have vendor concessions (i.e 5000,00 $ to replace a roof) as part of the purchase, any such credits to the purchaser must be document in the Statement of Adjustments which accompanies the Letter of Agreement.   Any "side deals" not disclosed in the Closing documents, aside from being illegal, would violate the lender's terms of the note and mortgage subscription; resulting in the mortgage being called.

Now, when it comes to concessions / credits which are disclosed as part of the transaction, while they are permitted, lenders will become "concerned" {read: suspicious and frightened} if the concessions are too large.   While there are no common rules for which constitutes "too large" of a concession/credit, our experience has been if you are north of 10 - 12(ish)% of the purchase price, the lender is more apt to:

• order a new appraisal on the property (as something was obviously incorrect with the old appraisal); 
• underwrite the lower (after credits), value of the property; or 
• walk away.

We had a concession of 18% on one purchase, but it was a unique situation involving a discovery late in the Closing process and it took a lot of phone time with the lender, who in the end withheld a portion of the mortgage funds (almost like a construction draw) until the required remediation had been affected.

While there are legal and process differences, in a real estate transaction, between Québec and the rest of Canada (RoC), finance regulation is predominately federal and has little variation across the country.

Bill Gulley · Answer

Not really, I used a translation feature, LOL.

I don't know anything about Canadian Law, other than it has aspects of French and English law to its roots.

I understand perfectly what you're describing and in the U.S. it is mortgage fraud, a violation of the IRS tax code distorting the actual costs of the transaction, a violation of settlement requirements, if you use the mail in that transaction, mail fraud, use a bank deposit and you have wire fraud. You can be wearing an orange jump suit regardless of how you think you might look in it. What you are doing is a "kick back" highly illegal.

Again, I suggest you get away from gurus and what others may do and check with an attorney up there, my bet is that your laws aren't that far from ours. :)

Guylaine Dore · Answer

@Roy N., @Bill Gulley, great to know we could speak French!  But I will try to explain better in English.

Basically, in order for this technique to be legal, the selling price must be close to the appraised value of the property.  In this case, the offer I would give to the seller would be 145K, which is a fair market price for the property considering the condition of the house.  However, I would have a separate contract with the seller stating that she would give me 50K at the closing in compensation for the repairs to be done.  In her income tax, she declares the price 145K minus selling expenses of 50K.

My Mortgage would be of 145K, since this is the selling price on the accepted offer.

What is illegal, in my understanding of this technique, is to boost the price of a property over the appraised value, which is not the case here.  The seller would only compensate me for the repairs I have to do to the house (foundation issues, and complete rehab - all is original and is from 1950 or so).

I hope this is clearer, but please tell me if you have questions,

Thanks! :-)

Bill Gulley · Answer

Excusez-moi, je n' al pas `etuduie`la finance en francais! :)

Thanks! :)

Manolo D. · Answer

Thanks or the article. What are the chances of self-employed individuals wanting to apply for FHA loan as their primary residence? Tax return is more than 1M in foreign assets. Kids are US Citizens, kids don't qualify for more than 400k house, they want 600-700k 5/3bath house, primary is applying for immigration status, is approved but not processed. Thanks.

Roy N. · Answer

Bill,

Though the word "subvention" was absorbed into the English language, it is a financial term more commonly used en français.   Essentially it is a form of assistance like an endowment or subsidy.

In that context, Guylaine may have been referring to a legitimate financing option in Québec and I misunderstood her initial post.

@Guylaine Dore - Si vous préféreriez expliquer la subvention à moi en français, je pourrais mieux comprendre le processus qui est employé.

Guylaine Dore · Answer

@Wayne Brooks Thank you Wayne for your answer.

@Roy N. Merci du mot de bienvenue!  I know people who does this kind of creative structure in Quebec, but there are certain constraints to respect to make sure it stays within the limit of the law.

I may not want to use it in US after reading all your comments.  @Bill Gulley, orange does suits me well, but the jumpsuit does not seem to be very figure flatterring ;-)  I'll make sure to avoid it!

@David Krulac Thank you for the information.  I am working with a Mortgage Broker at the moment, and he mentioned to us that it may be difficult to go with the 203K loan as we are under a J1/J2 visa.  We effectively do not have to be US citizen for FHA.

Thank you all for your help and have a great day!

David Krulac · Answer

@Roy N.

US citizenship not required.

https://portal.hud.gov/hudportal/documents/huddoc?id=4155-1_4_secA.pdf

Roy N. · Answer

@David Krulac

Are FHA loans available to non-U.S. citizen?

Subvention technique?

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