Interesting request...is it possible or even legal?

Question

I just got off the phone with a seller who made an interesting request after discussing what he'd like to get out of his property, and am curious if what he is asking is possible or even legal? I've never heard of anything like it before.

Quick back story on this is that the property is going into foreclosure due to his wife (now ex) developing a serious heroin problem over the past 2 years and blowing all of their money/not paying bills. Right now he owes about $90k on his property, and has $30k in personal loans from his sister. He is hoping to get $130k from the sale. He wants the paperwork to be drawn up in a way that would show only $100k from the sale going to him and the other $30k going to his sister to pay off the loan. I have a feeling that this is just a way to hide the additional money that he is hoping to get from his ex-wife so that she can't try to get a cut out of it. I am planning on asking to see actual documentation of this $30k owed to his sister when I go to look at the property this weekend. If he is able to provide legal documentation (i.e. notarized note, drawn up by a lawyer, or whatever documentation he may be able to show), is there a way that the money above and beyond what is owed on the mortgage can go directly towards paying off the debt, or does it have to go to the seller first, and then paid out by him to his other debts?

Wayne Brooks · Answer

Important question:Is the ex wife still on title?  If so, she would have to sign the contract, and the HUD.  If she is Not on title, no sweat.... as Account Closed suggested, execute a mortgage to the sister and she Has to be paid from the proceeds.  Unless, the wife is no longer on title, but there is some court/divorce order giving half equity or something to ex wife.....then again with a second mortgage there, it's the husband who could be committing fraud, not you.

Eric Toff · Answer

it would be a wholesale deal. He owes $90k to the bank and wants $130k for the property. Everything has been redone in the past 5-8 years; siding, windows, roof, finished basement, added second bathroom, completely remodeled kitchen. Other than the foundation and frame pretty much everything is brand new. Market price $150-160k.

It doesn't sound like he is trying to hide anything from a tax standpoint, but just wants $30k from the sale to go directly from the title company to his sister.  I think some of you may have thought that the $30k was going to be off the books? That isn't the case, it would still go through the title company with the full purchase price listed on all the paperwork. I think he is more or less trying to keep liquid cash away from his ex due to the drug problem. I could be wrong though and will certainly be doing my due diligence on the situation before I make any type of offer, if I decide to pursue this one.

Chris Wosnitzer · Answer

Eric-

• What' the property worth?
• Will the sale price satisfy the lien holders?
• Are you doing a short sale on the property?
• Are you wholesaling this or buying it for yourself?
• Buy and hold or fix and flip?

The capital gains on the resale, the property transfer tax and title insurance are all issues that would be of concern to us in this deal.

Ned Carey · Answer

Well if the property is security for the loan then there is no issue. If the property is not secured by the property and just a personal loan I don't see why that can't be done and added to the HUD-1. If money is paid out from the proceeds of the sale it should be on the HUD-1.  I see no issue with that and it is likely legal.

If there is a bank loan involved, not being on the HUD-1 is bank fraud. It is probably also fraud because you are defrauding the state of property transfer taxes and the wife of money she may be legally due.

Assuming the money is on the HUD-1, the problem is it doesn't even achieve what he wants. Even if the paperwork says his sister gets the money, if it is to pay off his debt, it is still considered income to him.

If you pay him with a bag of cash outside of settlement, then when you sell the property you will pay taxes on an additional $30K of capital gains.

Andy M. · Answer

There is definitely multiple ways to accomplish this.. That said, I would ask first what is right? If he is trying to show a lesser sales amount to defraud his ex wife (if she was owed a piece of the sale) some of the money then I don't think I would want to be involved in that. If he is trying to defraud the IRS, then I DEFINITELY wouldn't want to be a part of it. If he wants to do it for other reasons you could put 100k on the HUD with an agreement on the side to pay 30k to his sister. The IRS might have an issue with that way though.

Bottom line: Make triple sure you understand his full intent and that you want to be a part of that. But when you are dealing with a cash sale between a buyer and a seller, you can do any number of creative things to accomplish what he is talking about.

Eric Black · Answer

Hi Eric,

Sounds a little fishy to me. I would ask a local attorney and if you use a title company in NJ, not sure what the norm is there, also run it by a title company agent to get their thoughts.

I can make up some documents that look like they were written up by an attorney so be sure to solicit professional advice on this one.

Best of luck.

Interesting request...is it possible or even legal?

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