Expert: Dick Dennis - 5/24/2008

Question
My daughter is purchasing a home from a non-relative for $65,000 an amount that is approx.55K beneath market value. The reason for this "good deal" is the owner has lost his job and future job prospects are poor.  Additionally the area is flooded with homes for sale and it could easily take one or two years to sell the home. The present owner would prefer to accept $65K for the house now and pay off his mortgage rather then end up in foreclosure.  My daughter has been approved for a mortgage with the sales price listed as $120K but financing for $65K and at closing must have a letter executed by the seller demostrating a gift of equity in the amount of $55K.  My questions are: 1) Why isn't this transaction just viewed as a buyer negotiating a good deal for themselves versus the need for a "gift of equity" letter (obviously a safe deal for the lender for the buyer has close to 40% equity immediately.)  2) What are the tax implications for the buyer and seller? ie: capital gains/loss, gift tax ..... Thank you, Karl

Answer
Your daughter could be considered executing a fraud with the seller aiding and abetting, Karl. She would be defrauding the lender. That's number one. Number two, how does she know the house is worth $120,000? Number three, how does she know that she is not involved in a fraud from the seller even though the seller may not receive any money over and above what he owes to the lender? She would also have to pay property taxes based on the $120,000 and not the $65,000. That's ridiculous.

If she is involved with a real estate agent, that agent is also aiding and abetting the fraud just because he/she wants to get a larger commission. If there is no agent in the picture, that's because the seller knows the transaction is not kosher and/or the agent does not want to be involved.

Don't let her do it, Karl. She should just make sure that the deal goes down as a $65,000 purchase. I would never let any of my daughters get involved in such a deal. I do wish you well.

Dick Dennis