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Seller Assisted Down Payments: A
Help or A Handicap?
Down payment
assistance programs (DAPs) have become big business. It is
estimated that approximately 25% of all FHA purchase money loans are
done in conjunction with DAPs. But there is reason that many real
estate and mortgage professionals should be concerned.
The October 3, 2004
issue of The Harris Report, a publication issued by Don F. Harris
founder of the Nehemiah Program, the nation’s first down payment
assistance gift fund program, warns that many professionals may not
fully understand DAPs or the entanglements that the use of these
programs may have on their professional integrity, credibility, and
good standing with licensing agencies.
The Colorado Board
of Appraisers states that there are different sources of seller
assisted down payments. In some cases, the seller may fund the buyer’s
down payment through proceeds of the sale. Or, a buyer may offer
a purchase price higher than the listing price with the provision that
the seller contribute the amount of the offer over the listing price as
a seller assisted down payment for the buyer.
But in most
instances, seller assisted down payments work by having the seller pay
to have funds channeled through a non-profit organization to cover the
buyer’s actual closing costs, prepaid expenses, discount points, and
other financing concessions. The
seller pays a fee to the charitable organization and the charity “gift
funds” the down payment for the buyer.
The Harris Report
warns that “professionals should be wary of relying on the
representations of DAPs regarding legal matters without engaging in
their own due diligence.” Many DAPs actively promote the
deductibility of seller contributions as charitable contributions.
However, the IRS
has long determined that quid pro quo contributions are not deductible
by virtue that the donor lacks the true intent to donate (that is to
‘give’ without anything expected in return). In the eyes of the IRS,
such ‘contributions’ are treated as capital costs, not as an act of
charity.
HUD permits sellers
to contribute up to 6% of the property’s sales price toward the buyer’s
financing concessions and
defines expenses beyond these
as ‘inducements to purchase’ and considers them in a dollar-for dollar
reduction of the sales price before applying the appropriate loan to
value ratio.
If a property is
worth $100,000, but with contributions the property sells for $105,000,
an appraiser is duty bound to bring it back to the true market value,
distinct from the seller assisted down payments. It
is imperative that the appraiser
deduct all inducements to determine the accurate market value.
Recently, the South
Dakota Housing Development Authority declared they would “no longer
accept first-time home buyer loans with seller assisted down
payment programs such as Nehemiah Corp., HART, Neighborhood Gold
GIFT Program, or Partners in Charity Inc.” and instead would provide
their own state regulated down payment assistance programs.
It will be interesting to see if other states follow suit in taking
this precaution.
A July
2003 joint
position statement, issued by the State of Colorado Real Estate
Commission and the State Board of Real Estate
Appraisers concerning seller assisted
down payments, cautions that “a residential real estate transaction has
a life well beyond closing and possession of the property,” and that
“accurate sales data is crucial for appraisals and comparative market
analysis work products.”
The bottom line is:
all of these concessions affect the reported sales price of the
property in question. If a
property’s selling price is elevated due to a seller assisted
down-payment, then that inflated sales price is entered as the selling
price of the property. Although the buyer actually paid a lower dollar
amount for the property, the county records will show the full purchase
price.
The recorded
selling price will subsequently be used to justify the price of the
next property that comes up for sale, unjustifiably inflating the
market further. Some might ask, “what’s the harm of a trivial 1%, 3%,
or 6% being applied to sales price data in certain markets?” But
when these figures are again compounded by another re-sale of the same
property, the authentic market value becomes
severely
misrepresented. As a result, banks are being placed in a negative
equity situation without their knowledge.
Additional harm is
also incurred by the buyer. As prices become inflated so far
above the true value of the property, a situation is created that
results in the buyer procuring a loan on the financing, and not the
actual real estate.
This problem is not
just confined to other areas of the country or state. Consider
the example of a house located within the City of Pueblo, previously
listed for $52,000 for 312 days without selling, then subsequently
re-listed for $42,900 but reported as selling for $56,200 after a
further 281 days. A total of nearly two years on the
market. This same property was subsequently
re-listed for sale approximately six weeks after closing at $72,500
with “100% financing available.”
Has the Pueblo
housing market really changed that dramatically in the last few months?
To date, no
concessions on this property have been disclosed on the MLS system,
despite the original listing agent acknowledging that the difference in
price was due to an assisted down payment scheme and agreeing to
correct the inaccurately reported data.
This indifference
to accurate reporting serves
no useful purpose and places the participating agents at risk with the
state board and other agencies.
I.J. Hill Appraisal
Services intends to continue to monitor the situation and is currently
preparing a dossier for presentation to the relevant authorities.
Numerous cases that have been inaccurately reported have already
been targeted within
the city limits.
The 2003 joint
position statement brought needed focus to this problem and was
applauded by many County Assessor’s offices due to their frustration in
acquiring market sales data that reflected the true selling prices for
many properties. Although not required by law, the joint
statement advises real estate brokers to be forthcoming with information
including:
• disclosing
all seller paid costs in
the proper
transaction documents
• utilizing
all available fields in the MLS to record all
transaction terms (specifically
seller assisted down
payment)
• cooperating
with appraisers as they
perform due diligence
As appraisers, our
primary concern is validating a property’s
genuine worth on the market. Preventing manipulated and
inaccurate data from corrupting county records and listings such as the
MLS is imperative in establishing
true market value.
There is good
reason that we all must be concerned. The possible consequence of
unchecked seller assisted
down payment programs could be damaging to our
entire industry.
We, at I.J.
Hill Appraisal Services, are
interested in hearing from any of you who have an opinion on this topic
and would be pleased to provide you with any additional information
concerning this pressing matter. Only by establishing a productive
two-way communication can we hope to maintain high standards in
our profession.
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