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Real Estate Cashback Transactions Are Illegal?

Two weekends ago a friend of mine in Baltimore was telling a group of us that a rowhome in Federal Hill, two houses down from his, had sold for a mind-boggling four hundred thousand dollars. (My mind actually boggled) He didn’t say that it was listed at four hundred, he said that it actually sold for four hundred, signed, sealed, delivered. Now, without context (other than the boggling), $400k doesn’t mean anything but in that area I think that’s easily an $80k-$100k premium over comparable home prices. Well my friend, always one to talk things up just a couple steps more than they really should be, let that stew before dropping that the sale included a $100k cashback offer. So, it was $400k with $100k cashback… which apparently, according to Stephen Dubner, is illegal [3].

It seems like a great deal for the buyer, you get an interest deductible loan of $100k from the lender, who doesn’t realize they’re offering an interest deductible loan, as long as the home appraises for the selling price. Neighbors may or may not be excited, depending on their plans, because it boosts the price of their home; and the seller sells the home (though they pay significantly more in tax, 25% more, but whatever). Win-win-win-lose (poor bank!).

The problem is that while the cashback transaction may seem illegal, how is it different than sellers kicking in for closing costs? Or a new plasma television? Or any number of various little kickbacks that happen every single day? In the comments, there’s debate about the legality since it happens all the time, but I’d imagine that banks would frown upon this if they knew.

Personally, I don’t think it should be illegal because the bank has to write the check. If the home isn’t worth $400k, don’t get a trigger happy appraiser and don’t writ the $400k check. If the buyer can get the extra $100k and the seller is willing to offer it, so be it.

Some more Freakonomics goodies about real estate [4] stuff.