No Financial Deals of Any Sort “Under the Table”
As an industry, we are leaving a foreclosure driven market and getting back to standard procedures. A few things were made really clear while doing these deals like; staying on time lines, not making changes without written agreement, using the correct forms to make changes and closing on time. These are worth keeping in mind on all deals.
Today, We’d like to discuss the most important of these; funds under the table in a real estate transaction. Dealing with the banks reminded us daily, and made it very clear, that no deal outside the Settlement Statement could occur at all. The penalties for these type of dealings included fines and license revocation and worst of all, jail time. We saw some of these arrests on TV, or you became aware of a local agent near you in trouble.
Often in our work we have to appropriately arrange to pass money from one side of the transaction to the other. This can be for various things like: a credit to the buyer, repair money given in lieu of the repair, a last minute agreement of some sort that couldn’t be settled any other way. Due to loan requirements these funds may or may not be able to be passed through file legally and on the Settlement Statement. (formerly called HUD-1) That’s when we are asked to “help” these parties pass funds to each other. In many cases, agents get stuck in the middle of these illegal cash arrangements. Cash under the table is often attractive to buyers who have difficulty obtaining a mortgage or sellers that want a quick fix to a repair matter.
A seller or buyer may not know all of the rules, but it’s up to the licensed agent to do the right thing and explain to the client that money cannot be paid, “out of escrow”. No matter what, there should be NO money outside of escrow (settlement) paid to anyone. It’s FRAUD no matter how you slice it. You are doing something illegal and taking a huge risk if caught but you gain nothing from it. Don’t do it. It’s a lose/lose situation for you. If you wind up in court, how do you think the judge will decide when you tell him you and the client conspired to go “under the table” and defraud the other party, or the lender. It doesn’t matter is all parties wanted it done either. If its not on the Settlement Statement it cant be done. In some cases, the mortgage loan can be called due and payable. Worse yet, all your good work, on this deal and any other deals you have touched past or future, is now tainted by this bad choice. The amount of these funds does not matter either. Even a few hundred bucks is still fraud. Your
E & O insurance does not cover fraud. Keep everything above board. You are dealing with something that is public record, open to anyone wanting/needing to look at it, and irregularities will stand out.
One type of under the table deal is where the client does not make any under the table payments directly to the other party. Instead he pays an enhanced commission to the agent/broker, who will pass these funds along to the other party by receiving them through the commission. This is still an under the table deal and is a no-no.
As your brokers, when this happens we are often told the “lender knows about it”. However, all this means the lender has been consulted, and after not being able to move the funds through the closing statement, has sent it back to the agents to be solved some other way. This is when those creative minds get to work and come up with ways that are off HUD. We’ve seen some very creative solutions that are, nonetheless, totally illegal.
What the lender meant to say is “I know about it, but I cant help you, and its not my (loan) problem”. The agent often uses this to persuade us its ok to deal under the table. It’s not. We reply to the lender that if “he knows, and its ok”, please add it to the Lender Instructions for escrow to put on the settlement. That’s when the lender says what he should have said the first time. “I CANT. YOU CANT. THERE’S NO WAY TO DO THIS THRU ESCROW” (or we will mess up the loan). There are lots of solutions that don’t require cash exchanging hands under the table. Approach your broker for these solutions when stuck.
We wanted to point out Paragraph 3, J, K, on page 2, of RPA. It states clearly that if a credit does not fit the loan and cannot be on HUD then it cannot be had at all. There can be no price adjustments etc to work it in. Please remember there has to be a legal way for the funds to flow or there is no way to take them at all. Even if you spent days, weeks, months, coming to a settlement that ended in a cash exchange of any sort, if it cant be on HUD it cant be at all.
Agents often tell us the client “will lose his mind” if he cant get this agreement (money) and may want out of the deal over it. We have had this said to us for as little as $150.00 and had that agent beg us for a solution. During these important negotiations, please keep in mind HOW you will accept funds is as important as getting the agreement for someone to pay them. With TRID rules also now in place a credit at last moment may start the time frames over and delay your deal closing. Sometimes, “NO” is the only answer you can give and keep your integrity. Its worth it!