Commentary by Ralph R. Roberts
RISMEDIA, Jan. 3, 2008-It appears that the cash-back-at-closing issue is one readers want to know more about. In response to my article, “Realtor Caught in Cash-Back-at-Closing’s Crosshairs,” (link http://rismedia.com/2007-12-03/Realtor-caught-in-cash-back-at-closings-crosshairs) a reader e-mailed the following question:
“What about an allowance for repair or replacement of an air conditioner or light fixture as cash back to the buyer at closing? While this is for a specific “defect” it is still cash back, thus the question of legality based on the contents of your article.”
When I talk about cash back at closing, I am not talking about a few hundred dollars that the seller or an agent hands to the buyer to cover repairs of minor defects that are discovered between the signing of the purchase agreement and the closing or the final walkthrough. I am talking about thousands of dollars in cash back proceeds being paid out to the buyer at closing.
Otherwise, you never want the money to go to the buyer. What if the buyer never fixed the A/C and simply kept the cash? The loan would then be secured with defective collateral: a home with broken A/C.
If the A/C needs to be replaced, it makes more sense to do it in advance, before the closing, but let’s say that it can’t be done because the seller doesn’t have the cash. The seller could still provide an allowance for the repair in either of the two following ways:
1. Have contractor get paid at closing.
2. If the weather is such that the unit cannot be replaced right now, have a sufficient amount of money placed in an escrow account to cover the repair. Escrow 1.5 times the estimated cost; for example, if the repair is expected to cost $3,000, place $4,500 in an escrow account. Once the work is completed, the contractor is paid out of the escrow account and the balance is refunded to the seller.
In one case, while selling a condo, it was so cool inside, I assumed it had A/C and marked it on the listing ticket. During the final walkthrough, when the buyer wanted to check the A/C, we discovered that the condo was not equipped with A/C. Because this was my error, I paid out of pocket to install central A/C. I don’t call this CBAC (cash back at closing). This was ACBC (air conditioning before closing).
Ralph R. Roberts, official spokesperson for Guthy-Renker Home and author of Advanced Selling For Dummies and Flipping Houses For Dummies (John Wiley & Sons), can be contacted at 586.751.0000, or by e-mail at RalphRoberts@RalphRoberts.com.
For more information, visit http://www.aboutralph.com.