Another Look at “Sellers’ Concessions” in Real Estate

Our recent New York Times Magazine article on the use of cash-back transactions in home sales produced a mountain of e-mail responses. Among the most interesting was this one from New York attorney Nishani Naidoo, a former real estate lawyer and member of the New York State Bar Association’s Real Property group. He has been distressed by the growth of cash-back transactions, and has tried unsuccessfully to do something about it. He explains:

In order to buy a home, one typically needs to save 10 to 20% of the purchase price for a down payment. The remainder of the purchase price is typically financed by a mortgage. The need to save for a down payment is one of the biggest barriers for someone wanting to be a home owner. It involves living below one’s means; saving for several years; and discipline. To the bank, however, this all means that the new home owner has a vested interest in making their mortgage payments since their life savings is invested in the home from Day 1.

A new form of financing arose in recent years, however, that all but eliminated the need to save for a down payment. This new form of financing was called the “seller’s concession” and is easiest to explain by way of an illustrative example: A buyer sees a house she likes and bids $200,000 for it. Since she is the highest bid, the seller accepts her offer. However, the price written into the contract is $240,000 with a $40,000 seller’s concession. In other words, the price is simultaneously increased by $40,000 and decreased by $40,000. The reason for this is that the buyer can then apply to the bank for a loan based upon the $240,000 purchase price. If the buyer obtains 90% financing, then her loan will be for $216,000, or $16,000 more than the actual price she is actually paying for the house.”

While all of this may sound like fraud, it is not, at least according to the New York State Banking Department, which explained as follows in response to my inquiry:

“According to your letter, a ‘seller’s concession’ is an amount by which the bargain for sale price (the “True Sale Price”) for real property is increased for the sole purpose of enabling the buyer to obtain a higher loan. Effectively, at the completion of the transaction, the seller receives the amount of the True Sale Price, and the buyer gets a loan for an amount (the ‘Contract Sale Price’), which when added to the down payment is in excess of the True Sale Price. The excess amount (difference between the True Sale Price and Contract Sale Price), or seller’s concession is typically used to pay for some, or all of the closing costs incurred by the borrower in the transaction.

From the above related facts, it is clear that the Contract Sales Price, including any seller’s concession, is fully disclosed to the lending institution in the contract of sale. Based on the fact that this price is fully disclosed, the Department is of the opinion that a seller’s concession would not ipso facto constitute fraud since, generally, the determination by a lending institution as to whether it should make a loan is based on a fully disclosed Contract Sale Price. In reaching this conclusion, the Department also notes that under general underwriting guidelines, lending institutions make a decision on whether to lend, or not, only after such institution has received an appraisal of the subject property and has made a determination that the property’s value is in line with the loan amount and that the borrower has the ability to repay the loan.”

In other words, where is the fraud if everyone is aware that this is going on? However, an astute observer must ask two questions: (1) if the seller had advertised her house in the market and the highest bidder was $200,000, how did the appraiser just a few short weeks later appraise the home for $240,000?; and (2) why doesn’t the bank just advertise that they are willing to provide loans in excess of 100% of the contract price?

The answer to this riddle may lie in the fact that most banks securitize their home loans — that is, they do not hold these loans on their balance sheets but sell them to the capital markets. While there may be no fraud on the buyer, the seller, or the bank, there may yet be a fraud if this new type of financing is not fully disclosed to the capital market investors.

If this practice is disclosed, then it can be presumed that the investors factor it into their models and price their purchases of mortgage backed securities accordingly. If it is not, then it is a safe assumption that they are holding a portfolio that is much riskier than they had bargained for. If the loan was in excess of the market value from Day 1, as the housing market declines, this difference – and the capital market investors’ losses – will grow accordingly.

As they start to lose money on these portfolios, the willingness of the capital market investors to supply of capital to the housing market will decline. When people are unable to obtain mortgages, the demand for houses will fall. As demand falls house prices will fall. And as house prices fall, the losses that capital market investors sustain will increase, making them less willing to supply capital to the housing market …

Business Week just ran a story on the foreclosure rescue scams. It was an excellent article and, as far as I can tell, very accurate. I do not know how he got his information but he is right on. The National Consumer Law Center did a study on this as well. Even if you don’t agree with their politics, they are reporting on something that is real and that does happen. Part of why I think nobody paid much attention to this before was that it did not affect the rest of us: the people to whom this type of thing happens are often poor and minorities. It’s also pretty hard to gather data in this area. However, the fallout in the subprime market is making people start to realize that this does affect us all. And I am not sure if they’ve made the connection yet. But part of the huge rise in housing prices is because of this since — well, if housing prices in Jamaica, Queens, start to rise, then prices in the neighborhood next to it rise, and so on and so on. You could not get a house for less than $400,000 in Jamaica in 2004. If Jamaica commands that price, then Astoria is definitely going to be a lot higher, and Manhattan a heck of a lot higher.


kudos to Naidoo for exposing the 'free market' chicanery here- hopefully there will be lawful regulation to ensure there is no further social bailout to the industry


Very interesting post. Here in Europe a quite different practice exists: Transaction are usually contracted downwards to reduce the tax which is imposed on real estate acquisitions, because these taxes can be very high. For example, in Italy the "imposta di registo" can make up up to 10% of the amount which exceeds the "fiscal standard price" (which is mostly an arbitrary number derived from the usable area and probably the number of windows of an object). The sale of a $200000 house with a fiscal standard value of $80000 would therefore be taxed with $12000 and the contract will usually be written over $150000 which saves $5000 on taxes. (A notary public is mandatory for real estate transactions and the unmentioned money is usually handed over in a break during the contract appointment)

Seller's concession doesn't work here, because a $250000 figure for the bank would "cost" $10000 on extra taxes, which isn't quite the interest rate one would pay for the missing $50000 down payment.



WSJ has been running stories all week on new risks that "end buyers" -- the ones that buyers of CLO's, investors in hedge funds that invest in illiquid investments, etc -- are taking on beyond the ones that are ordinarily disclosed.

This is just one more example. The end buyer can't really pay attention since they are buying a large bundle and can't really pay attention to the many transactions bundled together.

There's little incentive for middle layers to pay attention (other than the threat of prosecution for fraud) because they aren't taking a permanent risk. The middle layers have to pay just enough attention to avoid fraud -- that's unlikely to produce top-quality diligence.


I cannot get excited by people who sign their house over to strangers or send their money to nigeria.



There is a big difference between a seller's concession that is disclosed to the lender and one that is not. Most lenders, as a rule, would not allow a 10% concession.

Most of the cash-back transactions are conducted fraudently. They are not disclosed on the HUD-1 settlement statement. Typically the lender will also require the buyer to execute a declaration stating that they are not getting cash back from the seller. The buyer will sign that fraudulently as well.

It takes a little bit of sophistication to pull this off, so typically the real estate agent is aware of the fraud. BUT, they only get their commission if the sale closes.


This type of practice is effectively prohibited by the underwriting guidelines of Fannie Mae,Freddie Mac,FHA, VA, Guaranteed Rural Housing and most likely all Alt-A investors and nearly all sub-prime investors. In short, any institution who securtizes their mortgage production.

A purchase-cash-back seller concession scheme may be allowed in hard-money lending. Hard money loans are typically arranged by a mortgage broker who "knows a guy" with money to lend. The guy charges a double digit interest rate for the convenience. Also, a small community bank that portfolios their loans, may go along with an excessive seller concession.

Why will the guy and the small bank do this, when no one else will? The guy and the small banker are most likley local and have a much better knowledge of the local real estate market than the
Wall Street.

The $200,000 home, with a $240,000 sales price could experience rapid value appreciation. The buyer, the guy and the banker may be aware of that the town council is about to pass a 5 year residential building moratorium. Of course, they could all be idiots , but the spillover effects of their idiocy did not cause the housing bubble or the conventional non-conforming MBS melt down.

There's enough soft headed commentary and proposed regulation of "liar" loans (no income no asset verification). The last thing poor and middle class aspiring home owners need is restrictions on low and no-downpayment mortgage programs that Fannie, Freddie, , sub-prime and Alt-A investors developed over the past 15 years.




There seems to be a lot of missing facts and misrepresentations in your post.

1. Fannie / Freddie don't allow more than 3% of the price to be "seller concessions"

2. Who is going to appraise this house 20% over market? Or moreover who is going to sell for 20% under market?

This is NOT a typical transaction and would be considered fraud. Most lenders watch very closely for inflated values as they have buy-back provisions in the MBS market this sort of loan would be pushed back to the originator.

Your post shows that you either don't know the mortgage market very well, that you have some axe to grind, or that you didn't do any research.

nishani naidoo

I wanted to clarify first that there are two types of things being talked about in the post: sellers concessions and straw buyer transactions. The two are not related. Seller's concessions are explained in the post (putting the contract price up, etc.) and straw buyer transactions in the Business Week article.

First, in response to "phoyd" from Italy. In New York State, the seller pays a transfer tax upon the sale of the property. When the price is increased in this way, the amount of the transfer tax increases too. Since this "seller's concession" is really only being given to enable the buyer to get a loan, the buyer also agrees to pay any increased taxes that the seller incurs because of this.

Second, in response to "egretman" who posted about straw buyer transactions. This is exactly the response I got from the Queens DA when I first approached them. And to a certain extent, I do agree with you. My biggest problem is that a straw buyer transaction is illegal. In fact, it is so illegl that it is specifically discussed in the FBI's Financial Crimes Report to the Public last year (
So while it is true that it is hard to feel sympathy for a straw buyer and seller who agreed to do this, what is very frustrating is that licensed professionals -- lawyers, real estate brokers and mortgage brokers -- participate in this. What ends up happening in a straw buyer transaction is that the buyer's credit is eventually ruined and the seller eventually loses the house. However, the lawyers and brokers get off scott free -- in fact, they are compensated handsomely. And they just go on to their next straw buyer deal. The banks/financial markets are also not affected by this (yet) since the houses have so far fetched more than the amount of the loan in the foreclosure auctions (straw buyer transactions are also equity stripping transactions so, unlike seller's concessions, they are done to homes with plenty of equity). In any event, as the market starts to turn south, the amount the bank gets at the foreclosure auction will start to be less than the loan, and then we'll see more interest from the banks/title companies in these transactions. The New York Legislature has acted (or reacted) in passing the Home Equity Theft Prevention Act. Again, this, in my opinion, is really dumb since one of the exit mechanisms for a home owner in this situation is to sell his/her home. What capitalistic investor will purchase this home if the distressed homeowner can just come back two years later to reclaim title? (that's the import of the act). What will end up happening is that more and more homes will go into full-fledged foreclosure, with a sale at a court auction. In essence, all this Act did was eliminate the situation where the distressed homeowner could sell the home on his/her own thus salvaging some of their credit history and also trying to get a higher price (auction prices tend to be lower because of the lack of information -- no title search; no home inspection; etc.). Anyway, all this act really does is HURT the distress homeowner since they now have to go to a full-fledged foreclosure auction, with the resultant ruin of their credit history and lower auction price, etc. The people who enacted the legislation are well intentioned. The problem, though, is that most people miss the fact that this is fraud and we already have laws to deal with fraud and, in particular, the state should not grant licenses to people who commit fraud and should certainly be taking away the licenses of those lawyers, real estate brokers and mortgage brokers who commit fraud. I would go a step further and say that the state should also prosecute them, but then this may all be far too rational for a State legislative body to comprehend. Hence the Home Equity Theft Prevention Act. One would think that "theft" was already unlawful. I could go on, but I think I've made the point.



First of all, I believe that the requirement to save 10-20% of the purchase price is a thing of the past. Everyone I know who bought a house in the Bay Area in the last 5-10 years borrowed 100% of the purchase price. Some borrowed a smidge more to cover their closing costs, but as long as the house appraised for the total sum, there was no problem. When my wife and I put an offer on our house in August 2004, we had to put down 3% in good-faith money to secure the offer. To do this, we had to borrow against one of our 401k accounts. We then wrote the offer for approximately 3% over the real price, and got that sum back in closing costs, which just about covered the actual closing costs. When all was said and done, we received a check at closing which was enough to pay back the 401k loan, and we had our house for an out-of-pocket cost of roughly zero. Since then, we've inherited some money and paid off about 20-25% of the loan balance, and the house has gone up significantly in value, but there's no way in hell we would have been able to put down 10-20% in a market where the median-priced house far exceeds $600K. It's just not expected. If it were, the only people buying houses would be those trading up or down, not first-time market entrants.


nishani naidoo

First, a response to "abccooper" and "agentscoreboard" regarding these FHA programs. Please read the testimony of Margaret Burns to Congress last week where she says that something needs to be done to reconfigure these programs are having a significant negative impact on the ability of FHA to conduct its business:

Second, a response to "agentscoreboard" regarding why a home would appraise for more than the contract price just set by the market? I asked the same question over and over again. It could be what "abccooper" says, namely, that the appraiser knows something about the market that the buyer (or a whole lot of potential buyers who looked at the house) did not know. Or it could be something like this: Or it could be something in the middle. I don't know.

Also, regarding the buyback provision in these loans, here's another article: It may be starting to unwind.



I think seller concessions are for much smaller percentages. They often are to cover closing costs and move-in costs for people with 100% loans. I cannot imagine one for more than 5%, since if you could get an appraisal for 10 or 20% over the original asking, then you way underpriced it.

You failed to mention that this would have an interesting effect on comparables and "market price" in a neighborhood if the full price was published rather than the "true price".

nishani naidoo

Here's one more blurb on appraisals:


I represent the people in the business week article, who had their home stolen. I understand that many cannot have sympathy or understand how it can happen. They are lucky they have not gone through difficult times and never trusted the wrong people. What seems to be misunderstood is that this a con game. The con men gain the confidence of their victims. Additionally, the con men are given credibility by the involvement of title companies, lenders and others involved in the con that appear to be legitimate. They are either willing participants or willfully blind because the transaction serves their purposes to receive fees. It is doubtful to me that anyone with any minimal experience would not immediately understand the transaction is not legitimate. Yet, they proceed with it.

Of course the victims sign over their property - otherwise it would be nothing more than an attempted con. By analogy, there is not a single person who was the victim of a loan shark that did not actually borrow the money from the loan shark.

I also agree that it is a basic form of fraud. The concept of fraud usually includes when one takes undue advantage of another. A law in Maryland was passed that specifically addressed the problem. The comments that it will interfere with purchases from person facing foreclosure is simply inaccurate. The law limits itself to the fraudulent efforts where the person tries to mislead the homeowner that the transaction is a sale such as where the buyer allows them to remain in the property. If someone wants to but the house - and take possession like you would in any other sale, the law does not affect you.

In any event, one benefit of passing the law is education. Judges, lawyers, homeowners and the public are made aware of the problem.



nishani naidoo

Scott: First I agree with you. I had represented someone who was the victim of a straw buyer transaction as well and it is definitely a con. And whle I agree with you that passing a law to specifically deal with this is great in that it educates the judges and other lawyers about the problem, I still maintain tha the law -- in New York -- is overly broad. It may very well be different in Maryland. In New York, even if you are a legitimate purchaser -- that is, you are not engaging in this con -- you need to jump through a bunch of hoops if you want your transaction to survive rescission. Title companies here are basically "excepting" any liability from this Act in their policies, meaning that no bank is going to lend money for this. It's going to severely curtail the legitimate efforts. My other point is that while legitimate activty -- activity that may actually be beneficail to a person in foreclosure who wants to sell -- is being penalized under this ne law, attorneys and brokers who perpetrate these cons are still running around plying their trade. That is a travesty.



NuWire Investor just wrote a story on lease options that you might want to read- it's here:

They look at the foreclosure bailout stuff from a couple different angles, both including the scam artists who try to screw people over, as well as the people who are honestly trying to help people out. It's definitely worth the few minutes to check it out.


It should be noted that there is a differentiated value for subprime or stated income loans in the commercial lending market. This loan type is not entirely bad despite the abuse of some in the residential lending arena. Oftentimes, individuals that want to start or acquire a small business, purchase a gas station, acquire a motel, open an auto repair shop or any of a myriad of sole proprietor establishements, and do not have the portfolio that would make them attractive to the big box leaders. Lending companies like Ocean Capital in Rhode Island offer subprime and stated income loans by using up close and personal evaluations of the borrower and the opportunity. We need companies like this to support new business opportunities.

You absolutely can get a house to appraise for significantly more than it's worth. Mortgage brokers arm twist appraisers every day to get the appraisal value they need to get the deal to go through.

Check out the following appraiser pressure chart:

Also, the standard seller concession allowed by lenders is 3%; some set their max at 6%; a few lenders allow seller concessions up to 9%.

Larry Lang

I ran across this article and have problems with it. In the beginning it starts with needing a down payment of 10-20% to buy a home. I don't know if it is any different in Florida, but the majority of loans I am seeing are made with 100% financing or as lttle down as possible.
If the contract is written for $240,000 and sold by a Realtor then the realtor is due commission on the $240,000. Who would be responsible for this?
If the home appraised for $240,000, why would the seller not sell it for that amount or something close to that. I do not see any benefit to the seller in handling the transaction this way.
On the HUD, the buyer cannot get get cash bach. They can get a credit towards closing costs. If I was a Realtor involved with this transaction, I would not want to be involved with it. To me it seems like a clear case of fraud. Transactions like these have created the real estate crisis we are now in.
Larry Lang
South Florida Homes


Here is information on the Seller's Concession.

jeff jack

The "example" you've used in this article is indeed fraud. Your example increases the value of the house by 20%!!!!!!!!! When you misinform the public as this article does, John Q Public walks away from this article and thinks--- Sellers concessions are unethical and/or evil.
The reality is that conventional loans (Fannie Mae and Freddie Mac) are limited to a 3% concession with minimum down. FHA allows borrowers to obtain a 6% concession from the seller. This size of concessions can be the only way some families can afford to purchase a home. Or maybe the borrower has made a long term decision to keep his or her monies in an investment that may be enjoying returns far in excess of the interest rate on the loan. So the buyer may be using concessions for their own fiscal preference. Maybe there were some unexpected repairs required to the home that the buyer wants to fix as soon as they move in. This is a way to get that done without spending additional savings.
I am in upstate NY and this is a "conservative" financial area. In NYS, we have significantly higher closing costs than other states. So not only does a first time homebuyer have to save the down payment but they may typically need An additional $ 10,000 -13,000 more to get their ($150,000) mortgage closed. It is more difficult for young families to save that kind of money that in the past.
So it really frustrates me when someone writes an article like this an either twists the facts for pizzazz or just doesn't know the facts !!!!!!!!!!!!!!!!!!