I received a call today that I have received many times over the years. In this instance, we represented both sides in a $4 million transaction. The buyer, without explicitly saying so, apparently wanted to figure out ways to reduce his property tax after close of the escrow. As a result, when structuring the deal, the buyer suggested two things: first, he wanted to pay the commission himself; and, second, he wanted to buy “personal property” from the seller which they valued at $200,000. As a result, the buyer wanted a purchase agreement with the sale price at $3,600,000 ($4 million minus $200,000 in personal property and a 5% commission of $200,000), with separate agreements for the commission and personal property. I was asked two questions in this regard: 1) What advice, if any, should be given to our clients about this structure?; and 2) What sale price should be reported in the MLS?
1) First, while our clients can structure their contract any way they would like, they should understand that, if there is a lender involved on either side of the transaction, this structure would constitute a fraud. In a short sale, the money going to the seller for the personal property would be against short sale lender guidelines and could not be paid. On the buyer’s side, by artificially reducing the sale price of the property, we are impacting the lenders determination of loan amounts, loan to value ratio, etc. As a result, if a loan were involved or this were a short sale, this structure would pose significant problems. Even without a loan, we need to tell our buyer that these attempts may not be successful in reducing his property tax. I have seen transactions where, after close of a deal where the buyer paid commission, the assessor added the commission amount back into the sale price when assessing the property. It was the assessor’s position that commission is normally paid by the seller and included in the sale price, and the tax would therefore be assessed on the sale price plus commission. We should also let the buyer know that the price for personal property could also be added back in if the assessor learned about it and determined that the value assigned to that property was artificially inflated.
2) Next, with regard to the MLS, we believe the sale price reported should include the commission, but not the personal property. As we said above, sales prices normally include the commission. That would be true for the vast majority of sale prices in the MLS. On the other hand, most MLS prices do not include personal property, so we are ok excluding that amount. Even if we have suspicions about the personal property’s true value, it is not our job to investigate or judge that issue.
As always, let us know if you have any questions