How does this kind of deal work?

A 36-year-old Israeli, Ben-David had served for four and a half years in the Israeli Army, studied industrial engineering and accounting and worked at a real estate company in Britain. He thought he knew pretty well how the world operated. But as he immersed himself in Chicago real estate for his dissertation research, he came to wonder how well he and his fellow academics truly understood the market.

For instance, as he interviewed mortgage brokers, real estate agents and bank loan officers, he heard regular mention of a mysterious kind of deal in which the seller gave the buyer a cash rebate without noting this transaction in the mortgage paperwork. (It is illegal for buyers and sellers to transfer cash or assets without properly notifying the lender.) Of course, none of the people that he interviewed copped to this practice. But sometimes the signs of a cash-back transaction were, quite literally, out in the open for all to see, on banners hanging from for-sale properties or in printed real estate ads.

How does this kind of deal work?

Pretend that you want to buy a house that costs $200,000 but don't have $20,000 to make the 10 percent down payment that would get you a decent mortgage. The seller"s real estate agent offers a solution: let's make the official purchase price $220,000 instead of $200,000, he says — but in return, the seller will give you $20,000 in cash. This rebate will be a separate transaction, the agent explains, which doesn"t need to be written into the mortgage paperwork. (A seller can legally offer a cash-back incentive, but it would have to be reported to the bank — which would negate the advantage of having the bank think that the buyer already has the cash.)

Voilà! Suddenly you have the $20,000 in cash necessary to get a good mortgage, and the seller still nets his original price of $200,000. The only difference is that the bank records the sale of the house at an inflated $220,000. And, instead of borrowing 90 percent of the value of the house, you have in fact borrowed 100 percent. "In short,” Ben-David writes, "a buyer can purchase the property with no down payment.”

Stephen J. Dubner and Steven D. Levitt

https://www.nytimes.com/2007/06/10/magazine/10wwln-freakonomics-t.html?_r=1&oref=slogin