Short sale strucutre

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Short sale strucutre

Kiel Cannon
Real Estate Investor · Greenwood Village, CO · Member since 2010 · 6 posts · 0 votes

Hey guys and gals,
Im struggling here a bit. Ive been working for another company in my area for the past few years with the intent of branching off and opening my own company which i did a few months back.

I don't know if im paranoid or simply the way they structured their business entities to complete a shortsale is just throwing me off.

Here is what they did. They have a brokerage firm, who handles the listing. They have a "bank relations company" who negotiates the short sale. And they have a phantom llc who is purchasing the property on the A-B side. There are two people who manage each of the 3 entities involved. They even have a girl sign a phantom name while speaking on behalf of one of the entities.

So, here is my question. I am one man, have my license and own an investment company. How can I take the listing, negotiate the short sale, buy and then sell for a profit? Is it possible? Do I need an agent to represent me to fix this issue. How are all of you structuring your deals entity wise?

As much info would be helpful. Thank you all in advance

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Scott Hubbard
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
16y
Originally posted by Kiel Cannon:


Here is what they did. They have a brokerage firm, who handles the listing. They have a "bank relations company" who negotiates the short sale. And they have a phantom llc who is purchasing the property on the A-B side. There are two people who manage each of the 3 entities involved. They even have a girl sign a phantom name while speaking on behalf of one of the entities.


Having someone use their name without actually being authorized to do so is called a straw buyer. It is not only unethical, it can also be illegal depending on the state your states laws. Many of the approval letters from lenders restricts straw buying. If it had this language in the approval letter and they went ahead and flipped it, then they have committed mortgage fraud.

Currently, there are several people charged in my state for fraudulent schemes where they cooked up the very same thing. If the lender's they reportedly defrauded decides to file charges, it may move to Federal Court. To make matters worse, they are licensees and can receive further sanctions and/or be fined.

What your former employers are doing is called collusion. They are using their expertise of their market, a straw buyer to submit offers and create a spread, then selling at market value. As experts in real estate and licensees, they are expected to operate ethically and using their local knowledge of their markets against the lender is considered unfair practises.

To avoid this, all you need to do is disclose you intend to flip or sell the property for a profit. You also need to disclose your an RE Agent (if your the buyer or a principal).

There is no problem setting a company as a buyer, a second one as the service company, or even a third as a parent, but you need to have an authorized signatory on the offer and disclose your intentions to make a profit. If your an agent, per your assocaition rules, you need to disclose this also.

As a former agent, I quit wearing both hats at the advice of my attorney. You need to wear one or disclose everything. Otherwise, you will be headline news somewhere down the road.
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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Kiel Cannon:


    Here is what they did. They have a brokerage firm, who handles the listing. They have a "bank relations company" who negotiates the short sale. And they have a phantom llc who is purchasing the property on the A-B side. There are two people who manage each of the 3 entities involved. They even have a girl sign a phantom name while speaking on behalf of one of the entities.


    Having someone use their name without actually being authorized to do so is called a straw buyer. It is not only unethical, it can also be illegal depending on the state your states laws. Many of the approval letters from lenders restricts straw buying. If it had this language in the approval letter and they went ahead and flipped it, then they have committed mortgage fraud.

    Currently, there are several people charged in my state for fraudulent schemes where they cooked up the very same thing. If the lender's they reportedly defrauded decides to file charges, it may move to Federal Court. To make matters worse, they are licensees and can receive further sanctions and/or be fined.

    What your former employers are doing is called collusion. They are using their expertise of their market, a straw buyer to submit offers and create a spread, then selling at market value. As experts in real estate and licensees, they are expected to operate ethically and using their local knowledge of their markets against the lender is considered unfair practises.

    To avoid this, all you need to do is disclose you intend to flip or sell the property for a profit. You also need to disclose your an RE Agent (if your the buyer or a principal).

    There is no problem setting a company as a buyer, a second one as the service company, or even a third as a parent, but you need to have an authorized signatory on the offer and disclose your intentions to make a profit. If your an agent, per your assocaition rules, you need to disclose this also.

    As a former agent, I quit wearing both hats at the advice of my attorney. You need to wear one or disclose everything. Otherwise, you will be headline news somewhere down the road.
    2Reply
  • Kiel Cannon
    OP
    Real Estate Investor · Greenwood Village, CO · Member since 2010 · 6 posts · 0 votes
    16y

    Scott,
    Thanks for your response.

    So as long as I disclose everything...

    I as an agent can list the property with the seller as a customer (disclosing I do not represent them).

    My business LLC can be the buyer (As I will disclose I am purchasing to make a profit).

    During the negotiations, I can find an end buyer (Disclosing the property will be agent owned)

    I personally as the listing agent (customer) and the buying entity can negotiate my purchase price with the bank.

    And then sell for a profit.

    The problem that comes to mind, is that I am not finding the highest and best offer for the seller. Are you saying because I am disclosing everything, I am in the clear here?

    I do intend to sell the property outright (shortsale if necessary) to a different end buyer if I am unable to negotiate a buying price that makes business sense for my company. In this case, my customer relationship would turn to a listing agent, and I would find them the highest and best. This of course is only if I can't buy low to sell high.

    Using this model, I'm ok?

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  • Chris G.
    Real Estate Investor · NowWhere, WI · Member since 2009 · 135 posts · 25 votes
    16y

    From my understanding it is frowned upon, if not illegal in some places, to be both the investor and the agent in the short sale flip.

    Not that I have my RE license, but I have been told to pick to make money through either the commission, or the spread between the two sales. But never both.

    1Reply
  • Kiel Cannon
    OP
    Real Estate Investor · Greenwood Village, CO · Member since 2010 · 6 posts · 0 votes
    16y

    I won't be taking a real estate commission, I will be paying 4% to the buyers agent on the B-C side. But on the A-B side, there will be no commission involved.

    Would that make a difference?

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    16y
    Originally posted by Kiel Cannon:
    I won't be taking a real estate commission, I will be paying 4% to the buyers agent on the B-C side. But on the A-B side, there will be no commission involved.

    Would that make a difference?


    Many DRE's contend that transactions involving financially distressed Seller's are to be more closely scrutinized because they have much more to lose than a traditional seller.

    With that said, I believe you cannot represent both yourself (as buyer) and the seller because your fiduciary responsibilities are conflicted.

    In essence, the A seller should have their own representation apart from the B buyer. I propse you should partner with a joint venture agent, where he or she solely represents the seller. You represent yourself. If you purchase and resell, then you can make a profit. If you go A to C, then your JV Agent will get a pre-approved short sale and you can get a referral fee.

    If your JV Agent is active, you can flip flop deals so you both are receiving the listing commissions equally. To keep the separation 100%, your JV Agent should have his or her own investment entity too.

    I know it is a little more complex, but I believe this is the proper way to set up a cooperation that will keep you ethically and legally out of trouble. Plus, with the added JV Agent, you will volumize your pipeline more quickly.

    The above information is not to be construed as legal advice and you should seek independant counsel before proceeding.

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  • Ted Akers
    Centennial, CO · Member since 2009 · 758 posts · 251 votes
    16y

    Great advice by Scott, as usual. The deals that are getting done are the ones that are very transparent and totally disclosed. In this environment the old days of skirting issues are long gone, and issues like straw buyers present potential large problems.

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