BiggerPockets

BP member Scott Hubbard posted the Freddie Mac link below in another thread but after reading it, I thought it was important enough to highlight it on its own. To me, it was pretty eye-opening as to what Freddie (and probably other lenders and quasi- lenders) considers to be fraud.
This gives a very clear example of what it considers fraud. And unfortunately,when we are honest with ourselves, I believe that alot of us here are possibly doing it or are perilously close to it. We can try to justify not wanting to disclose higher offers or profit margins, but this makes it clear that by doing so, you are running a big risk.

A few years ago, alot of people tried to justify lying on stated income loans, lying about owner occupancy and other shortcuts as normal operating procedure. At the time, it seemed ok cause everyone was doing it, but after the fact it was obvious it was fraud and some people have paid a big price.
I wonder if we are setting ourselves up for another of those by convincing ourselves that short sale flips are ok. The common thinking now is that as long as you disclose the intent to sell at a profit, you are covered. But to me, this web page (and other things like the recent Colorado anti-flip law) says that is not enough. You must specifically disclose a higher offer. The thinking about flips seems to be still changing and evolving and what we thought was ok just weeks or months ago, might really not be ok.
Just getting flips approved and closed does not make it go away, they can come back years down the line and accuse us of fraud.
What this web page doesn't address is what the penalties are or how or if they will enforce this opinion of what fraud entails.
And to be sure, this is simply an opinion. It is not a law or a court case establishing the exact guidlelines of fraud. But do you really want to test them? Do we really want to be looking over our shoulders for years wondering if what we did to close that deal last year will come back to haunt us?

This has definitely given me pause and is making me think about my involvement in flips.

http://www.freddiemac.com/singlefamily/news/2010/0412_payoff_fraud.html

So let me get this right. The bank wants to write off bad debt, they use their broker to find a buyer and determine the value of the property. They agree to the amount of debt they are willing to write-off. Then, the investor buying the property must disclose their B-C contract. The bank realises their broker sucks, cancels the deal, then sells direct to the C buyer, cutting out all the hard work B did?

And investors are the bad guys?

I think if the bank is given all the information they need to make a dtermination as to the current value of the house, with nothing left out, and they choose the amount to write off, then the investor should be able to make money by selling the house for what MUST be over market value. Because the bank wouldn't write it off under market right?

Yes, that's what I thought! CAVEAT VENDITOR (seller beware) applies in buesiness law, except for banks and Fannie/Freddie as they see fit! Well, absolutely I want to see it tested! Let's see what the car dealers do!

No I don't advocate lying to a lender nor misleading them, but I think a buyer has a right to privacy in conducting their business dealings! In no other situation in business can I think of where you are rquired to tell a seller that you're going to sell what you buy at a profit and what that profit is. Is I want to see it tested!

Hope one of our attorneys can chime in on this....maybe the key is not to have a buyer until after the purchase transaction. Bill

Originally posted by Marc Freislinger

So let me get this right. The bank wants to write off bad debt, they use their broker to find a buyer and determine the value of the property. They agree to the amount of debt they are willing to write-off. Then, the investor buying the property must disclose their B-C contract. The bank realises their broker sucks, cancels the deal, then sells direct to the C buyer, cutting out all the hard work B did?

And investors are the bad guys?

I think if the bank is given all the information they need to make a dtermination as to the current value of the house, with nothing left out, and they choose the amount to write off, then the investor should be able to make money by selling the house for what MUST be over market value. Because the bank wouldn't write it off under market right?

Hey, I hear you, Marc. It is frustrating. But I am trying to think with a clear head about this.
Thinking from an unbiased point of view. Does the bank have "all the information" if there is a higher offer that they don't know about? No, not really. So that defeats your whole point.

This kind of stuff isn't unprecedented. In a court case, if one side finds out a particular piece of information, they are often required to share it with the other side even if it is not in their best interests to do so.

To use the Examiner's example, if I were selling a car to a used car dealer and as I was selling it to him for $1000, there was someone in the next room ready to buy it immediately for $1500, would I want to know that information? Yes. Would I be pissed if I wasn't told? Yes. Would I think the dealer was shady? Yes. Would I accuse him of fraud? Quite possibly.

I think that is the whole key. Do you have another deal already set up on the side that you are keeping secret?

No one has a problem if you are buying something on speculation in hopes of making a future profit. That is what the car dealer does, that is what the stock investor does, heck it is what the owner of a 7-11 does when he buys a case of candy bars. And that is what real estate investing traditionally was.
None of them already have a contract already in place at a higher price.
But some things have changed along the way. A year ago I didn't know what transactional funding was let alone doing it. I am just taking a fresh look at whether these changes are all going to be legit and legal. The more I think about it and respond to these questions the clearer it is becoming that maybe there is a line here that I don't want to cross anymore, even if it is profitable.

Originally posted by Financexaminer

For years I have attended car auctions with a dealer friend of mine, I'd tell him I want that car, he bids on it, get's it and sells to me the same day. If you go to an auction, you'll see lots of non-dealer types tagging along with dealers and buyers!

Yeah, but in this example, in the B-C transaction you are fully aware of the mark-up you are paying.
And I am guessing the dealer is performing the A-B because he has a license or an account to buy from A so it is a regulated transaction in a different way. C (you) simply are not allowed to buy direct from A (auctioneer) because of other rules A has created for itself.
So, while similar, it is not truly a relevant parellel to the RE transactions.

Originally posted by Financexaminer

Good points, but again, let's change this up a little....you go to a car dealer and say you're looking for a Prowler, and you'll pay up to XX,XXX bucks for it. The car dealer finds a Prowler as a bank repo. So, will someone like to tell me the difference here? The dealer buys the Prowler. drives it back and sells it to the that afternoon!

Good example (I love an intelligent discussion!!). I also think about the Pawn Stars tv show I have seen. Someone comes in to sell an item and the pawn broker knows he has a collector who will pay up for this kind of stuff so he buys the item knowing he can resell it.
It is close, but I still think it falls short because when that dealer brings you the Prowler he just bought, you can still say no I don't like the color or whatever. The dealer still has risks.
Now, you might say the B-C contract in a flip can fall apart too. And that would be a good example. The only thing I can point to as a difference is the lack of a written, signed contract.

And I think this is where things are going with this new Colorado law, etc. They key is going to be what is the date on the signed B-C contract. It probably needs to be dated AFTER the A-B transaction closes.
I saw Nick posted details about a deal he has with SS realtors and that is one of their stipulations too.
So my guess is that is where this is going. The question we are all going to have to ask ourselves is whether we wait for our state to REQUIRE us to do it or we play it safe by doing this now because it is the safe way to do business.
Everyone will have to make that choice. All I am saying is there are risks to those choices.

Anyone? Curt, William, you guys around? Opinions Anyone?

First thing I would argue is that the bank is not the seller. They are a third party to the transaction and must decide what exit strategy to employ to recover their money. I looked up a couple other states SS addendums and see that the buyer can allow or disallow the seller and or his broker from continuing to market the property and or presenting other offers to the bank.
The lender cannot sell the property. They have no contractual right to do so. They can only agree or disagree to release the lien for a certain valuable consideration. If they have no right to market the property they can only rely on suckers who will defy contract law in order to find a higher offer….presuming you have an educated buyer who will not allow the seller to continue to market the property.
I would not tell the bank that I was the highest offer but I would make it clear they will not be able to skirt contract law to access another buyer behind me. The message is "take it or leave it" Since the bank has no legal right to market the property and find another buyer they will be left with an unpredictable homeowner who might take the "produce the note", BK, or property destruction avenues to increase the lenders loss and risk in the situation.

Simple economics if you ask me.

That said; I think it might be worth the effort to do what Nick (Motiv8td) is proposing in another thread. It would be considerably easier to sell to brokers and agents and I will be looking into the idea.

Eric- expect an email from me.

Right Steve, it's pure politics, but IMO, it needs to go to court. Now if it went to court in my backyard, it would clearly be in favor of the corporate interest regardless of violation of other statutes and precedence from Fair Trade to the long standing basics of buying anything low and selling high. However, if this were brought in another part of the country that was in anyway fair in dealing with public issues, I think they would have to tone down thier cry.

I was rather ticked when I bought my last REO, I'm really tempted to push it on someone. What's the down side? I think jail is out of the question as one house and the spread, say $1,500 just wouldn't be a significant claim!

I knpow too well the attitude of regulators, having been there myself as one, but there is much more to it than finding a banker paying his mortgage from interest on a securities portfolio for example. Fraud is very difficult to prove in any court! But now that I have voiced my opinion, maybe I shouldn't be the guy to carry a test case to court! LOL

I think if investors were more careful, about obtaining other contracts, the timing of the transactions would be a hill to climb for any regulator to press this issue.

I have a couple of friends at the FBI, I think I'll be picking their brain on the topic. There is also the issue of selective enforcement and the cost benefit of seeking remedies.

Any suggestions? Comments?

First, to be clear, I am not on "their" side on this. I'd like to continue doing business as I have been.
But I am just trying to consider both sides and am sort of arguing their side to play devil's advocate and try to work out in my own mind what is the right or prudent way to proceed.
Alot of you guys make some valid points that on the surface seem easily justifiable. But only looking on the surface is a dangerous trap.
When it comes to legalities, arguments like "what business is it of theirs" aren't going to hold up.
As in most legal situations there are gray areas that can be argued either way.
I don't know the answer, but this whole car dealership example just isn't the same. There is no signed contract. BIG DIFFERENCE.
If there is a signed contract for a dealer to go out and find a specific car for you, then he is acting as a broker. In real estate you have to be licensed to act as a broker.
When you think about it, arranging a back to back flip really is just being a broker. You are bringing a buyer and seller together. So you should be paid a fee. But that isn't what we are doing. We are not taking a fee, we are extracting a spread out of the middle. A spread that is not disclosed. As you can see, this is a situation ripe for fraud and in fact, many do use it to commit fraud.

And with regard to the seminar, the big phrase is "if you are not withholding crucial information" it is not fraud.
Ok, fine, but then you have to ask what is "crucial information". I think it could EASILY be argued that your signed contract at a higher price is very crucial. That is easily enough for you to be charged with fraud. How could one argue that it is not "crucial". You might say it is none of their business, but you can't say it isn't "crucial".
Can they convict if you fight? Who the heck knows, but I try to avoid even being charged with a crime. It tends to ruin my day.

As for the bank not being the seller, that is true (in SS, not REO) but I am not sure it helps our case and it may hurt our case. Does only a seller and buyer have "rights" in a transaction? Do other parties involved have rights? I would guess they do.
Because they are not the seller, you can't claim "seller beware" or you can't call them lazy for not pursuing other buyers. They are not able to pursue other buyers if they are not the seller, they can only make the decision based on the info they are given. And therefore they can claim a disadvantage and they can claim damage if information is purposely withheld to take advantage of that disadvantage. Because they are not the seller, they can put any stipulation in there that they want. They can say we agree if.....and if any of those if's are broken, they can claim damages.

Of course, no law says you can't sell something for a profit. That is a misleading argument because no one is claiming it is.
But it possibly is against the law to withhold crucial information in a transaction. And if FreddieMac is specifically saying it is fraud if you have another higher offer and don't disclose it, I think you have to take notice no matter how much we dislike or disagree. Not to take notice could be harmful to your business.

I don't know, give me something more well thought out that shows with reasonable certainty that they can't make a legit fraud claim. BTW, FreddieMac isn't the only one who thinks this is fraud. How many Realtors or title people or other lenders have told you flips can't be or shouldn't be done? I had to go through a few attorney's who told me trans funding wasn't legal. We have always blown them off as uneducated and fearful cretins, but maybe not.
Let's face it, a relatively very small handful of people are doing these flips and alot of people out there think they are not ok. When do we ask ourselves if they might not be right?