Backwards short sales?

Question

What are these so-called backwards shortsales?  One guru is claiming you can make 50k on one property.  All you have to do is find a high end home, homeowner who needs to shortsale.  This guru partners with you to buy the home and sell it back to the homeowner, giving you $ (50k) for setting this up.  How is this even possible?  I thought it was illegal for a homeowner who loses a home in this way to buy it back also?.....

Will Barnard · Answer

Amy, first red flag is you "heard it from a guru".
Second, your intuition that this is not right is dead on. Lastly, you are also correct that selling the home right back to the homeowner is likely going to get you into trouble.

There is no such thing as a "backwards short sale" that is just some guru's play on words to make someting sound fancy that is not even legal.

That said, you can certainly find an upscale home where the homeowner needs to short sale it, negotiate the short sale and then sell to another party for a $50k profit. Nothing illegal about that and no need to partner with some crooked guru.

Kevin Boyd · Answer

I think what you might be talking about here is a "backflip".  This is where a third party buys your note from the bank at let's say 30% of it's current value. Let's say you have a loan of $500k on a home now worth $300k. The third party attempts to purchase the note for about $210k. If the bank will sell them the note the homeowner then refinances for around $260k. The bank gets rid of a "high risk loan", the note buyer makes $50k, and the homeowner erases $240k in debt. Not sure if these are successful, but that's the strategy.

Amy F. · Answer

I gather from the info above that the first homeowners, lose the home/shortsale and go to auction so they are out of the scenario altogether now.
From an investor standpoint I understand how it could work and why it would be a great benefit to already have qualified buyers who want the home.  Very interesting.

Will Barnard · Answer

What Mike has stated is not a "backwards short sale" but nothing more than finding a short sale that is already locked up with an end buyer and one that has an upcming trustee sale date. What you do is talk with all parties offering an option of the bank does not approve the sgort sale in time before the trustee sale date. If not, you simply go to the trustee sale, bid on the property and you in essence, already have a buyer for it at an agreed upon price. Hopefully, you can purchase at auction at an amount below what the other buyer is willing to pay.

The incorrect statement about such a process is that you can not use the buyer's money to purchase at auction as almost all end buyers are getting loans and no lender is going to release funds to you to buy at trustee sale!

Wayne Neal · Answer

So, what are the mechanics behind this?  The way this lays out, the owner/buyer would need to obtain financing to buy the property after it has been foreclosed, correct?  How, exactly, are they going to qualify?

Mike Nelson · Answer

Yes, I actually have heard of these. What your looking for is a property that has a pending contract on the short sale and also has an auction date (meaning that the bank hasn't accepted the offer so they are going to send it to auction). What your trying to do is get a hold of the buyer and use there down payment to purchase the house from the auction usually $1 over opening bid and sell it to the home owner for what they were going to pay for it.

Will Barnard · Answer

What Chris is basically saying is that providing full disclosed up front is the prudent thing to do. Short sales can be tricky, particularly now for investors looking to quick flip, so full disclosure is better in my opinion.

Chris Calabrese · Answer

It isn't automatically fraud, and to be honest, I can't say for sure that it ever is, but it is a gray area at best, and most of the gray area can be eliminated with proper disclosure.  I believe that the distinction lies in that it's a short sale, and that the negotiator is convincing the lender to forgive debt, and the lower price can result in a bigger deficiency or tax liability for the seller as well.  Therefore the negotiator is profiting at the expense of both of the other parties in the transaction.  I'm referring mostly to the case where the negotiator, or buyer, is double or back-to-back closing and never intends to buy the house (i.e. wholesaling).  In the specific case described in the original post, selling back to the original homeowner is, as Will stated, almost always prohibited.

Amy F. · Answer

Thank you all for your responses.  I guess the old cliche "if it sounds too good to be true, it probably is" rings true here.

Shanequa J. · Answer

Chris, how is that mortgage fraud if you don't volunteer information. I understand if they ask you or inform you of the law and you lie then that's fraud; however it's none of their business that I'll make money if I do it legally.

Backwards short sales?

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