Ohio Division of Real Estate's take on option contracts
Hello everyone, this is my first post. Glad to be here. As an agent, I've handled several short sale closings. After several painful deals, I came across a local investor who wanted to partner up. Her expertise was also in short sales and she used the option contract to double close. The lure of sharing leads, having an offer up front, and farming out the negotiations was VERY tempting.
However, after running the option contract and notice of option by the chief legal counsel and chief investigator at The Ohio Division of Real Estate & Professional Licensing (they go after both licensed and unlicensed people in the state), I was told the following:
Yes, double closings are legal so long as they are separately funded.
No, option contracts are not considered equitable title for the investor to act as the seller on an end transaction until the option is exercised (ie. property is purchased or buyer goes into purchase contract). Purchase contracts, however, ARE considered equitable title.
No, I am not doing my fiduciary duty to represent the seller if the bank will go after them for a deficiency as so often happens on junior liens. Another pitfall regarding fiduciary duty is if the investor rejects an offer because it doesn't give enough of a spread and the home ends up foreclosing.
No, it is not legal for an unlicensed person to take a fee for negotiating on the HUD. (The logic is that taking a fee for an activity that only gets paid out when real estate sells is illegal unless you're the seller or a licensee. To me this makes little sense as that is how a title person or mortgage lender gets paid and they are not licensees, either.)
Long story short they advised me to stay away unless this investor was willing to use a purchase contract and ultimately buy the property whether there's an end buyer or not. I asked this investor her thoughts and she decided to continue using her option contracts and find an agent more comfortable with these transactions.
Even though everyone seems to have an opinion on the legality and validity of these transactions, there's no case law to define the line.
They advised me the major problem was unlicensed activity. They said the fee for violation was $1000/day/transaction. Activities requiring equitable title or a real estate license include marketing, signing as the seller, and/or getting paid for negotiating on the HUD.
It's too bad there doesn't seem to be a clean way to do short sales. The problem I run into working these deals without an investor's backing is either 1) an offer doesn't come in time to postpone the foreclosure or 2) the ready, willing, and able buyer walked while waiting. The beauty of the investor was having the offer up front to get the ball rolling and even stall the foreclosure.
So that's my sad, sad story. Now I'm hoping to find an investor who will make a low ball offer on all my short sales so I can get the paperwork started before listing the properties for sale. I would still like to hire out the negotiations if possible but it sounds like I have to pay a set fee whether it closes or not. Any thoughts on my long rant?
I'm sorry you are having these issues.
I can certainly understand the conservative approach they are taking with this.
However, and these are just my, non-lawyerly observations...
While there is little to no case law acknowledging an option as a form of equitable title, there is case law acknowledging an option as a negotiable asset. I think if push came to shove a court would agree an investor has a right to buy an option and to sell that option without the assistance of a broker.
Where many get into trouble, and this is where I think your investor friend has problems, is most investors advertise the property, which they don't own and not the option to buy the property, which they do own.
FWIW, I don't like how options are used most of the time. I like clean transactions that stand up to scrutiny. But, I do believe an investor can buy an option on a property giving them the right to buy the property at a set price and later sell that option to someone else as long as the contracts do not prohibit it. Done properly, only the final buyer is at the closing table because the option exchange has already happened.
Hmmm interesting topic how does this affect lease options?
Originally posted by Mr_Investor:To my knowledge, it doesn't.
Hmmm interesting topic how does this affect lease options?
I have been told by my title rep here in CA that double closings without coming to the table with your own funds (which defeats the purpose in my opinion) is considered lender fraud and no title company will touch it.
I would like to see more info and explanation on this topic of option contracts, selling that option, and so forth. The other issue that comes up is the end buyers lender. They will only lend on the original purchase price of the contract and not on the increased price, be it a option, or assignment fee. Therefore, the new buyer has to come to the table with the cash for the option/assignment fee.
If anyone has a legal and moral way to make this transaction happen and it can be done in states such as CA, NV, TX, AZ, etc. we are all ears!
Come on Taz, this is your department - investigations!
Originally posted by nationwidepi:Yes, but you are asking for legal advice and I don't do that.Originally posted by Mr_Investor:To my knowledge, it doesn't.
Hmmm interesting topic how does this affect lease options?
I have been told by my title rep here in CA that double closings without coming to the table with your own funds (which defeats the purpose in my opinion) is considered lender fraud and no title company will touch it.
I would like to see more info and explanation on this topic of option contracts, selling that option, and so forth. The other issue that comes up is the end buyers lender. They will only lend on the original purchase price of the contract and not on the increased price, be it a option, or assignment fee. Therefore, the new buyer has to come to the table with the cash for the option/assignment fee.
If anyone has a legal and moral way to make this transaction happen and it can be done in states such as CA, NV, TX, AZ, etc. we are all ears!
Come on Taz, this is your department - investigations!
LOL.
How about some investor opinion on the subject, off the record or even privately if you wish?
PM me, I would like some non-legal experience clarification.
If I understand their position and your explanation, if a purchase contract is used in a short sale, that creates equitable interest, even though the purchase has not been completed and is pending approval of the short sale offer? It seems that a purchase contract would work as well as an option, since the initial offer to purchase is generally lower than the MAO, and is rarely accepted by the lender anyway. If the bank's final counter is too high, then the contract is voided due to non-approval of the offer by the bank. Did I misunderstand, and/or is there a hole in my logic?
No holes in your logic, you got it. I agree with you that a purchase contract could work as well as an option. Better, technically.
Then the follow up question is, how do you establish that equitable interest so that as an investor you can enter into a second contract to re-sell the property to an end buyer before closing on the first, enabling a double closing? Do you record a copy of the purchase contract at the Count Clerk's office, similar to a Notice of Option (seems unlikely), or, do you just show the title company and end buyer's lender a copy of your pending purchase contract to show there is equitable interest to re-sell?
Sorry for all the questions, but I am considering going from outright purchases of short sales to double closings using either the option contract or a purchase contract, whichever will keep me out of trouble. thanks
There is a difference between a purchase contract and option contract. Yes, the PC gives you equitable interest in the property, the option does not. It would not be legal to market the property as if you are the owner when all you have is an option contract. However, it is perfectly legal to market for sale, the option contract itself. This is how I understand it currently, and it may differ in other states.
Good question. I would do whatever makes the title company comfortable, while making sure lender doesn't see purchase price on contract or they may only be willing to lend on that money. I don't think it's necessary to record the purchase contract, though.
I would still like to hire out the negotiations if possible but it sounds like I have to pay a set fee whether it closes or not. Any thoughts on my long rant?
There are plenty of companies that will take your files on a contingency basis. However, I don't think many are that good. I hired someone to do the bank processing and some of the negotiation.
How's that working for you?
Good. But you need a good amount of volume to support an employee though (obviously).
I tried out-sourcing. It was a big no-go for me.
Originally posted by nationwidepi:
I have been told by my title rep here in CA that double closings without coming to the table with your own funds (which defeats the purpose in my opinion) is considered lender fraud and no title company will touch it.
The one title agent I knew in California (I think she worked for Stewart Title a year or so ago) was perfectly willing to do double closings. The argument of lender fraud makes absolutely no sense to me. You can find title agents in any and every state who will NOT do double closings for whatever reason, and you can find title agents in any and every state who WILL.
Originally posted by nationwidepi:
I would like to see more info and explanation on this topic of option contracts, selling that option, and so forth. The other issue that comes up is the end buyers lender. They will only lend on the original purchase price of the contract and not on the increased price, be it a option, or assignment fee. Therefore, the new buyer has to come to the table with the cash for the option/assignment fee.
If anyone has a legal and moral way to make this transaction happen and it can be done in states such as CA, NV, TX, AZ, etc. we are all ears!
I think the original poster's partner is a wholesaler. Wholesalers sell properties to other investors. Investors who are cash or cash equivalent buyers (hard money or commercial loans), so the end buyer's financing issues will not be a problem. Hard money lenders and commercial lenders do not care if an assignment fee or option fee is included in the purchase price.
If you are trying to "wholesale" to homeowners who are using traditional type financing, you are not wholesaling. You are retailing.
Then she's a retailer because she does sell to an end buyer who obtains financing, not another cash investor. Just like with title companies, lenders vary in what they accept. I believe if she runs into a problem with the buyer's lender, she suggests they work with her lender of choice.
If you can't buy a short sale with an option contract then how is this guy named Nathan, aka The short sale kid" doing this in Tampa? He sells a course that basically uses the option contract. His partner is Chris McLaughlin who is a real estate attorney and broker. There has to be a way to do this.
Hi Karen,
I'm not surprised that a State regulatory agency would discourage options. It makes them nervous to go outside the traditional box they have constructed. Before giving up on the idea entirely, I would talk to an [or better yet a few] investor-friendly real estate attorney and see what they say.
It's a matter of perspective. The government agency wants you to stay in between the lines, and the attorney is, hopefully, more interested in how to make the deal happen
I've had a lot of success with the option contract. My option explicitly and expressly gives me the right to list, market for sale and contract for sale, so I don't have any issues. Its already been approved by Real Estate One's legal eagles and Keller Williams is giving it the stamp of approval as well. Now, these are individual offices, but in the case of REO, they sent it to corporate and it was approved for use.
We can handle short sale negotiations, message me for more into and I'd be glad to tell you more or suggest other companies as well.
Steve
Originally posted by nationwidepi:
There is a difference between a purchase contract and option contract. Yes, the PC gives you equitable interest in the property and the option does not. It would not be legal to market the property as if you are the owner when all you have is an option contract. However, it is perfectly legal to market for sale, the option contract itself. This is how I understand it currently, and it may differ in other states.
Here is where many people mistakenly misuse the Option Contract when marketing the option. In my case, I do not market the property in my name, rather I market the property in the name of the owner. Specifically, Karen, the investor (in your case) should have been given the right (as prescribed by the option contract) to market the property on behalf of the owner. The listing agreement would be signed by the investor, but the owner on record is still the seller. In the MLS listing, the investor is not listed at all.
I have not run into any issues with an option contract since the seller is granting their rights to market the property and as long as the option is disclosed and the sale is a contingent upon that option being excercised.
I list properties on the MLS which I have under option contracts. If I do not exercise my option, then the listing contract is cancelled or the option period expires.
I also use a PA to market properties off MLS. In my state, you cannot use an open ended real estate contract and market the property using the MLS. That is why I use the option contract when listing on the MLS.
The owner doesn't have the right to let someone market their property on their behalf if they are taking a fee unless they are licensed. Don't you think that's a fine line given the investor takes a fee when they close...and sometimes upfront from the owner?
In the past, when I used an option contract to market a property, I always stressed (in writing) to the property owner that I was marketing the property on "my" behalf, or, for my benefit to realize a profit, and that I was not representing the owner in any fashion. But then, I subscribed to the opinion that an option contract provides equitable interest. Now I am not so sure. I think most investors who use the option contract are succesful with it because if all parties are happy with the outcome and no waves are made, no authority is brought into the picture to determine if something was improper. What that determination would be would probably vary from location to location.
Originally posted by Karen Sheets:
The owner doesn't have the right to let someone market their property on their behalf if they are taking a fee unless they are licensed. Don't you think that's a fine line given the investor takes a fee when they close...and sometimes upfront from the owner?
Karen: I do not think it is a fine line AT ALL! Legislators, attorneys, and brokers want you to believe there is a fine line because there knowledge and power are based in the fuzziness of the "gray area". There is right and wrong, black and white! Do not complicate this anyomore than it needs to be.
First, Investors do not charge a fee; professionals, licencees, servicers, charge fees. A fee, is defined in many ways depending on the context, but inherently the fee is predetermined (fixed) and based on costs and some measure for margin or profit. Our profit is determined by the market place. We absorb carying costs and assume risk when we close. We stand to lose a lot of money. Whereas a REALTOR and Broker simply markets a property and is paid if successful. There is no assumption of great risk since they never acquire the property to induce the sale. Commissions are purely fee based.
Secondly, our profit is NOT paid by the seller directly since they are underwater. The profit is paid by the lender which agrees, independently, with full disclosure, to assume those costs. On th HUD, there will be no mention of fees or commissions.
Thirdly, in my case, if current market conditions do not allow me to sell the option for a profit, or the lender does not agree to sell to the property to me at the purchase price, then I have the same listing agent keep marketing the property on behalf of the seller at the counter price the lender made plus commissions. I will then keep working the short sale when a new buyer makes an offer and do so without profit or compensation.
I know of no agent or broker who will step aside and continue to assist the seller without compensation.
Lastly, in my contracts, we put in a contingency whereby we (as buyers) agree to negotiate the loan balance to be considered zero and waive all rights to pursue the loss post-sale and to waive any rights to a deficiency jusdgment. If the we cannot obtain this in writing, the seller has the right to void the contract.
I am confident that there are very few REALTORS practicing this policy.
There is a principal in law called intent. If any investor were to be charged with practicing Real Estate without a license, there would be a burden for the plaintiffs to provide evidence that the defendant intended to circumvent the law and that act had some dire consequence to an individual or an entity.
I am confident in my business model because I simply get much better results then REALTORS do! Less 2 out of 7 short sales listed on the MLS are closing in our market. My success rate is much better and we are not profiting from every successful close.
Bottom line, you are bound by your DRE and your Broker's mandates. Most investors are independent and unlicensed thus are able to be more creative.
Instead of criticizing what we are doing and questioning it's legality, perhaps you should use your energies more wisely and find out which brokers and under which parameters you can help your clients. I have agents and brokers who are receiving business through my current model and are helping sellers and buyers to either sell their homes and stay out of foreclosure, or are helping buyer's get into a home under market value. In other words, they are good stewards of the their market by understanding where they can be creative yet maintain compliance .
Getting paid is nice, getting paid to do the right thing a AWESOME!
Originally posted by Larry Moore:
In the past, when I used an option contract to market a property, I always stressed (in writing) to the property owner that I was marketing the property on "my" behalf, or, for my benefit to realize a profit, and that I was not representing the owner in any fashion. But then, I subscribed to the opinion that an option contract provides equitable interest. Now I am not so sure. I think most investors who use the option contract are succesful with it because if all parties are happy with the outcome and no waves are made, no authority is brought into the picture to determine if something was improper. What that determination would be would probably vary from location to location.
I wholeheartedly agree with your premise that most of us operate based on the outcomes; This is simply called client centic service, whereby your success is largely driven by being focused on the seller. If your seller is successful, then you are successful. I do not profit directly on every Short Sale, but I am successful in other ways that are a direct result of being client focused.
For instance, I purchase rental properties and have a ready made renter everytime I get a Short Sale contract. If I do not have a rental proerty to suit, then I refer them to another investor. In another case, I am currently looking for a property for which I will purchase and carryback to another short sale client.
For one, I hope brokers and agents continue their rigid practices because it just drives more business my way.
This is fantastic.
Scott, I never thought about marketing renters to other investors. :D