Short Sale Approval Clarification

[B Cory]

Someone brought some language used by lenders to my attention. I hadn't noticed it before, but now that I look back, I see it in a couple of my approvals. I know a lot of investors use the Trust Method of flipping, deeding the property into a trust. Do these clauses affect that? Please give me your take on the language.

Wells Fargo: "It is further understood this transaction may not involve any third party who received a deed from mortgagor at, prior to, or after settlement."

GMAC: "This transaction may not involve a third party who receives a deed prior to this closing or after after this closing and before recording of the deed to the purchaser."

[Scott Hubbard]

Originally posted by motiv8td:

Scott, why is that?

A local big boy shop that I wont name but is rhymes with Dun Fields is still swearing by the trust claiming they can't do any double closes and keeps wondering why I can and do.

There are many reasons for this, some of which I have listed below, but the most comprehensive reason is that lenders are automatically defensive about this type of arrangement. Why? Because it is out of the ordinary and anything out of the ordinary may require an exception, which then will bring on further scrutiny.

There is a national guru that has licensed Donald Trump's name and selling a property wholesaling system that touts you can buy homes under 50 cents on the dollar and flip them to a national syndicate of wholesale investors. This "system" utilizes trusts (very poorly written trusts IMO) and they maintain low-ball offers without any seller protections like turning over the failed investments to an agent. Guilt by association....

I have spoken with several larger investments firms who utilize trusts in REOs and Short Sale transaction and all have said they are becoming more difficult to deal with the lenders. Keep in mind, these are larger firms with capital resources and they are spending more time and capital justifying the "legal and ethical" use of trusts. Many use attorney opinion letters and this takes time and money.

Some of the reasons are:

1. The negative stigma- Trusts have valid uses. However, when being utilized in a short sale transaction, they are being used to flip without funding the close yourself. This is not valid use since you can flip without a trust. Many notable frauds have been committed using land trusts and this unfortunately has put lenders on the defensive.

2. Negative attention. Kind of building off of the above, the last thing you want when you have presented a short sale offer is attention. I spend a lot of energy trying to have my offers reviewed on their business merits. Throwing in a trust has, in my experience, diverted the focus. This can reduce your success.

3. Disclosure- No matter what vehicle you use in a short sale flip, you must disclose. A trust, (aka a distrust) is a contrary to full disclosure. How can you fully disclose if your hiding behind a trust.

Personally, I believe if you present your offer with a standard PSA with your personal name as the buyer and closing your own funds, you will be effective more often than you will be using any other method. However, as this is not always practical, I think the next best thing is using an option.

Originally posted by Justin S.:

I received a letter from Well Fargo stating: "The parties agree that this short sale transaction will not constitute appraisal fraud, flipping, identify theft and/or straw buying."

I'm trying to get them to define flipping for me.

This is another example of the provisions being used to to keep investors from profiting. I would argue this is zeroing in on trusts because of the term "straw buying" and "identity theft" which eludes to historically fraudulent uses of them.

Unfortunately, its ambiguity is key to its effectiveness. The title company will require clarification and will not issue a title policy without it. Meanwhile, Wells will probably do nothing about it. At least that has been their modus operandi with me. Check with your title company to see if they will have issue with clause.