Here is the LinkedIn discussion. Sorry for the length! If anyone would like a pdf of the complete discussion emailed, let me know.
Bill
This was the posted question on the LinkedIn / National Association Of Realtors Group:
I’m interested in getting some feedback on Short Sale Flips. Specifically AB and BC transactions. So here are the questions.
The short selling lender obviously wouldn’t sell the property for less than market value. Of course they should be obtaining an appraisal or a BPO at the least. But as a Realtor do you feel it is ethical to not disclose the higher offer at the actual market value? In addition to this the original listing agent will normally represent the seller on the AB transaction then the buyer on the BC transaction. Do you feel they are under any obligation to tell the buyer that the short selling lender will actually accept less than what the property is listed at?
Also, do you feel these types of transactions shed a favorable light on the Realtor community?
If anyone would like a pdf of the complete discussion e-mailed to the, please let me know. Thanks to Kim, I have it to date and can easily update it as comments are added.
These are some of the responses from different posters. The "dots" are the Realtor postings and the "zeros" are my responses:
• “I would not get involved in such a transaction because 1) I don't want to lose my license to practice real estate and go to jail, and 2) I would not be acting in my seller's best interest if he could get a higher price for his home and not be saddled with a larger income tax on the forgiven debt.â€
o Bill Patterson • Quite the contrary! I’m a Realtor and have been a broker for over 25 years. The process you loosely describe is legal, ethical and a benefit to all parties involved. There is a lot of misconception out there and I was going to bring this subject up myself….THANK YOU Dennis! One thing though, we do not use an option contract. Our transactions are through a purchase agreement, we have two completely separate closings, disclosed to all parties (including the end buyer and their Realtor).
The seller benefits because our negotiator is looking out for them, getting the short sale approved with usually NO deficiency. The Mortgage Forgiveness Act is additional protection against homeowners who find themselves subject to a short payoff.
The lender benefits enormously because they get a quick, certain acceptable alternative to foreclosure without having the expenses of the foreclosure process, carrying costs of the property (taxes, insurance, maintenance, etc.), and costs of sale when listed as a REO. They quickly remove a non performing asset from their books and immediately net more than they will likely get if they foreclose.
The buyer gets the property relatively quickly without the uncertainty of waiting for short sale approval.
Our process is a huge advantage to the listing realtor. The realtor does not have to negotiate the short sale, the buyer doesn't end up walking because they don't want to wait 3 months to see if their offer is accepted, and the realtor's commission is protected. I hope this discussion is well received and a lot of misinformation is cleared up.
Bill
• I want to clarify a couple points. In these transactions the listing agent is representing the short selling lender in the first transaction then he will represent the seller on the second transaction. How can that be if these are arm’s length transactions? So, while he is negotiating the short payoff he is actively marketing the property for the second transaction at a higher value. He also is not disclosing to the short selling lender that he has another sale lined up at a higher value.
o This is Institute One stuff. Does the listing agent have a contract with the lender? NO! They have a contract with the seller. We have “dual agency†that says we can represent the buyer and seller with full disclosure. I don’t remember anything about “triple agency†where agents can represent the lender, too! Let me put this into perspective…..Suppose you have a short sale listing and an offer of $150,000 on your client’s principal residence…(then I gave examples showing Realtors losing sales when another was submitted and a non-short sale example with an accepted offer being cancelled when a higher one was available)
• I know there have been a few agents charged with fraud for facilitating these types of transactions but it seems like it is still largely ignored.
o The first case that comes to mind is the Connecticut one where there was found to be fraud committed. Here is the main problem, the agent received an offer and rather that submitting it, they held it and inserted an investor to make a lower offer to the seller. Then they planed to sell to the original offer. This is fraud! They did not disclose to all parties. Had the investor first had an offer accepted and used the disclosures that we use before the other offer was obtained, there would probably been no problem.
• Mortgage servicers and originators don't get a lot of sympathy because they brought a lot of this on themselves for their loose underwriting practices. However, behind every loan is an investor who put up the money for the loan and they are being taken advantage of in such a situation. The original home seller gets out of his predicament, but the investor in the loan takes a substantial hit as they seldom recover their full principal. Meanwhile, the "flipper" walks away with the balance of what should have been the lender's principal if the original owner had sold at fair market value.
o Jack is correct that our mortgage and housing meltdown is largely the result of unscrupulous loan originators (aided by supporting appraisals, but that is another discussion!) that have falsified loan applications, mislead unsophisticated buyers and done basically anything needed to close a loan…. One big reason that this was happening was demand! Yes, there were so many investors trying to get in on the easy and lucrative RE Mortgage Funds, that it put lots of pressure to provide more mortgages. It was reminiscent of the Dot Com bust! They just got greedy! THESE ARE THE INVESTORS THAT Jack is feeling sorry for. There are very few if any investments that offer much return that don’t have risk.
• From Realtor Magazine this spring… Short Sales Ethics: 6 Temptations to Avoid
4. Selling to a flipper. Unless the investor in a flip is prepared to add substantial value by fixing up a property, don’t participate in a flip. Short sale flips benefit only the investor, who’s clipping off money that could go to an already bleeding lender.
o This was originally in Realtor this spring and when I read it, the first thing I noticed was that it was written by Scott Thompson, vice president of ServiceLink, a national lender platform in Rancho Cordova, Calif. Do you think it might be a little “one sided� (I then explain how we do add value by taking a financially distressed property through the short sale process and make clear title available to the buyer that we find. I then support that as follows:) Here is a link to the State of Virginia’s Realtor Magazine from last fall. Its Legal Lines section is focused on short sales. If you look at page 12, the issue of investors is talked about and the advantages and value added are outlined. The difference is only that our buyers know who they are buying from when they receive their executed contract. This is, I believe, a more objective and reliable source than the one presented by Sandra.
http://www.varealtor.com/sites/default/files/SeptCommonwealth_web_0.pdf
Thanks!
Bill
• Realtor SC & NC • Bill, I wish we had investors like you in our market. It sounds like you are doing this the right way and I commend you for that.
Jack…. You are absolutely right about agency. The real estate agent has a fiduciary duty to the seller or buyer in the transaction not the seller's lender. However, the seller's lender must approve of the sale or it simply won't happen.
o Bill Patterson • Thanks Spring! I appreciate the vote of confidence.
Jack, I see your points and appreciate your feedback! That's how we do it and it works well for all involved. The seller's lender is not the problem, but sometimes a buyer's lender may have an issue with seeing a recorded deed. There are other ways to "skin a cat" that often can satisfy those lenders, though. The key is an open and honest dialogue with them. They want to write the mortgage and we work hard to provide the information that they need to accomplish that!
Bill