"Flipping a short sale is illegal"
Commercial Real Estate Agent · Western, MA · Member since 2010 · 36 posts · 7 votes
I'm sure all the "flippers" out there read the subject and said, "That's not true!". I would say it all depends. The reason I'm writing this is because as I was speaking with a "short sale expert", she informed me that "flipping a short sale is illegal." Of course my response was that it can be done illegally, and it can also be done legally. She insisted that profiting from a short sale was illegal, period. After telling me all of this, she then said that you MUST be in default in order to do a short sale. As I've learned from this site, that's not the case.
Last, before I had to walk away, she said that it was "impossible" to do a short sale on a second home/ income property. I've also learned that this was not true.
I suppose the moral to my story is to not listen to someone because they say they're an "expert".
Anyone that has a comment, I want to hear what others are thinking.
Carl,
This really angers me when I hear people say that it is illegal to make money off of a short sale. As long as you close, take title, and then in a separate transaction sell it to your end buyer it is perfectly legal.
After you close the A-B side of the deal and take title you become owner of record. I would say to her, if I am buying the property does it matter what I do with it.
If I want to sit on the house for 30 years, bulldoze the house tomorrow, or turn around and sell it 24hrs later it is my right to do that because I now own the house.
Now as investors we do have to play by the state, federal, mls, and other guidliness stipulated by the payoff demand approval letter. However, for this lady to say that it is illegal to make money on a short sale just tells me that she does not have her finger on the pulse of real estate rules and regulations in her area.
It usually helps if the homeowner is in default, because the banks are more apt to move when they are not being paid, however if you know that a homeowner is current and will go into default in the next month, you can still start getting things going with the lender.
Finally, it is the lenders decision to entertain the idea of a short sale on a residence that is not primary and usually there is no problem doing this. Now, getting a full and complete satisfaction of all debt obligation owed by the homeowner is tuff to obtain on a house that is not a primary residence.
However, most of the time these homeowners who have multiple properties are sharp, wealthy individuals who have retained councel and advise from their CPA's and they understand that they will probably have to pay some sort of difficency judgement and will be issued a promissary note. But in this case they are just happy that the bank entertained a short sale in the first place and in many instances will pay the judgement and with the help of a savvy CPA write the debt off.
Carl,
This really angers me when I hear people say that it is illegal to make money off of a short sale. As long as you close, take title, and then in a separate transaction sell it to your end buyer it is perfectly legal.
After you close the A-B side of the deal and take title you become owner of record. I would say to her, if I am buying the property does it matter what I do with it.
If I want to sit on the house for 30 years, bulldoze the house tomorrow, or turn around and sell it 24hrs later it is my right to do that because I now own the house.
Now as investors we do have to play by the state, federal, mls, and other guidliness stipulated by the payoff demand approval letter. However, for this lady to say that it is illegal to make money on a short sale just tells me that she does not have her finger on the pulse of real estate rules and regulations in her area.
It usually helps if the homeowner is in default, because the banks are more apt to move when they are not being paid, however if you know that a homeowner is current and will go into default in the next month, you can still start getting things going with the lender.
Finally, it is the lenders decision to entertain the idea of a short sale on a residence that is not primary and usually there is no problem doing this. Now, getting a full and complete satisfaction of all debt obligation owed by the homeowner is tuff to obtain on a house that is not a primary residence.
However, most of the time these homeowners who have multiple properties are sharp, wealthy individuals who have retained councel and advise from their CPA's and they understand that they will probably have to pay some sort of difficency judgement and will be issued a promissary note. But in this case they are just happy that the bank entertained a short sale in the first place and in many instances will pay the judgement and with the help of a savvy CPA write the debt off.
LOL - Carl,
Ask her for the specific law or statute that you can look up that says profiting from a short sale is illegal. Don't try to prove your point, ask her to prove HER POINT!!!
Sounds like an old school Realtor to me.
It amazes me when people take on the title of expert and then have limited education and often little experience. Sometimes people may have a great deal of experience in one aspect of a broader pie and then want to claim expertise in the broader pie.
Personally, I would be reluctant to call myself an expert in real estate tax issues even though I have more than 15 years experience working with many aspects of real estate taxation. Then I hear some that will take a few classes in a subject and perhaps handle a few transactions and now they are an expert on the subject.
While I agree this "expert" is clueless, the blanket statement above is not correct either. It is not that simple.
There is alot that can be done in there to make it illegal. Make a false statement to the financial institution and it is a felony right there. "Influencing" the BPO. There are lots of other ways to make it illegal.
Maryann,
I knew you would like that one! By the way, I'll be calling you this week about the property we discussed.
Charles,
I agree. I think any time you take on the title of "expert", people expect you to be flawless. I know that is not something that I want people to think about me because it is NOT the case. However, I don't think it hurts to know what you're talking about either...
One thing I have learned over the years is that it is a rare situation where you can say for certain that something can or can not be done without knowing the circumstances.
To say short sales are illegal right away makes me wonder about someones experience. There is usually some circumstances that are legal for almost anything. That is often why an attorney will tell you it depends because it is necessary to know the circumstances and underlying facts to make a judgment.
Eric,
Misrepresenting financial, influencing the bpo, and already having an end buyer in place is a flop.
Sure there are several things you can do in any transaction to make it illegal. I was just pointing out how the generalized statement the realtor made was completely off the mark.
There is a right and wrong way to do short-sales and the right way def takes work. My hat is off to every real estate investor out there who takes the same time and care that my team and I take in staying "Above Board" and in compliance with full disclosure when doing short sales.
It may not be the easiest thing to do, but it is the right thing to do.
To realize that we as investors are always under the microscope is something that I wish all real estate investors would operate with in the back of their minds.
Wow, I don't even get mad at stuff like that anymore. Just from what you've typed here proves to me she has no clue what she's talking about. She probably attended some 3 hour Realtor training, got some paper certification, and slapped the title "Short Sale Expert" behind her name.
I just feel sorry for all the poor homeowner(s) that come to her for help.
Personally, I wouldn't listen to a word she has to say!
I agree that it's scary for homeowners. It's scarier that she was teaching a room full of realtors, who will then go and inform all of their homeowners,
Carl,
My partner is a broker (in MA) although he never acts as a broker in any of our transactions. I'd love him to maybe "re-educate" her.
LOL I KNEW it was an old time Realtor. let me guess is she NOT with KW either? You and I have had that discussion. I have found KW agents are WAY more progressive than a lot of the other agencies, but maybe that's just me.
Anyways, when we speak off line, I'd love to know who it was.
Talk to you soon.
LOL, nothing is as dangerous as a Realtor who really wants to be an attorney.
Operate in the sunshine with full discloure, that your intentions are to sell after needed repairs and improvements.
They will probably ask what you're selling it for....but unless you have an accepted contract in hand, the true answer would be "I don't know until after repairs and improvements are made"!
You'll bump into deals where the Realtor is trying to help their brother-in-law in a SS, you can't get rid of all bad Realtors, there is no law or rule against you talking to a seller, calling them, writing them or knocking on the door, unless you are a Realtor. James would have a better idea how to do this.....James, you there? Good luck
Eric,
This is another "hot button" term like the word "flipping" seems to be.
How is one to INFLUENCE a bpo illegally? Well, I've heard of buyers going in and trashing a place, or placing human or dog waste, etc., but I still don't believe that substantiating your offer with comps and having a repair list in hand is "influencing"
I'm working on a property on the seacoast right now that has a LAUNDRY list of issues including, encroachment on the next property, lack of parking, mold, broken water heaters, improper insulation, a waterline that supports the next building over, 4 unit assessed but 5 actual units and a NUMBER of other misc issues. Now the general old BPO agent hired and paid $40 to value the property would NEVER have a clue as to the extent of issues with this property. An investor that is thorough and knows the property they are buying needs to make sure the BPO has this information before making a valuation on the property. So the uninformed BPO values the property at MARKET CONDITIONS which shouldn't happen, the home doesn't sell because it's NOT an accurate valuation, and the homeowner goes to foreclosure.
The Realtors I work with know every inch of the property they are bringing to me. If the listing agent hadn't been so knowledgeable about the above property, I may have missed some things, just like a BPO agent who is coming in from another part of the state who may not know the area etc.
I think "influencing" a bpo is almost impossible. Is someone going to influence me in my business if I don't think the information they provide is accurate? NO. I wouldn't buy a property if I didn't think the information was accurate. Am I going to take into consideration accurate, substantiated information in my decision --- YES, but no one can influence me with improper information. It would be highly difficult.
The funny thing about all this is Realtors do the same thing. They "assist" the BPO with relevant information about the property in hopes of having their offers accepted, but when investors do it ... we're the black sheep bad guys who INFLUENCE all these bpo agents.
Maryann,
You might know her, actually. She's right in your area!
As far as influencing a BPO, I don't think you can illegally influence a bpo unless you offer a bribe. I think that any agent doing a BPO in an area they are not familiar with, would appreciate the help from a local agent. Then again, it depends who you speak with. According to some people, you should not even be doing a BPO if your plan is to flip it. That's illegal...(sarcasm)
I tend to approach those situations with one question in mind:
Does this person DO THIS STUFF DAILY... I mean, are they in the trenches duking it out day in day out?
If the answer is "No", I swiftly change subjects or wrap up the conversation QUICK, and get the heck out of there!
Time is your most valuable asset. Knowing where NOT to invest it can be just as valuable as knowing where to invest it.
Something I've also noticed about people like that is that they come to you with their minds already "made up" about what they believe and there's NOTHING you can say, do or prove to them otherwise.
So, why "fight" a wall?
Save your blood pressure and thick skin! After all, your "favorite" BofA loss mitigator already specializes in pissing you off enough already! :D
You know the saying......"Three Strikes and You're OUT!"
Strike #1: Flipping a short sale is illegal. Profiting from a short sale is illegal.
Strike #2: You MUST be in default in order to do a short sale.
Strike #3: Impossible to do a short sale on a second home/ income property.
I would say she is OUT! We've done short sales where the owner was not in default (harder and takes more time, but can be done). We've done short sales on income property (more than once), and our business model is to make a profit. This Realtor is definitely out when it comes to understanding short sales.
Hi Carl, I try not to tire myself with these so called, "experts", because they really don't know. So, I usually will point a real estate agent who is at least open to hearing from a short sale attorney and give them a link to someone like "Jeff Watson" ebook, entitled, Navigating the Short Sale Jungle. OR Perhaps, the power point presentation on OLD School Title - website/ suggest that they give them a call to speak to the source.
Seek for themselves ...Hope this helps!
I was just reading this blog here:
http://massrealestatenews.com/short-sale-lawsuits-will-realtors-be-next/comment-page-1/#comment-2625
which was generating quite a bit of commentary. It talks about realtors getting caught up in short sale scams.
Truth is; there ARE things you need to be aware of when investing in real estate. If it "feels" wrong, then do some due diligence to make sure you aren't breaking any state or local laws. Above all disclose what you are doing. There's a lot of bad apples and scam artists out there, unfortunately, that are a fly in the ointment for all the ethical investors out there.
Certainly, making money on a short sale is not unreasonable. There is work that you do to earn that reward, like anything else. Playing smart and within the rules is your trump card.
Another point: I think about these comments like " You MUST be in default in order to do a short sale." and "Impossible to do a short sale on a second home/ income property" and it's really insanity. The bank also has a stake here and needs to do their proper due diligence. They can't (or at least shouldn't) come back after the sale and complain about what happened when they had all the time in the world to carry out their research and analysis to see if the offer price being made is a fair one and logical for the lender to accept.
This isn't Best Buy. There is no 90 day price guarantee.
Just got a short sale approval from Wells Fargo. There are no restrictions on the approval at all.
We will do whatever we want with the property, whenever we want. As long as we bring cash on closing day (which we will), its all good.
We will do whatever we want with the property, whenever we want. As long as we bring cash on closing day (which we will), its all good.
Congrats jim :mrgreen:
Nick,
The big issue with what Carl is saying is there is a Realtor that is teaching OTHER REALTORS that flipping is illegal and you cannot short sale a second home. Both situations are completely doable. This is what is scary.
Liability in short sales goes away with full disclosure of outcomes and risks. Realtors/Investors that don't divulge that information may open themselves up to liability. If a homeowner knows exactly what is going on, then there is little liability, but if they are clueless about their own short sale, there could be a major problem.
I'm sure what the realtor was trying to get at and failed, is that the bank doesn't want the owner of the property jamming them for a short sale, then partnering up with a friend to sell to someone and make the profit themselves. The bank wants to make sure it's a legitimate sale. Once you buy the property, and title is transferred, it's your business what you do.
The illegal part the agent must have referred to is a different case, whereby (in days gone by) an agent finds a property at a ridiculously low price, finds a buyer and double escrows the property for a profit, because unbeknownst to the seller, their property is worth much more than they had it listed for.
Karen,
Welcome to BP.
An agent can't find a property at a ridiculously low price. Banks aren't stupid. They order an assessed value of the property and they will only sell the property a certain % under that value.
Fraud is any purposeful misrepresntation in the short sale process.
Double closings are legal and you can sell for a profit. It's all legal if done correctly.
Unfortunately as Carl originally posted this Realtor was making a blanket statement that all short sale flips are illegal and you cannot short sale an investment property which also is not a true statement.
The world is full of "experts". The good people in any field are able to determine good information from bad. Realtors are no exception! Probably no one pays any attention to that Realtor anyway!
Bill
An agent can't find a property at a ridiculously low price. Banks aren't stupid. They order an assessed value of the property and they will only sell the property a certain % under that value.
Fraud is any purposeful misrepresntation in the short sale process.
Double closings are legal and you can sell for a profit. It's all legal if done correctly.
Unfortunately as Carl originally posted this Realtor was making a blanket statement that all short sale flips are illegal and you cannot short sale an investment property which also is not a true statement.
NOTE: I said in days gone by.. and was explaining a different situation, not with banks. As for the double closings, I was looking at it from being a licensed agent, in which case you have to disclose what you are doing, profits being made etc. Sorry for the mix up.