"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.
What a great, hot topic. Of course there's no black and white answer to what's legal or not. That being said, the banks are certainly getting smarter as to limiting the options of the buyer of a short sale.
Depending on the bank, most that I have closed have "Arms-Length Transaction Affidavits" that specifically curtail the buyer's right from renting back to the current owner and from selling the property for a minimum of 90 days.
Fannie Mae just put out a great Power Point presentation called "Recognizing and Reducing Short Sale Fraud" as part of their Mortgage Fraud Program. It's 3MB but I'm happy to email anyone a copy for your own review - just email me with your request. [EMAIL REMOVED]
Everyone has the right to make a dollar, we just need to keep it above board!
Good thread here. A couple of simple answers are to ask her for the citation proving them to be illegal or to point out that they are closed every day of the year by national title companies, AS LONG AS there is complete disclosure to both sides of the transaction. Reality is she will never get it so move on to someone without blinders on.
Ted,
That seems to be the general idea here...Present the fact that she is incorrect and if she doesn't understand, move on. It's funny how different the responses depending on who you talk to. Anyone with an investor's mindset says what you said. Other agents, even my broker, have said, "Well, I don't know. Be careful with that..."
I'd probably tell her if she continued to practice law and ever opened her mouth about it again, she have to answer to the RE commission and the state bar association!. Cut that stuff off real quick!
Carl,
That's the key. They "don't know" - I've spoken to literally dozens of agents and those that "dont know" are all skeptical and are the ones that through out "fraud" and "illegal" - They don't know because they haven't been educated or never took the time to look at it from the investment side, and honestly, why would they? They took a class that taught them very little, got a license, and now they can legally sell real estate.
I swear part of the real estate education agents get should include at least ONE class on investing. It doesn't even have to be short sale investing, but at least to open their eyes to what investors do and need. THAT'S why so many investors get their licenses, because most agents are uneducated. SORRY NO OFFENSE TO ANYONE HERE.
Talk about an industry filled with generalizations about investors. It's sickening.
You're one of the good ones Carl. You are open minded and progressive. You are also doing yourself a huge favor and getting educated by coming to these forums.
Thank you Maryann! I agree that it really doesn't take much to become a licensed agent. It takes a whole lot to be a good agent.
As far as working with investors go, I suppose I try to learn about investing because that's what interests me. I'm not really interested in the color that someone painted there living room...I like cashflow :)
You guys also do 4,5, 10 deals a year. The average person buys a new home every 6 or 7 YEARS. I like my chances with investors. As "illegal and fraudulent" as you may be... Just kidding!
It can be especially hard to work with agents and brokers in an area where one of the "bad apple" investors has caused problems. We are slowly making headway in one of those markets now and are starting to hear from agents that they are hearing good things about us! A local Title Company is also putting in a good word for us.
Basically, it's doing things right and slowly changing the wrong perceptions. I like Maryann's agent education ideas, too!
Bill
Of course flipping per se is not illegal. But there are folks who violate contractual terms in order to resell a property.
Core Logic estimates fraud in short sales at about 1.9% of sales. So fraud is present in a fairly small percentage of cases.
They have an interesting report that you can download that analyzes a number of loans – about 250,000 I believe - with specific examples of types of fraud found.
Fannie Mae and others, for example, now have covenants in their deeds that bar the resale of a property within 90 days for more than 120% of the acquisition price. That is a contractual agreement that the buyer enters into in order to get something of value - the property - from the seller. Core Logic now offers a service to monitor future sales of those properties for compliance.
This is a big business. Lots of good folks out there, and some bad actors, as anywhere else in life.
[i]" The new service allows lenders to receive alerts on “risky†pending and closed short sales to minimize unnecessary losses related to fraud and property under pricing, which CoreLogic estimates at $41,500 per transaction. Short Sale Monitoring Solution provides real-time access to lenders’ concurrent transactions on short-sale properties through the CoreLogic Mortgage Fraud Consortium, the largest repository of application and transaction data, representing 65 percent of annual loan applications"
"Short-sale fraud is costing lenders $310 million a year and those losses may increase if lenders cannot proactively identify risks in real time,†stated Tim Grace, senior vice president of Fraud Analytics, CoreLogic.. [/i]
http://www.corelogic.com/About-Us/News/CoreLogic-Launches-IncomeAdvisor-For-Real-Time-Fraud-Assesment-and-Income-Estimation.aspx
Best! M
Michael,
Did you know that Corelogic is also paid by lenders to utilize their fraud software? Talk about keeping yourself employed.
If you SCOUR the FBI fraud website (an impartial source) then you will see that "the extent of short sale fraud nationwide is unknown" http://www.fbi.gov/stats-services/publications/mortgage-fraud-2009
Michael, can you show us the Fannie Mae source that puts the covenants on a deed? I'd like to see that. I do know that FHA DID have something similar, but it was lifted in April 2010.
How is it illegal to disclose to all parties you are reselling a property for profit? Fraud is misrepresentation. So "flipping" is legal if disclosed. I'm sure there are those that don't disclose and I'm assuming that's what you meant by contractual terms.
:D First time posting here so be gentle with me! lol...ok, let me try to help clear up a few things on these short sales and the guidelines that need to be followed.
1st...in regards to the question of needing to be in default…the short sale requirement is that there needs to be a hardship...For the HAFA program the verbiage is default or imminent default (an unavoidable default foreseen in the future). The truth is, unless the INVESTOR (not the servicer you see such as Chase, Wells etc)on the loan is one of the few that took TARP funds and have not repaid them back then, then they are NOT required to accept a short sale and further, each investor can make up their own terms to accept or deny the short sale. Example is a small private investor who's loss matrix this week shows that they need to unload fast (more favorable terms/price etc) versus the next week when their matrix shows they unloaded/lost too many and there for will need to delay until the following quarter.
2nd:In regards to flipping, there are a few issues that we need to look at...first is the short sale approval letter. Most are buyer specific, non assignable and the bank during the negotiating process usually makes you remove anything in the contract that makes it assignable. And, as stated many of the short sale approval letters are requiring that the property close and not be resold for a specific time frame usually 30-90 days depending on the investor on the loan. Please understand that not all CHASE files for example are owned and decisioned by the same investor. Some Chase loans (again, just an example) are serviced by Chase but are owned by another investor (such as Freddie Mac-who is the #1 hater of flipping, Fannie Mae, and private investors or investor lots). Per most short sale addendums, the buyers are due to be given a copy of the approval letter and by accepting to close, all parties accept the terms dictated in that approval letter. Some lenders are actually requiring the buyer's, seller's, Realtors and the title company to execute a notarized arms length to stipulate that the transaction is arms length, that the parties are not aware of any other agreements between any members of the transaction and that they will not resell for a specific time period.
3rd: The title company's underwriter. The underwriters are requiring that the title company report ANY requests for simultaneous closings for additional review. They haven't told us that we CAN'T do one yet, but it is definitely something that is being carefully monitored.
4th: Funding...this can be a real big NO NO when it comes to escrow...you cannot use buyer D's funds to purchase Buyer B's transaction, so unless you bring your own funds in to close this is a VERY big no no here in FL in terms of escrow. There has to be a complete paper trail on this-as of late I hear less of this trying to happen (mainly because any title company who cares to stay in biz won't do this), but 3 years ago when the option contracts were coming in left and right this was common attempts and creates major issues.
Oh…FYI: I have over 480 short sales negotiated in the past 3 years. With that said, even I cannot claim to be an expert because in 2 weeks things will have changed again and the information I have today may no longer be applicable. Look for advise with people with a LOT of experience and who are not afraid to say...hmmm...I don't know, that's a great question because the truth is, we are all learning DAILY on this stuff. Hope this helps!
Keri, WELCOME to BP!! Excellent and truthful information. Thank you. This topic unfortunately has been discussed to death.
I agree Freddie is on some type of crazy ex girlfriend crusade, and making unrational publications. I mean they published this at the end of 2009. "At the end of 2009 Freddie Mac published an attachment to their 2009-24 Bulletin which stated that short sale flips are not "inherently illegal" - "Legitimate property flips are acceptable transactions." "not all transactions involving a rapid purchase and resale are improper." Freddie Mac went on to further define that "Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee's sale, etc.), where any increase in the sales price over the property seller's acquisition cost can be clearly shown to be a result of the difference (if any) in the market's reaction to distress sales and typical arms-length market sales." http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924xA.pdf -"
LOL...now doesn't that seem like what is LOGICALLY happening? I get a kick out of Freddie each time they post something new about flipping and fraud. They are going to bury themselves.
Opinions are like buttholes, everyone has one! LOL! :mrgreen:
THank you Maryann for the warm welcome. It has been beat to death but is apparently making a new comeback lately as I'm seeing more of these coming around again (I work for a title company here in FL as a full time short sale negotiator and I have an RE team here as a Realtor) so I am seeing this again on both ends yet it seems like the collective groups (general public as well as the underwriters etc.) still don't have a strong handle on how to effectively do these transactions. In my experience unless B can fund themselves as well as D and as long as there are not any seasoning requirements in the short sale approvals these are still viable deals and I have yet to come accross anything saying that it is "illegal" unless it's a Fannie or Freddie loan but then those ALWAYS have seasoning requirements so it's a mute point.
Rob...lol...I appreciate a sense of humor in this biz these days! :)
Keri. Yes Fannie & Freddie always have seasoning requirements. At that point, you would simply hold the property until the required seasoning period is expired, then sell. You are correct, as long as you disclose to all parties that you are an investor & intend to resell for profit & you fund with money that is sepperate from the end buyer, then life is good. We actually talked with the Deputy Commissioner at the DRE & the State Attny Generals office & asked them how to do this legally & they said that it is LEGAL as long as you do it correctly & explained to us that these are the things that they look for. So as long as you do these things then you are good.