Short Sale Flipping "Illegal"??
Property Manager · Las Vegas · Member since 2011 · 21 posts · 6 votes
Short Sale Flipping "Illegal"??
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
15yIs there an addendum that generally comes with short sales that indicates what is and what isn't expected of the buyer? Are there selling restrictions that are introduced by the lender as part of the contract?
The reason I ask is that it's not clear where the concern is about buying a short sale and then reselling it?
Presumably, a lender wouldn't have an issue with me buying a short sale, holding it for 30 years and then reselling it. And I don't imagine a lender would have a problem with me holding it for 1 year and reselling it. Even 3 months probably wouldn't draw any questions. But, if 3 months isn't against any implicit or explicit rules, why would a one month hold, or a one week hold, or a one day hold, or even a one hour hold be "against the rules?"
Obviously, I'm missing something here, but I don't know what it is (I've never closed on the purchase of a short sale before)...
45 Replies
- San Francisco, CA · Member since 2011 · 69 posts · 18 votes15y
Does she have a law degree?
Did she offer any advice on tax treatment as well? How about medical advice?
- Property Manager · Las Vegas · Member since 2011 · 21 posts · 6 votes15y
ahhh yes, I already know.. I shouldnt have posted this in such a panic. My grandfather is actually a full time investor, but I couldnt get ahold of him so I thought this was the next best thing.. He BASICALLY said the same thing you did. Having not actually closed a short sale deal like that on my own, I totally bought her pitch. Still young/gullable enough I suppose. :)
- SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes15y
Many legal activities can be done in an illegal way. For example, driving a car is legal, unless you're doing 80 mph on the sidewalk in a school zone with an expired license while texting on your cell phone without wearing a seat belt.
My understanding is flipping, wholesaling, etc. requires careful adherence to several rules, codes, and laws. Unfortunately, there are some unscrupulous individuals looking for a short-cut or unfair advantage over their competition that ignore and violate some of these rules. But just because a few give an activity a bad name doesn't mean there's something inherently wrong with the activity.
- Property Manager · Las Vegas · Member since 2011 · 21 posts · 6 votes15y
Good point Mitch! I was just a little disappointed because she misrepresented herself as a realtor who "only" works with investors and "totally gets" the concepts of wholesaleing, subject to, assigning etc etc and then in person she told me my best bet is to buy and hold and try to lease/option all of my properties. Considering my credit isnt really suitable for even qualifying, it was less than motivating.
So I took a minute to freak out about it, and now back to the drawing board
- Commercial Real Estate Broker · St. Petersburg, FL · Member since 2009 · 47 posts · 23 votes15y
Its really fairly simple. The FHA and Lenders are coming down hard on three things.
1) Any attempt to mislead who owns or is selling the home
2) Any attempt to mislead who is buying the home.
3) Any attempt to mislead where ANY amount of money is coming from or going to in a real estate transaction.Since all of these things have been fairly common in the practice of flipping, and they are now considered mortgage fraud, (which is illegal) It could appear that flipping is an illegal activity.
I don't do flipping, I rarely handle any residential transactions. But I can tell you as a realtor, we constantly get it drummed into us, that if we engage in anything that looks anything like the above, we are to run the other way, and not participate in the transaction, or we could lose our licence, be fined, or go to jail. So, when we here it again and again from the real estate commission and we get our monthly publication showing us all the names of the brokers who helped out a flipper and lost his license, we tend to pay attention. - Property Manager · Las Vegas · Member since 2011 · 21 posts · 6 votes15y
Fair enough! Thanks Robert. I know when I was helping with my grandfathers business years ago, there were PLENTY of people doing it the shady way.. un-necessarily so, because there are plently of people who dont care WHAT you make off of their house, they just want out. No need to even be sneaky.
I do see your point though. Like I said, it just amazes me how much the investing game has changed since I was really immersed in it a couple of years ago, especially here in Las Vegas
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes15y
My suggestion is to disclose exactly what you are doing right in the purchase contract. For example, add a line to the contract that says:
"All parties agree that Buyer is an investor who may choose to market and resell property within 12 months."
Or whatever you intend to do...
As long as you fully disclose your intents -- and as long as you don't sign anything that would prohibit you from acting on those intents -- I think it's safe to say that there is absolutely nothing illegal about what you're doing.
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
Ashley, please don't get discouraged. Many "seasoned" Realtors have no idea how to work with an investor to "flip" a short sale. Actually I think Realtors that can assist in this type of transaction are definitely in a niche of the industry. They likely have a good deal of business too because if you know how to do something that few others do, you could be in big demand for certain investors.
That said, it's perfectly legal to flip short sales. As previous J Scott said, it's all about disclosure. If you are "intentionally" trying to misrepresent anything in the transaction, you then border on fraud, but if you disclose to all parties that you intend to sell the subject property for profit, then you have done nothing fraudulent.
It's funny because the Realtors I run across that have been in the industry FOREVER do seem to be clueless about flipping and how to do it. I find newbies are much more agressive and investor friendly.
Call her back and ask her to give you the law that states flipping is illegal. That should give her something to chew on.
- San Francisco, CA · Member since 2011 · 69 posts · 18 votes15y
When I was in Arizona looking at properties last weekend, my realtor brought the following article to my attention detailing fraudulent short sale flipping:
http://azstarnet.com/business/local/article_7ce108c5-307d-582d-935b-d7cbe0ac3a01.html
Local real estate agents partner with investor groups. The agent's job is to spot borrowers in financial distress - usually people underwater on their mortgages. They persuade the homeowners to sell to investors in a short sale at a low price. Then they contact the bank with the investors' short-sale offer.
Meanwhile, the agent finds legitimate buyers who are willing to pay more for the property, but the agent never presents their offers to the bank. To back up the investors' lowball offer, the realty agent produces an appraisal or a "BPO" - a broker price opinion of the distressed home value that confirms the low valuation. The bank then sells to the investment group. After the closing, the investors sell the house to the legitimate purchasers at the higher price, and the realty agent and the investors split the profits.Based on this article, can someone on this forum venture a guess at what point the transaction described became fraudulent? Was anything misrepresented to the bank? Is it the fact that the agent already had another, higher, offer lined up? Did they have duty to disclose and did not?
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
Mike, a very well known lawyer already wrote an EXCELLENT article picking the article you posted apart.
http://californiashortsalelawyer.com/2011/06/exposing-corelogic/ - San Francisco, CA · Member since 2011 · 69 posts · 18 votes15y
Thank you for posting the link. In that article, the lawyer pokes holes in Corelogix's findings, but does not address what made the transaction in question in the article a case of bank fraud.
I did find the FBI's press release about the case in question:
http://www.fbi.gov/newhaven/press-releases/2010/nh021910a.htm
Also, the actual case document is here:
http://www.mortgagefraudblog.com/ee-assets/my-uploads/NATERA.pdf
The code cited in the complaint 'Bank Fraud' is here:
http://www.law.cornell.edu/uscode/718/usc_sec_18_00001344----000-.html
It would be nice if consumers, i.e., individual tax paying citizens, in this country were afforded the same level of protection as our financial institutions. Are they required, under penalty of fine or prison, to fully disclose the nature of their transactions?
- Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes15y
smitnlit, excellent rebuttal. It's always true, "The devil is in the details."
Having been a licensed California Real Estate Broker back in the 80s and 90s, it was always pounded in us to present "the highest and best" offer available to a seller. To with hold a higher offer from a seller is fraud. Fine, loss of license and in severe cases, jail time, can be the reward.
On the other hand, if an investor wants to "buy, fix and flip", all they have to do is DISCLOSE it, as per the clause that J Scott mentioned. Seller's may try to list a "holding" period, and buyers can try to negotiate it, but always DISCLOSE.
Getting back to the "highest and best," we always debated about what is "highest and best?" For instance, is a $90,000 cash buyer better than a $100,000 FHA buyer? Is a 20% down buyer better than a 10% down buyer? Is a buyer with 2 incomes (husband and wife) better than a buyer with one income, if the income is the same? And the questions continued.
I am not a lawyer and this in no way is to be considered advice, but I can't find "Short Sale Flipping" being listed as illegal, but DEFRAUDING a seller is illegal. A seller can put contingencies in a contract, especially when the seller is a bank/lender, and the contractual obligations do have to be followed. Try to negotiate them as much as possible, but no amount of profit is worth one day in jail.
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
@mikewelch
I think what the author is saying throughout the article is it is NOT bank fraud. That's what I took from it.
- Real Estate Investor · CA · Member since 2011 · 55 posts · 1 vote15y
i think the part where the agent messed up is that he intentionally partnered up with the group to take advantage of those down on their mortgages.
that right there is misleading and is comparable to insider trading and what not. and then by intentionally bypassing other higher offers to get a deal for the investor group he's partnered up with is messed up.
- Real Estate Attorney · Charlotte, NC · Member since 2008 · 54 posts · 3 votes15y
Is it legal??? Not sure... but it really sucks when the FBI shows up and starts serving your attorney with subpeonas for your files. Its happened, its stressful, scary, and very very expensive.
Before you start flipping short sales, I would suggest a call to your local attorney general and FBI field office to see how they feel about it.
Its not whether its legal or not, its all about how much it costs to defend yourself in court.. I guarantee you it will cost NO LESS than $50,000.00 to start a good defense...
If you are gonna flip in NC... please do not call me to close, I will not do it
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
Jaime,
My attorney drew up all my contracts and if you look at publications from the FBI (Mortgage Fraud Reports 2009 - latest) there are "NO CLEAR NUMBERS on short sale fraud"
I think if you even look into convictions of short sale fraud you may find UNDER 5 cases of arrest and conviction, so it's not this WIDE SPREAD epidemic that people seem to think.
While I appreciate you may be uneasy with it there is NO LAW that I'm aware of that states you cannot buy and resell the same property - even immediately. If you've disclosed to the selling lender your intentions, how do you feel this is fraudulent?
- Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes15y
Whether legal or not, you're not going to find any decent succesfull short sale realtor that really knows what they are doing that will be interested in helping you flip short sales. Its just too much liability for the realtor - the one person in the transaction who has the most to lose when someone comes asking questions.
Also - the sellers realtor works for the best interest of the seller, whose best interests are mutually exclusive from yours as the buyer.
Hence - no good or ethical realtor is going to help you here. Some bottom of the barrel, desperate realtor may, but that probably wont be helpful to you.
Learn to buy, sell and negotiate your own short sales if this is the road you wanna go down. - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
Even if as a broker owner if I call the real estate commission they will just say to anything questionable "NO" you can't do it.
Flipping short sales isn't the hard part.Being ABOVE BOARD flipping short sales and fully disclosing to all parties is.Once investors see what they will have to do to be compliant and it makes deals harder to close many will try to cheat the system or bend the rules.
When you bend the rules you ride the line and open yourself up to interpretation of the law of what is correct and not correct.
Whether it be an agent or investor when they are starving for cash many will choose to play with fire to make money.
- Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes15y
Is there an addendum that generally comes with short sales that indicates what is and what isn't expected of the buyer? Are there selling restrictions that are introduced by the lender as part of the contract?
The reason I ask is that it's not clear where the concern is about buying a short sale and then reselling it?
Presumably, a lender wouldn't have an issue with me buying a short sale, holding it for 30 years and then reselling it. And I don't imagine a lender would have a problem with me holding it for 1 year and reselling it. Even 3 months probably wouldn't draw any questions. But, if 3 months isn't against any implicit or explicit rules, why would a one month hold, or a one week hold, or a one day hold, or even a one hour hold be "against the rules?"
Obviously, I'm missing something here, but I don't know what it is (I've never closed on the purchase of a short sale before)...
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
Minna, not every Realtor understands how to flip a short sale, but there are many excellent Realtors that do, and for those elite few they do a great job in facilitating a sale.
Maybe you've run into something different in your area. The "bottom of the barrel" Realtors I meet seem to be doing BPO work because the ones with enough listings don't need that work. I would have a hard time saying any Realtor is at the bottom of the barrel but there are certainly different levels of experience that come with ANY Realtor.
I also find that it varies within each brokerage and how open that brokerage is to working with investors. Keller Williams in my experience is one of the most invstor friendly brokerages around and VERY progressive in their knowledge. PROGRESSIVE agents know how to effectively work with the particulars in contracts, aren't usually scared of new things and many of the KW agents I've met can help facilitate a short sale with ease.
I've bought and sold properties on the same day and within the same hour. The key is DISLCOSURE to all parties involved including, agents, homeowner, buyers, selling lender and buyer's lender.
J Scott hit the nail on the head. If I buy a property as an investment and sell it a year later, no one blinks. If I buy and sell 6 months later, it may raise an eyebrow (for no reason). If I buy and sell within 3 months, I may fall subject to deed restrictions and title seasoning (it's the SAME PROPERTY) - If I buy and resell on the same day the scrutiny is FIERCE and again FOR ABSOLUTELY no reason. That's why we have to have a small book of disclosures involved in any short sales we purchase. It's absolutely CRAZY.
- Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes15y
I cant speak for every realtor- but I'll tell you why I wont get involved in a short sale flip ( and I do understand what is involved very well. I also run basically a 100% short sale business, have over a 95% approval rate and close more short sales than any other realtor in the state, so I actually do know what Im doing - Im not clueless here).
Liability is #1. If I attempt to represent the seller, and the buyer (as the seller) in a double close transaction, I am putting myself right into the line of fire when this transaction goes south, or when the seller decides to sue, or some other realtor wants to turn me in to the board for being "unethical". No thanks. I run a very successfull and profitable business and I have zero desire to throw it down the drain so some investor can play middleman in my deal and make a couple bucks.
#2 - Why bother? Why would I bust my butt to get a low price approved so an investor can resell to a retail buyer, when I can just sell to the retail buyer quicker and easier myself? No need for the middle man in my deals.
#3 - I simply find it unethical representing the seller in this fashion. Its not in his best interest to sell to john for as cheap as he can, so that john can turn around and sell to joe fo $X more when we all close on the same day. Even worse if they have some tax liability or a deficiency or are asked for a prom note or cash contribution as a result. Come on now. Im not doing my seller any favors, especially when I am perfectly capable of getting the short approved (and more easily for a higher value) and giving the seller the best odds at a full settlement MYSELF - Without any flipping investor involved. Again - no need for the middle man.
Im the only midle man necessary here - LOFL.
#4 - 75% of all lenders are now issuing addendums to make double closes on short sales next to impossible anyway.So why after all that would any good realtor even want to get involved with these?
The only reason would be that they're willing to sell out their seller and put their career on the line for a chance at a double commission. Thats PATHETIC.
But hey - theres pathetic realtors out there.
And btw many of my properties sell to investors. I dont have any problem with any property being sold to an investor, and I dont care what they do with the house after close. I have listings only an investor could love, and thats who they end up with.
Just dont ask me to get involved in your double close nonsense. Seriously. Im tired of the calls and emails with promises of "double commissions".
And I do think I speak for ALL GOOD ETHICAL REALTORS here. - Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes15y
Originally posted by Minna Reid:
And btw many of my properties sell to investors. I dont have any problem with any property being sold to an investor, and I dont care what they do with the house after close.Okay, so based on everything you wrote, what I'm taking away is that the investor isn't doing anything wrong when he wholesales a short sale (assuming no restrictions in the contract); additionally, the agent is doing nothing wrong as long as there is no collusion between the agent and the investor.
So, it sounds like the issue here is when an agent colludes with an investor to get a short sale approved without actually marketing the listing to the general public. (Which I always assumed would be wrong, as the agent wouldn't be satisfying his/her fiduciary responsibility to the seller).
Is that correct?
- Specialist · MA · Member since 2009 · 858 posts · 306 votes15y
“I cant speak for every realtor- but…And I do think I speak for ALL GOOD ETHICAL REALTORS here.“
Either you do or you don’t…LOL :D …ok all kidding aside, I’ve obviously touched a nerve, which leads me to believe you’ve had a problematic experience with a short sale investor. Just like there are different levels of experience in Realtors, there are also different levels of experience in investors.
You realize you are liable no matter WHAT if you negotiate a short sale. It doesn’t matter if John and Suzi Smith buy it or ABC Investments, you’re liable. Call your E/O and ask if you can get insurance and MOST will say no. Now with everyone trying to interpret things like the SAFE ACT and all of us being compliant with MARS your liability goes up even more. SO what can you do? DISCLOSE DISCLOSE DISCLOSE.
IF you’re uncomfortable with short sale flips, I understand, but the question was ARE THEY LEGAL and the answer is YES. Since when is buying low and reselling for more money UNETHICAL. This is part of everyday business. It becomes unethical if someone is deliberately giving misleading information, or falsifying documents.
Yes your responsibility is to your SELLER, NOT to the lender. Getting a higher offer doesn’t mean you have a more qualified buyer. I have sold property and take offers $45,000 lower because the buyer had a stronger ability to close. Anyone, whether it’s an investor or retail buyer that offers cash is likely going to give you a lower offer.
I completely understand if you’re not comfortable with this type of transaction. Like I said it’s a niche market, but please don’t give the impression that other Realtors that do facilitate a sale like this are doing something unethical or they are “selling out their sellers†- There are many EXCELENT Realtors that aren’t nervous about the middle man.
We all aren’t bottom feeders and I genuinely care about every homeowner I work with.
- Real Estate Investor · Outer Banks, NC · Member since 2009 · 121 posts · 44 votes15y
2 votes for you Maryann.
I love how you keep up the fight.Minna , Minna, Minna....Really?
- Real Estate Broker · Jacksonville FL & Middletown, CT · Member since 2008 · 1k+ posts · 632 votes15y
J Scott - pretty much yes. Not illegal. Just unethical for the realtor involved.
MaryAnn- I never once implied I had any duty to the lender at all as I dont. I also never said I was looking for highest dollar either regardless of terms.
I am looking for the STRONGEST buyer and the one that is most likely to close. That is never some middleman investor who is depending on finding a buyer in order to close. In an A-B-C transaction there is simply no value to having B around (for my short sellers). You're not closing yourself. Your simply finding another buyer. Tell you what - I can do that better than you, so why not just cut B out and go directly from A to C?
Please dont come to me with "I care about my sellers" - if you did, you'd get out of the deal so they had a better chance of closing.
I am not "nervous" about investors I simply find short sale flipper investors completely unnecessary. You bring NO VALUE.
And hey there really is a difference between all realtors and GOOD ETHICAL realtors. Re-read the sentence and maybe youll get it.
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