Last week I wrote an article about the opportunities in the short sale market; especially with other investors who bought at the peak of the market. With the large number of properties being advertised as short sales on the MLS, it’s become easier than ever for new investors to try their hand at this strategy. Many real estate investing info products have been developed around this technique and many investors have had success following these strategies. That said, most of the investors that I see in this space end up walking a very fine line that could land them in hot water if they are not careful.
The strategy most wholesalers attempt to employ when working with short sales is a technique wherein the investor buys the short sale from the distressed seller (with the banks agreed upon discounted payoff) and sells it for a profit to a different buyer all in the same day. Most people either call this type of transaction a “flip” or a “back to back” closing.
Most investors assume that they have a right to negotiate the best deal possible with the discounting lender while at the same time negotiating a higher price with an end buyer. Some real estate professionals would argue they do and some would argue they don’t. In either case, the bigger issue comes down to who is privy to this information. Where investors can unknowingly find themselves in dangerous territory is when the full extent of the transaction is not disclosed to the discounting lender involved in the short sale. And truthfully, any short sale that involves a back to back closing should really be accompanied by a litany of disclosures to all parties involved, not just the discounting lender.
I would speculate that in many instances of mortgage fraud, investors simply didn’t understand their duty to disclose information to involved parties. I think many new investors get excited about the latest and greatest techniques to “flip” property, but don’t have a healthy understanding of how to structure and disclose the transaction appropriately. Often times, trouble could have been avoided had the investor simply disclosed his/her intent. Granted, in doing this you will probably lose deals in the process; but, it’s better to be forthright and lose a deal or two than find yourself on the wrong end of an investigation.