Would this be legal?

1. The owner knows and agrees that the property is going to be immediately marketed for resale at the same time that the investor is negotiating the short sale.
2. The owner knows and agrees that the investor's compensation for 4-6 months of work will be any spread between the purchase price and resale price after closing costs.
3. The lender is informed that an investor is negotiating the short sale, and that the property will be immediately resold for a profit.
4. The lender sends out their own agent/appraiser to value the property.
5. The investor closes on the short sale transaction, with his own private funds, and resells to an end-buyer for a fair market value (according to the end-buyer's appraisal) in a seperate closing -- no commingling of funds.

Would the above scenario be legal?

It seems to me that everybody is jumping to conclusions in assuming that someone is defrauding someone.  Well, fraud has always been fraud.  Lieing has always been lieing.  Being a filthy crook has always been being a filthy crook!

Why is everyone assuming that a short sale investor must be a crook by default -- on what grounds is this assumption made?  Did anyone actually "comprehend" the title company alert?

"Before you insure any kind of transaction involving a short payoff to the existing lender, or a simultaneous closing, make sure that the following requirements have been met:

•1.    There are no violations of any restrictions listed in the short sale payoff letter or closing instructions.

•2.     There have been no misrepresentations as to the value or ownership of the property to the existing lender, the new lender, or the purchaser.

•3.     All disbursements must be made exactly as stated on the HUD-1 settlement statement, and only to parties involved in this specific transaction.

•4.     Each half of the simultaneous closing must be kept separate and stand on its own.  The sale from A to B must be fully funded and disbursed with money coming from and going to all appropriate parties.  The sale from B to C must also stand on its own.  The money from C's lender must not be used to fund any portion of the A to B transaction.

If the circumstances of your transaction do not meet the above requirements . . ."

So then, what the title company is saying is that it is okay to proceed if:

1. There are no violations of the payoff letter, or instructions.
2. Disclosure as to true value and ownership are made.
3. All disbursements are made properly.
4. No commingling of closing funds.

Now, I'm not the brightest bulb on the planet, but to me that says that there's a right way and a wrong way to do these.  Simply deal honestly with everyone in terms of disclosures, follow all instructions, don't cut corners, and don't comingle funds.

Simple!

Since when has our industry become so fearful, hateful, and accusatory?  Since when was a FULLY DISCLOSED AND PROPERLY EXECUTED TRANSACTION SHADY?

I must say I am surprised at people's attitude here in the USA towards this whole issue. Every property's value is perceived differently, and obviously if the lender was happy with a number after doing their own independent evaluation, but an investor through his know how in perhaps successfully negotiating the deal with the lender, and through successfull negotiations/marketing/perhaps even improving the property for the end user can make a profit, how is this fraud? If the short sale lender has been disclosed as well as the end user and the lending institution, how is this fraud? I am confused!!! Is it that we are bothered with investors making a profit? I dont think us as practitioners are aware of the immense cost that the banks incur to take a property back, pay all back assessments/code violations, connect utilities, secure the property, pay asset managers, etc. I have presented as a realtor many times full retail offers to banks which they refuse, or some where a modest profit for the investor would be gained, and yet they refuse them, only to then foreclose and either accept a lesser price at the auction or as an REO!!! I had an offer for $190k for a property which needed much work, the investor was willing to take the risk and put his time into fixing it before the closing so he could make a $20k profit as one of these demonised flips, and Washington Mutual denied it. It was subsequently sold for $156k at the auction, and then resold for $250k by that investor! Cant hear you screeching!!

Another time I had an offer for another house where the investor had it resold for a $25k profit, the offer was for $203k, the bank refused it and it foreclosed and listed it as an REO for $175k. The original investor was going to take care of some code violations as well and improve the house, thus producing better comps for the area. As it stands an investor bought it for $160k, and has it rented out. The result? Poorer comps for the area, a lower number for the bank.  So who is losing there?

Recently I was involved in a transaction where the property had clocked up $25k in violations, because of nightmarish tenants, whom the sellers could not evict due to lack of funds. An investor got involved, evicted the tenants at own expense, risked $8k of own money to clean up the mess and bring up to code, and managed to negotiate the violations. The house sold in the low $300's, and made a $30k profit. Had the investor not gotten involved, the property would would have sold as a distressed sale for maybe in the low $200's, and the bank would have had to pay the $25k in violations, he made a profit because he went before a magistrate and negotiated the violations down to $2500. Long live entrepreneuralship and capitalism! Maybe I am the only one who believes in the free market amongt my peers.

Guys, this is the USA, the capitalistic spirit and profit motive is what has motivated this country to be what it is, in Cuba this would be illegal but here it is not. By having this knee jerk reaction to perhaps a handful of investors who may be making $100k we're all now making these transactions illegal and we're going to be hurting more people in the process. Do we not understand the BPO process? Banks do their own independent evaluations before they accept the offers, and not under duress. If these investors were not involved who is to say the bank would be getting a better offer and simply not foreclosing and losing considerably more, like tens of thousands more per property!  I cannot believe the number of you saying that you'll keep away from them all together! How ignorant, closed and narrow minded !

Richard, you are profiting by scaremongering and exploiting realtor's fears. Should this also be illegal?

If all the title companies followed suit, we will see a greater number of foreclosures, so simply these investors will figure out a way of funding them and then flipping them. Flipping houses has been with us since the beginning of time and it always will be. Are we going to interfere with free thinking adults  who they can or cannot do business with if you are not happy with the amount of money they are making or losing if they are happy with the transaction? Who are we to tell anyone what they can or cannot do, even if they have agreed and followed their own due process? Yet this is what the Fund is doing to the banks, hurting them further by crippling a section of our community that through their skill can help someone save their credit, and save the banks the legal costs of foreclosure, the holding costs, etc etc, plus the prices as REOs are always quick sale prices, thus the bidding wars we see. They are not in the business of keeping houses, so the Fund has no business in stipulating how the bank should do their business, if they wish to sell under market value after doing their own evaluation and having a willing, ready and able buyer to sell at whatever price they see fit and they can get finance for.

Richard,

Its not about shooting the messanger, I am responding to your comment "The Seller may be getting the short end of these short sales and the Seller's lender may also be getting less than what they could get with a better contract - but no one party is getting injured - several". We are all entitled to our opinion and you are simply stating yours, but in these conversations these types of statements cannot go unchallenged.

As a realtor I work with 4 investors who use these "schemes and devices". What is it about them that bother people? OK, so on the first transaction there is an option/trust, each method have their advantages and disadvantages from the investor's point of view. They are negotiating with the bank, clearing HOA special assessments (which by the way in one transaction there was a condo association liability of just over $11k the montly maintenance had not been paid for about 18 months and the special assessments had not been paid, the investor bought the property and re sold it for a profit of $50k. Yes 50k. He should be rotting in jail right now shouldn't he? But here's the thing. Had it foreclosed, the condo association according to State law should have only been entitled to 6 months worth of condo dues, about $3k. His illegal-disgusting-jail-worthy profit was due to the fact an overseas buyer simply fell in love with the property because his parents lived there and they wanted it but still at the right price, plus the fact that the investor successfully negotiated a 2nd and 3rd liens and judgements paid in full no more liability. Had it foreclosed and sold as an REO the second and third liens would have been wiped out, the first bank may have received less money as I later saw for a similar REO listing in the complex, the end user may have or may have not been the winners of the subsequent bidding war, and please everyone know something. REO agents are not always 100% ethical. They also undervalue properties and "convice" banks of lower values, thus bidding wars. No undermarket values, no bidding wars, its that simple.

So analysing your comment about the "confusion". So the short selling banks get given an option contract disclosing that the property will be sold for profit. What is it about this that bothers you and everyone exactly? Is it that you all feel they should be told the exact amount? If I am a vegetable retailer, does the vegetable wholesaler need to agree with my end price? Would I simply not be outpriced if I charged too high, and out of business if too low? Is it their business? Does the consumer at the supermaket need full disclosure as to how much I paid for my potatoes, or do they buy according to quality and price? 

So here we have a bank who by going through their usual "reo cost analysis" which every loss mitigator must do before they submit the short sale offer to the investor who owns the loan, they figure out the cost of foreclosing, average days on the market, then the cost of taxes, insurance, HOa, opportunity cost of not lending the money, repairs of property, code violation compliance, etc get taken into account. If in their own calculation, this is a computer based program calculated by free thinking adults not under duress, with the facts as they have researched and as they stand, not misrepresented but independently gathered, through BPO pictures and phone calls to local cities and associations, if they receive more money by foreclosing they decline the offer, if they receive less by foreclosing they accept the investors offer and allow him to make his "profit" as mentioned in the option contract. Please feel free to point out the problem at this point.

The  end user gets a property purchasd by an investor previously, which after having seen 15 houses they like that one and want to buy it for the retail amount. The property gets appraised, the value comes in and they close. Please point out the problem here. Is it that they should have gotten it cheaper? But if the investor had not interfered maybe the property may have foreclosed and be in competition with the usual all cash quick closing investor so good luck to you if you are a FHA or VA buyer. Just dont look at REO's, banks dont want to know you. So now FHA and Va buyers are excluded from the process. I know as a buyers agent I dont show my FHA VA buyers reo properties, its heart breaking for them.

The seller. Do people really think its better for your property to foreclose than to sell it through an investor? The investor has submitted and argued hardship, negotiated promossory notes, paid in full contracts (the option contract stipulates that the debt will be paid in full, no deficiency judgements for the seller, and 99% of the times they accept this). Second and third lien holders receive some payment towards the debt, and later go after the seller anyway, but what I am seeing is that they are willing to take deep discounts and $50-100 a month arrangements which help seller re build credit. This is win win. In the case of foreclosure, the bank wants a quick sale, the prices are so low they attract cash buyers bidding wars, comps are lower, and now the banks go after the sellers for the deficiency. Bankruptcies are then the only hope,but since the 2005 changes its harder to qualify. I am seeing this putting deep distress in families, and things are only going to get worse not better. So who is winning here? Who is losing?

An important advantage for the seller is that their credit does not have a foreclosure, and the short sale is much easier to recover from than a f/c and then a b/k. Now this family, within 3 years can purchase another house, but as per F/M F/mac rules with a f/c they have to wait 5 years. Pay higher interet for their credit cards, insurance, etc. etc etc.

Sellers work with investors because at the end of the day its a better solution for them. As realtors we should not be involved with negotiations with banks, representing clients financial situations and negotiating arrangements, we're only opening ourselves to future lawsuits. I believe we will see realtors being sued in the future for "making" sign closing docs which the sellers will later regret. We are in the business of selling houses, not negotiating with banks.  Neither should we "outsource it" to the so called short sale processing companies, so far all I hear is that they can be worse than realtors themselves, and for the fee a distressed owner or a realtor is willing to pay upfront, out of their own pocket, that's what they get. The numbers I have heard of realtors being successful negotiating short sales is 30%, investors 70%. Some banks will foreclose no matter what. Some banks you cant do a short sale, try Countrywide and see which buyer will wait 8-10 months for an approval. An investor will wait as long as there is a profit. Realtors get discouraged after they have been working the same deal for a year and had three buyers fall through.

Now the legal profession would like to then step in and say they are the only ones who should be doing this negotiations.  At $300 an hour which distressed home owner can afford that? The wealthier ones can, and when the very "ethical" lawyers advertise they can keep the home owner with "free rent" because they can delay the process for over a year, they get the clients in that way. Is this ethical? How much more money is the bank losing here? I dont hear anyone screeching about this either! However,  the majority of the families I see in distress they panick when they see all these letters come in the mail, the lis pendants is a terrifying thing. That's why they simply give up and let the house forelcose. I hear this a lot. Also, some lawyers are happy to take the clients money every month and see if they ever communicate with the client and return phone calls. Regardless, its a quiestion of the have and the have nots, and the have nots need someone to help them.The investors do it because they then make a profit, so we need them, just like we need retailers to provide us with goods and services, and we accept the profit motive.

So what is the "scheme" as you state it? That they dont say the exact amount that they make? Do we expect that from your tennis shoes retailer, to disclose to you how much money he is making on the shoes you buy, otherwise its illegal or unethical? Do you argue you could get a better price if you dealt direct from the chinese manufacturer or wholesaler?  What about on your daily business, all the products and services you buy? YOu expect that it was sold to you at a profit, and if its too high you dont buy.

The minute we see option/trust we know there is an investor working the deal. There is a profit that will be made. Nothing can be "squirreled" away in public notices as you said before, that's why they are public notices, for the world to see, to read. The contract says who the seller is, a trust/optionee, public records verify this, an investor is working the deal to make a profit, a family's credit is going to be helped, their wages wont be garnished through deficiency judgements -my husband is a bankruptcy attorney, he sees this every day, perhaps we should run information seminars for realtors explaining how foreclosures are hurting families.

Investors make a profit, the comps are healthier, the banks agree because it saves them money, the sellers dont have a foreclosure on their credit and less risk of a bankruptcy, buyers can buy using FHA and VA loans not in a bidding war. So your comment about the parties getting injured is not correct, and as practitioners we are hurting families by not selling their properties.

Richard, you're statement, "Don't shoot the messenger," is dishonest.  Clearly, your post is biased against short-sale investors to the core.

Clearly there are two legal issues at play:

1. Disclosure to lenders.
2. Commingling of funds.

Rather than taking an anti-investor approach (please Richard, if you deny this fact you only embarrass yourself) you could have written something like:

Great news everyone!  The title companies have come up with clear guidelines to ensure that your short sale investor transactions comply with the law.  Now that we know the right way to do it, let's get out there and help as many families as we can to avoid foreclosure . . .

Instead, you choose to feed on the fears of real estate agents, most (not all, so to borrow Richard's excuse phrase, "Don't shoot the messenger") being very unsophistication when it comes to the world of business, and get them stumbling about themselves.

An attorney competent in business transactions in general and real estate transactions in particular can ensure that PFIB (pre-foreclosure investor buyout) transactions are done properly and in compliance with the law.

It's that simple.  Why you choose to go the route of fear-mongering I'll never know -- perhaps you don't know enough about how to structure transactions properly that the thought of doing so scares you and you let your own personal fear spill over into the real estate agent community?

Shoddy work Richard.  Shoddy work indeed.

Richard you are right!  I want to be able to point the exact law out to people that I am dealing with, so they know that I am dealing in FACT, not opinion.

Exactly which law requires a prior owner to disclose to a buyer's lender that the previous sale was for a lower price and that a profit is being made on the resale?  Can you direct me to the statute?  Perhaps it's case law; which case establishes this precedent?

I want to deal in FACTS.  Can you provide me with the FACTS, so that I can put the crooks in their place?

I realize that lender POLICY are not LAWS.  A lender is free to adopt whatever internal POLICIES it wants, and as such (it being nothing more than an internal policy) has NO FORCE with respect to third parties dealing with the lender.

I'm tired of these crooks taking advantage of the system!!!

What is the exact law -- either statute, or case law -- that requires a seller to disclose to a buyer's lender when he purchased a property and that if it is being resold for a profit, the amount of that profit?

Now I'm confused?  What are the actual laws involved?  Let's put this to bed once and for all . . .

But you keep assuming that someone is lieing to someone!  You are the one who doesn't GETIT!

The conversation goes like this:

Investor:  Mr pre-foreclosure lender, I am an investor and I will resell this property for a profit if you let me buy it on a short sale.

Pre-foreclosure Lender:  Okay.

Investor:  Mr end-buyer, I am an investor and I bought this property to resell for a profit.

End-buyer: Okay.

End-buyer's lender: Mr Investor, do you have the legal right to convey this property.

Investor:  Yes

End-buyer's lender:  Are you making a profit on the resale of the property.

Investor:  Yes.

End-buyer's lender:  How much profit are you making?

Investor: Did you do your own appraisal on the property?

End-buyer's lender: Yes

Investor:  Does the end-buyer qualify for a loan under your credit standards?

End-buyer's lender:  Yes

Investor:  Am I your client?

End-buyer's lender: No

Investor:  As the seller am I obligted to disclose my personal finances to you?

End-buyer's lender: No

Investor:  Okay then.  I bought and closed on the property with my own funds and I now have title.  I am reselling for a profit.  Since I am not obligated to disclose my personal finances to you I won't.

End-buyer's lender:  But we demand it.

Investor: Too bad.

Nobody is lieing to anyone!  The end-buyer's lender can choose to go through with the deal, or not.

Have you all gone mad?  Can you not see how convoluted your thinking is?  Is this a communist state, or the United States of America?

Richard, is that it?  What if you don't make a false statement to a bank?  I thought you said these are illegal?

Best!

John

Richard, I think that John poses a very valid question. If you do not make a false statement to the bank, how then can these be illegal, in any sense of the term?

Richard, clearly you are biased against these deals.   Why do you continually make up examples of fraudulent transactions and hold them up as the way all of these deals are typically structured?  PROPERLY structured:

• First, the short sale lender is told on day one that an investor is buying the property and it will be resold for a profit -- now don't forget this point again, as you have in every single response you've given thus far.
• The investor clearly lets the bank know that no such 30-day resale clause will be acceptable and if such is included the deal will be off.

Take your scenario, leave out the fraud, and now you have a good deal.

DID YOU HEAR THAT EVERYBODY.  These deals are doable -- you just need an honest attorney and title company that understand the process, and you must let the lender know up front that you intend to resell.  As long as you do not comingle funds, the deal is completely legit.

If anyone tells you otherwise they clearly do not real estate transactions.

I echo the sentiment of the last comment - THESE DEALS DONE IN A LEGAL MANNER ARE A WIN, WIN SITUATION FOR EVERYONE INVOLVED!

You just need to have an honest lawyer & title company who understand the process.

Where these fail is in the lack of understanding by certain parties involved in these transactions. Sometimes that is the investor/buyer, sometimes it is the lawyer, sometimes it is the realtor, etc...

There are definitely investors out there who are trying to commit fraud, just like there are lawyers & realtors doing the same, just don't throw out the baby with the bath water. We have closed many transactions that comply with the exact terms laid out at the beginning of this post. And, I know people who have legally completed 100's of these types of transactions throughout the United States.

Many times on Activerain I have seen people bash these transactions because of a lack of understanding or because of an experience with an unscrupulous investor. If we all stopped learning, or doing business, because of bad experiences with certain people in a profession, we would not be able to do business anymore. Don't let a few bad apples spoil this great way to make money, while helping people out of foreclosure.

Travis,

You and "anonymous" cleared up many of the things that Richard left out/avoided -- thanks!

Do you know an attorney who knows how to do these the right way and isn't afraid of helping families out of foreclosure?

Thanks!

John

John, you will need to get in contact with a local attorney or title company, as the exact process is state specific.

It may take a little legwork, but there are attorneys & title companies who will close these transactions all day long. Just keep looking if you run into some roadblocks.

Thanks Travis!  I guess it's like anything else, there are experts that know what they are doing and then there are others who just act like it.

From what I can see here, nobody has come up with a single reason to not do these other than "don't commit fraud when you do it,"  well duh!

Best!

John

I occasionally hear, "a short sale will hurt the homeowner because of a possible deficiency". I thought that letting their over-leveraged property get foreclosed also carries a risk of deficiency. With the short sale one at least has an opportunity to negotiate away a deficiency. I am not aware of any such opportunity for the foreclosed property. As for the deficiency being higher on a short sale versus a REO it just might be a coin toss.

Amen to #52!

I am only addressing properly done transactions that are fully funded, properly disclosed, and no outside of HUD-1 funny business. YMMV

It appears some RE Professionals believe that parties to a transaction must disclose information about that transaction to parties outside of the transaction. I am not an attorney but it would cause me some concern that a disclosure could be a violation of the law and/or harm one or more of the parties to the transaction exposing the disclosing party to a possible lawsuit. I like to provide full disclosure but I would think it is obvious there is a limit to what can be disclosed to those that are not party to a transaction. Some RE experts may think that this is fraud but I am not so sure they are correct.

Problem solvers are desperately needed in our housing market. Instead of, "you can't do that" how about, "it won't work that way but we can help people this way and still be in compliance."

Hidden in plain sight??: "Just because a document is squirreled away in the public records..." #20 Why would an end-buyer's title insurer NOT look at public records very closely? Especially, since there are supposedly many fraudulent transaction happening under their watchful noses. Isn't typical title insurance only covering their own mistakes in searching what is in the public record? I have to believe they are actually looking at public records with a very discerning eye.

The only party more disparaged than investors in this thread appears to be (not mentioned by name) loss-mitigators for multi-billion dollar lenders. Apparently these billion dollar companies cannot afford to hire anyone that is not apparently so stupid they cannot even figure out what is in the best interest for their employer on a given property even though that is their primary job responsibility. Wow.

As an investor I take care of my distressed seller (do what is best for them), the agents and brokers in the transaction (proper compensation), the end-buyer's lender (conservative LTV based on conservative purchase price), and the end buyer (good deal for them). Would someone suggest that after I do all this I also need to somehow take wonderful care of the seller's lender and not have my experts negotiate the best deal possible for myself and all of the other parties I am working to protect?

I stumbled on this blog after looking for information on the legality of short sales.  I am a licensed settlement agent and have been in the business for over 20 uears.  The "flip" sales that were an issue in the 90's was because of buyers not having "disclosure" that the property was bought at foreclosure by their seller and a large profit being made.  What was happening then was that some deceitful people (ie appraisers, lenders, agents and title companies) were overstating the real value of those foreclosed properties and getting uninformed buyers to buy them at inflated prices.  Most of the time, these properties had issues of some type that the "seller" did not disclose and then the buyer was stuck with a lemon.  This was collusion plain and simple.  But we got past that thank goodness.

Now I see these short sales and am being asked to do them on a daily basis.  I don't have a problem with them if they are completely disclosed.  I have made a requirement of my "investors" that they have the short sale lender(s) acknowledge in the contract (option or otherwise) that the investor is going to sell the property immediately for a profit.  I have run this by my title insurance underwriter and with "full disclosure", these should not be a problem.  I got a call from a friend who is an attorney today and he told me that the FBI just shut down a title company for doing "short sale flips".  But the issue it seems is that they were not doing 2 complete settlements with good funds on the first before settling on the second sale.  I also require that the state realtor contract have a separate addendum stating that the seller is an option contract purchaser and that they are negotiating a short sale with the record owner and their lender which will result in a profit to them with same day settlement. 

I am worried that the FBI is now involved in this.  I do handle settlements for REO lenders and see properties get sold for significantly less than what was owed on them.  They are not required to have "seasoning" to do an FHA, VA, Conventional or Rural Housing loan to purchase these properties.  Why is it different for the banks to sell them for a much lower price than they are worth, but not an "investor" who has negotiated a short sale.  These banks have lost so much money, it seems that they should be allowed to save some money by getting these bad loans off their books. 

Is there a legal reason that the FBI is getting involved??  Please give me some input.

Thanks,

So if we get full disclosure from Seller and Bank to buyer "b" and full disclosure from "b" to buyer "c" acknowledging the intent to resell the short sale for a profit immediately, then this is a legal transaction?  2 full settlements with 2 complete fundings is also the "legal" way to handle these transactions.

Great Dialogue from all hands!  That is why I love this country.  Everyone's entitled to an opinion and we don't get shot for it.  Awesome! I love it.  Let's keep it going. 

However we are not addressing Richard's main question which is in regards to the End Buyer's Lender needing full disclosure. 

I do believe full disclosure is key in these deals, but the question I have to ask myself is:  Do I ask Nike or Addias how much they manufactured my $80-100 shoe, even though they are cost of good sold runs for $1-5 made from a 3rd world country, do I question Men's Warehouse how much their so called $175 suit when I know it cost them $20-25 to make? Do I question Ford on how much they manufacture their 5K Fusion and retail it at 22K? Do I question Wal-Mart on everything they sell even though I know they are making a killing?  No we do not. What's the difference when it comes to houses?

  We must remember the end-buyer if they are not in the Real Estate game they do not look at the same lens we RE professionals do.  The End-Buyer looks at comps and the value in their own eyes.  It's up to them to make that decision.  Once they make they make a decision it is their responsibility to get their financing in order. If they use cash, more power to them. If not, and they need to use the bank, good for them too, but they now lost their right to say how much they pay for a particular property.  If they bank decides to finance them, the banks should be savvy enough to do their due diligence and know what the true market value is using their appraisal report based on know short sale price & retail prices.     They don't need to know how much the investor got the house for.  It's not necessary.  If they wanted to know they should talk to the short sale lender not the investor locking in the price. If I was the End-Buyer Lender in this market I would strictly base my appraisal or my reason to finance my client on only Short Sale & Cash Only comps period.  That is the true value today, but they don't and it's their fault not doing their due diligence correctly or they should higher another appraiser. If I was the bank again,   I would never allow my clients which would be the End Buyer to buy full retail, but that's the investor in me talking.  All the end-buyer lenders in my experience of the 50+ short sales of done is if the buyer can afford to pay the loan and if the LTV is close enough to the market value.  They could give a damn about who is making 100K or more as long as they get paid all their interest and the original loan 15-30 yrs from now... 

Banks are interesting entities. They are in the business of making money!  Let's not forget that.  Once again, I'm for full disclosure but is it necessary for the investor to disclose to the End Buyer Lender on what we were able to purchase our Nike Shoe, Ford Fusion, Italian Suit, all my Wal-Mart Good and Single Family Home when we are selling to their clients.  Absolutely NOT!  If the end buyer lender wants to know what we paid for the SFH, I would tell them that they are in the wrong business and should be in the Residential Construction Business.  Their business is on making good solid loans to people that can pay them and if they were to default, would they be able to resell their new asset which is the property not the end buyer which was the original assets within 15-30 days in today's market. If they are not willing to get a little elbow grease and learn their market on who they make loans to and the area their collaterals will be located at, then shame on them for making their loans.. 

Morale of the story: Let the End Buyer's Lender make their own decision on whether or not they should make their loan to the End Buyer based on their own due diligence   If it's a bad deal, I wouldn't finance project much in the same way if I would finance a new business.  If I was the bank I would not be loaning on unless it was back to 2002-2003 Prices which were we should be really at! 

Great question Richard!  This was a great dialogue to learn from everyone's feeling on the matter.  We have much to learn from each other.

WOW!

Applause to all of you guys.  You know I also asked myself if this is ethical or not.  Look at all the parties involved and the effects and cost to foreclose.

Traditional short sale

• Property is listed - Seller agrees they need to do a short sale
• Realtor gathers documents from the seller which takes weeks because realtor is unfamliar with the process of each bank
• Then submits for an approval
• Bank says we will not start any file without an offer
• Agent drops price to get an offer
• Usually 2-3 months go by until you get an offer
• Agent submits offer and try to work the deal
• Interior BPO is trigger
• Bank usually take anywhere from 2 to 6 months until an actual approval
• Buyer usually walks because they find a home the are able to occupy and usually in better condition

Seller gets forclosed on and agents doesn't get paid.  Seller get credit score effected anywhere from 200-280 points. Bank hire laywers to foreclose, cleans up property, Property taxes, home deteriort, Code violations, outsource to asset company, property cost to clean up and repair, realtor then gets involved and does BPO, and then property finally goes back on market and usually for a discounted price.  Price incurred by the bank?  I have heard it could cost any where for total cost an average for $25,000 to $35,000.  This is for the total complete process from A to Z.

Investor

• Investor give seller all of their options (Full Disclosure)
• Investor knows what the bank needs (Bank is also aware of the intent of the investor)
• In the offer investor also has verbaige to have this account settled in full!
• Makes an offer = negotiations start immediately
• BPO is triggered
• Because offer is in foreclosure is extended
• Price is agreed
• Buyer or Investor is generated
• Property close

Seller moves on with their lives to start a new life.  Agent gets paid.  Bank does not have to foreclose.  If you add up all these types of deals, banks could save millions.  Our economy is slowing recovering instead of having hundreds of thousands of more foreclosures.  Also, if negotiated properly the seller could get a 1099.  Mortgage Forgiveness Debt Relief Act of 2007 will eliminate taxation on debt forgiveness until the end of this year.  I think they will extend this.

4 Wins - BANK/SELLER/AGENT/INVESTOR - Stop reading and go make some money!!!  Great topic!!

It has been until 2012.

http://www.irs.gov/irs/article/0,,id=179073,00.html

To address a comment earlier regarding approval letters stating theres no reselling the property for 30 days, that is one lender (Bank of America).  No other short sale lenders object to this type of purchase and re sell at this time.

"The Fund" has reversed its position -- it appears that those who were ridiculed for disagreeing with the Fund's position and advocating on behalf of legitimate short sale investors were right all along.  They have been vindicated by the very same folks who put out the wrong information in the first place.  See below:

UNDERWRITING BULLETIN

That fund bulletin is directly from the www.thefund.com  it applies in florida as well.  I think the issues you are all discussing come down to whether it is still legal to use a trust to hide the sale of intangible property.  Walt Disney does it all the time.  The answer is yes, it is legal.  Trust law is well settled.  Ethical? Thats a judgement call.  An investigator can decide its not ethical and try to find something else you did wrong.  So if you do these deals the way the fund advises, make sure you are not skipping any steps or doing anything else that may draw unwanted attention.  That includes making sure all parties in the transaction are happy with the end result and kept fully informed.  There is no legal requirement that the purchaser's bank know about an intangible transaction of rights.  They can see the trust on the title commitment and each bank can make their own policy regarding trusts.  Its not that difficult to do.  

In Michigan as well the only sales are short sales.  Sad but true.

Aric K. Melder
Attorney at Law
Melder & Melder, P.C.
2304 East Eleven Mile Road
Royal Oak, Michigan 48067
Telephone: (248)-541-3400 or (800)-LAW-5454
Facsimile: (248)-541-6332
E-Mail: aric@melderandmelder.com
Web: melderandmelder.com

Vindication of Back to Back Closings!

Below is an excerpt from one of the leading real estate attornys in the U.S.

"In the middle of the summer of 2009, there was much fear and hand-wringing over whether short sale transactions where investors were involved could be done. Some investors were running around screaming "the sky is falling, the sky is falling" because of the newspaper publicity over an underwriting bulletin issued by The Attorney's Title Fund services in Florida.

Recently, another underwriting bulletin was released The Attorney's Title Fund. It was released on September 4, 2009. There was no media buzz, there was no hand-wringing, there was no hue and cry. Why? Because it quietly and simply vindicates exactly what I and Strategic Real Estate Coach have been teaching since 2007. See The Fund bulletin of September 4, 2009 for short sale transactions.

One of the purposes of the option contract is to disclose that the intermediary has a right to sell. Not only is it disclosed in the option contract, it also disclosed in the recorded notice of option. Print the bulletin out, show it to your title companies, and obviously show it to all of the naysayers who say that what you are doing is illegal, because now you have even more proof that what we are doing is not only permissible and legal but it is also insurable from a title underwriting point of view.

See, I told you so."

I am an investor and work with lots of local investors.  Here are some answers to your speculations.

MYTH: "The investor tricks the bank into selling for less"

TRUTH: The bank pays for an appraisal of the property and I have never heard of a BPO Agent or Appraisal 'in-kahoots' with the investor.  The problem is that the bank is soo cheap that they will not pay for an appraisal and count on a newbie Agent (BPO) to 'price' the property.  The bank got their 'Value' and made an educated decission.  There is no'Trick' to that.

MYTH: "It is not ethical to re-sell a property the same or next day for a profit"

TRUTH: Yes it is ethical. 

    REASON #1) If You and I were both looking for a home in the same area and over dinner I just happened to mention that I locked in a contract on a house that you would 'die for' at a price you would 'kill for' .. should I have the right to make you happy and re-sell you the property?  Yes. And if found the seller and negotiated the contract .. I want to make a profit for giving you such a great deal on the home you wanted much more than I do.  Is that unethical? I do not think so.

     REASON #2) Think of the investor like a Used Car Dealer.  Does the used dealer give you 100% market value for your car? No.  He buys it at 'wholesale' (say 70% value), may have to make repairs, market for a new buyer and then finally sells it 'Retail'.  You could call this 'Flipping Cars' if you wanted to.

    Same applies to investors except with houses. A Motivated seller contacts the investor to sell their home at a wholesale price (70%), investor may make repairs, markets the property and resells it to a retail buyer. Same exact thing? YES.  Is it unethical, no.

     REASON #3) In the 'art' of negotiation, the Buyer is ALWAYS looking to get the best possible price. It is not the investors job to pay more money bc they feel bad that the lien holder is ignorant about its own assets.

     REASON #4)  I cant count how many times I have had short sales refused and then see the property LISTED with an REO Agent for $20k less than our offer a month earlier. Or maybe a pipe bursts while the property sits vacant and knocks $100k off the value.  How much money did they save now?

I am representing an end buyer on a short sale that has an investor involved in the middle. The listing agent has not been involved since the original offer was presented. All contact for us has been with the short sale investor who has been doing the negotiating with the lender and whose name was on the contract as the seller. The investor told us that the lender agreed to $372,000 but because of seasoning issues, the buyer will have to bring two checks to closing, one for $360,000 to the lender and another for $12,000 to the investor. It is obvious that the $12,000 is his profit and the buyer is OK with this, the investor's dishonesty notwithstanding, as he feels $372,000 is a good price for the property. The buyer is getting an 80% mortgage on the $360,000 contract price. It all smells to me but I can't figure if any legal or ethical lines are being crossed. Any thoughts would be appreciated.

Hey Everyone,

In case any wants to know The Fund Revised this back on September 2009. Their new bulletin clearly states the disclosure to the selling lender is no longer required. The "right to resell" must be included in the contract.

"it is no longer required that the “true sales price/value” be disclosed to the original lender as long as the intermediary’s “right to sell” is disclosed in the purchase contract."

http://www.thefund.com/portal/news/index.jsp?id=1011699#item

It only makes sense they are two separate transactions. If you sold your car to a dealer for $4000 and he has a buyer waiting to buy that same car for $6000. Is it the sellers right to know the dealer is selling for $6000. Of course not, it's basic capitalism.

More and more lenders. No including FHA are making waivers so investors can buy distressed properties and resell them quickly. See Wells Fargo new credit policy again allowing for short sale flips with proper disclosure. The market is changing every day.

 By the way I value Richard's opinion very much. He has an opinion that the seller should not sell his property to an investor because they are getting short changed. My only comment is sometimes the seller would not have sold the property without the investor. We are the only ones that stay in the deal till the end, while other buyers would have walked away long ago. All ethical investors truly want to help the homeowner, but we can only help so much. We need to make a profit to continue, we got bills to pay.

Thanks for listening.

Ever

I'm starting to notice a common theme in Richard's posts and it's one of fearmongering.  I guess that's one way to get people's attention but couldn't you just tell agents the CORRECT way of doing a flip instead of reinforcing the fears their uninformed minds already have?

I've been a licensed realtor in CA for 18 years.  I am also an investor who uses the business model mentioned.  Transactional funds are used to purchase the property and re-sell it in a double closing, which is totally legitimate according to FNMA, Freddie Mac and now FHA based on their recent guideline change regarding legitimate property flips.

http://tinyurl.com/4f3bjo

http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924xA.pdf

The state of California is extremely protective of consumers and if it can be done here legally, it can be done anywhere.  (These deals in fact are happening around the country, every day) Here in our state the distressed seller has become a protected species and the utmost care must be taken to make sure they are represented and that the listing agent is not involved in any other part of the transaction and owes no fiduciary duty to any other parties involved.

AS someone else has alluded to previously, arbitrage occurs every day in business. Welcome to capitalism. 

"Realtors," in all their wisdom, often ask the question "how can a property have two prices on the same day?"

The answer is that a distressed property has a lower inherent value than a property which has been taken out of the distressed category. Realtors, ask yourself why buyers and their agents will pass up a short sale listing to pay a higher price for a non-short sale listing.  There is your answer.

The one thing that really irks me about many who call themselves Realtors is that they don't realize that once someone is in default and heading for foreclosure, their fiduciary duty is not to get the highest offer for their property, it is to get them OUT of foreclosure.  The best solution to their problem is a quickcash sale.  The buyer who offers top dollar is often a marginally qualified FHA buyer who may likely fall out of escrow or lose interest in the property mid-escrow. As we all know, the banks usually keep heading towards foreclosure full steam no matter what the status of the short sale and often do sell the property out from under a homeowner despite them being in the middle of negotiations.

(I have seen this happen to so-called "distressed property specialists")

Realtors are really doing their clients a disservice when they stick to the standard "highest offer" mode of thinking while dealing with a client who has an impending foreclosure sale date. 

I'd go so far as to say they are committing malpractice, especially if the home is sold out from under the seller while he is waiting for his realtor to get the "highest offer."

http://getoutofforeclosurenow.com

The best offer is the one that will close.

Sorry, I inadvertently posted the wrong link for the FHA revision.

Here's the correct one.

http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-011