Short sales and double closings - the good, the bad, and the ugly - Part 1

By
Real Estate Agent with Sand Dollar Realty Group, Inc. BK627826

Short sales and double closings - a controversial subject to sale the least. Many Realtors have never even heard of this type of transaction while many real estate investors have done dozens of these transactions successfully.  There are even some very highly respected real estate "gurus" out there teaching how to do these.  Just do a quick Google search and you will find several people selling courses and trainings on how to make giant profits by doing these type of transactions.

short sale realtor orlando central florida double closing 

Basically the short sale double closing concept comes in 2 forms.  Both transactions involve a homeowner being upside down with negative equity in their home and the homeowner no longer being able to afford the payments. During the many months that it takes to negotiate a short sale with the owner's lender, the investor finds a buyer willing to pay more for the house than the investor is paying.  Then the investor collects the spread at closing.

(1) The first form of this transaction involves a double closing (a/k/a simultaneous closing a/k/a back to back closing). Homeowner "A" owes $200,000 on their house.  Investor "B" signs a contract to purchase the house for $130,000.  Prior to the short sale being approved and the deal closed, the Investor "B" finds a Buyer "C" who is willing to buy the home for $150,000 and signs a purchase & sale contract with "C".  At closing, "A" sells to "B" for $130K and then a short time later (typically the same day), "B" sells to "C" for $150K.  "C" ends up owning the home and "B" walks away with the spread of $20K minus some costs. 

(2) The second form of this transaction involves an option agreement.  Same scenario and numbers as above except instead of a contract to purchase the house, Investor "B" signs an option to purchase (instead of a purchase & sale contract) for $130K.  Then Investor "B" finds a Buyer "C" willing to pay the $150K.  "B" either agrees to assign his option agreement to "C" or agrees to release his option for a fee.  At closing, "A" sells directly to "C" for $130K but a fee is paid to "B" for the option assignment / option release.  Again "C" gets the home and "B" gets the spread.

Some Investors "B" actually go so far as to get a deed from the Homeowner "A" and record it.  Often titling the property into a land trust with a name similar to the previous homeowner but with the Investor "B" as the trustee controlling the property.  An example ... owner is "John Brown" who deeds the property into "Brown Family Trust dated x-x-2009, Short Sale Investor LLC as trustee." 

Now to many Realtors and most laypeople, this is extremely confusing.  You may even want to re-read the examples above.  But for so many investors, they know this stuff backwards and forwards. Like I said, check out all the courses and boot camps available via the internet.

The Good -

There is nothing inherently wrong with making a profit, even a very large one on a real estate transaction.  This happens all the time.  A homeowner has to sell cheap because of a distressed situation - foreclosure, divorce, re-location, hurricane or fire or termite damage, probate, etc. An investor buys a great deal because they are willing to buy the house in as-is condition without a financing contingency and close in a matter of days or at most a few weeks.  And if the investor can find a buyer prior to closing who is willing to pay a little more, then good for them.  Until recently most of these deals did not involve a short sale, so the time from contract to actual closing is often under 30 days. However it seems like probably 1/3 of the deals out there anymore are short sales, so they need to be dealt with.

In fact on the second short sale deal I ever completed (back in 2001 before short sales were a household topic), I did this exact same scenario.  I wasn't quite as creative though.  I simply assigned my contract for an extra $5,000 and my assignment fee was right on the HUD-1 statement for everyone to see. Seller deeded the property to Buyer and I got my $5K for negotiating the short sale and getting the deal completed.

In another non-short sale deal that I did last year, I bought a house for just $25,000, closed on it using a line of credit, and 3 days later re-sold it to another investor for $40,000.  A nice profit for only 3 days holding time.  I did have to double close on this property, so the original owner was unaware of my end buyer and so my end buyer was not aware of the full amount of profit that I made.  Didn't matter, there is nothing inherently wrong, illegal, or unethical about buying low and selling high.  

In fact, there is an absolute need out there for these type of transactions.  Sure some investors doing this can be portrayed as vultures (and I will elaborate on that in Parts 2 and 3).  However, I can't tell you how many times I have seen Realtors listing short sale properties who were completely clueless on what they were doing. If you don't have an offer on the property, then the bank typically will not even talk numbers to you. And how many of us have seen a retail buyer offer to purchase a property and then 3 months later, they have disappeared and the seller has to go and find yet another buyer (who will probably offer even less).

With an investor deal, THE INVESTOR IS THE BUYER so the negotiations get started almost immediately.  And obviously the investor is in the deal to make a profit, so you cannot begrudge them to expect getting a paycheck out of the transaction.  After all this is still America.

I will say though that ever since short sales became commonplace in the market starting about 2007, that I have removed myself from the double closing / option closing aspect of these transactions for various reasons that I will elaborate on in Part 2 and especially Part 3 of this article.

Next time I will discuss the Bad (Part 2) and the Ugly (Part 3) of these short sale double closing transactions.  Stuff to look out for and stuff to stay far away from.  Until then ... make some offers.  

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(Copyright © 2009. Sand Dollar Realty Group, Inc. All rights reserved.)  

Rob Arnold - Your full service and investor friendly Realtor ® in Orlando and Central Florida.

407-389-7318 / 1-877-389-7318 www.SDRhouses.com   www.WeBuyHousesFlorida.com 

We sell foreclosure, short sale, and bank owned REO house home throughout Central Florida, metro Orlando, and the Space Coast. We sell and list Central Florida real estate and Orlando real estate. Free list of foreclosure and short sale houses available.  Our firm also provides flat fee MLS listings, For Sale By Owner, and menu-based services in most parts of Florida including Orlando, Altamonte Springs, Apopka, Kissimmee, Sanford, Lake Mary, and Deltona.

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Rainer
85,933
Bob Murphy
Re/Max First - New Albany, IN

Your double closing sounds a lot like "Flipping" to me which is illegal.  If I'm not mistaken there is a 90 day seasoning period required by a lender before lending on a property.  Which means the seller must own a property before a lewnder will lend to a new buyer.

Aug 30, 2009 04:38 AM #1
Rainmaker
932,975
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Bob - Flipping in and of itself is not illegal.  Loan fraud is what is illegal.  The 90-day seasoning requirement is only for FHA loans.  Some conventional lenders also provide closing instructions that require deed seasoning.  In both of the examples I gave, the end buyers paid all cash so no loan was involved.  I can buy a home for 25K, sell it to you for 30K, you can sell it for 35K, and the next guy can sell it for 40K.  As long as no loans are involved, there is no problem.  It is perfectly legal pretty much everywhere even without a disclosure.

Aug 30, 2009 05:40 AM #2
Rainmaker
670,845
Sandy Shores FL Realtor®, Melbourne Real Estate
M & M Realty of Brevard Inc. - Melbourne, FL
Brevard County Real Estate, Florida's Space Coast

Hi Rob, We are seeing and hearing of many of these same types of transactions in our neck of the woods, too.

Aug 30, 2009 07:46 AM #3
Rainmaker
516,073
Russell Lewis
Realty Austin, Austin Texas Real Estate - Austin, TX
Broker,CLHMS,GRI

Oh man...this is such a well written and comprehensive post on the subject. I am just glad we have managed to basically dodge the bullet this time around in Texas!

Sep 01, 2009 01:47 AM #5
Anonymous
Ethan Tilton 1st Choice Home Buyers, LLC www.IBuyThem.com

Keep on educating those Realtors Rob! Great post on shortsales

Sep 01, 2009 07:59 AM #6
Rainmaker
299,825
Heather the Realtor Orlando, Lake Mary
LemonTree Realty - Orlando, FL
First Time Home Buyers, Bank Owned Homes

I was contacted by a company that does this on a full time basis they wanted me to be their realtor. I just didnt have the time to do this and it didnt fit my business model but there is nothing wrong with it. Good post.

Sep 01, 2009 09:22 AM #7
Anonymous
Joe MacGregor

Great Post Rob! Keep them coming.

Sep 01, 2009 10:08 AM #8
Rainmaker
1,136,378
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Rob, These are certainly areas where your average agent can get themselves in a lot of trouble. Legal if handled properly. Of course when it's a short sale it becomes more complicated. Many of the lenders will not allow assignable contracts and even prohibit another title change for a certain period of time after closing.

I made a choice along time ago to broker deals for sellers and buyers and to stay out of the ownership loop. Unless I'm buying rentals for myself or flipping after holding for a while. I'm just not comfortable doing simultaneous closings and quick flips.

Sep 02, 2009 11:00 AM #9
Rainmaker
932,975
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Bryant - I actually stopped doing any sort of of buying of short sales back in about 2005, but I still made a few unsuccessful offers until 2007.  The State of Florida and the feds have started making all sorts of new laws regarding this issue, so I figured it best just to get out of their way.  I am going to elaborate a bunch on this in the next part of these articles.  My only investing anymore is my rental properties and the occasional quick flip. 

Sep 03, 2009 01:27 AM #10
Rainmaker
277,784
Jim Paulson
Progressive Realty (Boise Idaho) www.Progressive-Realty.info - Boise, ID
Owner,Broker

Great post.  My two main concerns on these are:

  1. Is the investor disclosing they are selling an interest in a property they don't own and covering that with a disclosure "subject to them acquiring the property".  I am close to bringing a claim on another Realtor that is doing this without disclosing it since I brought a "ready willing and able buyer" to closing that didnt' happen since he couldn't close prior to flipping it to my client!
  2. If they are selling the "option" through a Realtor, is the Realtor a licensed "securities dealer" via the SEC?  There will be lots of lawsuits forthcoming on this!

Also, so many people are disregarding the "due on sale clauses" on the original deed of trust.  When the banks get their heads above water again and start putting even 1% of their bail out money toward attorneys to sift through the wreckage . . . let the agent/agnecy beware!

Sep 06, 2009 07:04 AM #11
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Jim -

1. A licensed real estate agent cannot be in contract to sell real estate with a person who is not the owner. Option contracts do not give ownership to the investor until the option is exercised. So if you catch a real estate agent listing a property for an investor who only has an option on the property, you might want to contact that agent's broker or the state department that handles real estate transactions.

2. You don't need to be a licensed securities dealer to broker option contracts. You are thinking about stocks where we are talking about option contracts on real property.

3. The "due on sale clause" does not apply here because:

 A. The lender MAY call the loan due if there is a transfer of legal ownership.

 B. On a option contract, when the contract gets exercised, usually the buyer flips it before the lender calls the loan due.

 C. You can transfer your property into a trust without violating the "Due on sale clause".

 

Rob - Very good blog. I know these flips inside and out. I am waiting for the Ugly! I have developed a short sale system in which I eliminate the investor and get the same results. I will comment when you are finished.

 

Sep 06, 2009 09:56 AM #12
Rainer
27,974
David L. Montgomery
MULAMONT REALTY, LLC - Pontiac, MI
David L. Montgomery

I had an investor that would find, fix and flip.  Then sell on land contract (contract for deed) and then sell the paper to instiutional or individual investors.  As then end drew near even they wouldn't buy without seasoning.

I applaud your technique especially in these times.  But I have one question; why would a buyer purchase a home that has passed through 1-2 others at an inflated price?  What's the incentive?

Sep 06, 2009 10:14 AM #13
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

David - Because the buyer is still getting a great price. You short sale a property at 170k which is worth 210k and the end buyer gets it for 200k and the investor made 30k and your buyer got a great house at or below fair market value. By the way, the investor used flash cash so he made the 30k without fronting any of his own money.

 

Sep 06, 2009 10:50 AM #14
Rainmaker
985,556
Bob Souza (925) 513-3400 & Leilani Souza (916) 408-5500 Souza Realty - Real Estate Broker in Placer County, California
Souza Realty - Roseville, Rocklin, Granite Bay, Loomis, Penryn, Newcastle, Lincoln, Auburn, Meadow Vista (Placer Coun... - Roseville, CA
Homes & Land, Real Estate Investments and Rentals

Thanks for the informative and educational post, Rob...I'm looking forward to reading the "Bad" (Part 2) and the "Ugly" (Part 3)! :)

Sep 06, 2009 06:06 PM #15
Ambassador
1,998,119
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

I have been approached by investor groups to do these.  It seems to me where a seller can be on the hook for potential taxes from 1099, it may not be in the seller's interest to do this unless a more retail buyer can't be found.

On the other hand, I imagine the investor is more likely to stick around the short sale process than many traditional buyers, so maybe it would be best for some in the end.

Sep 07, 2009 04:25 PM #16
Rainmaker
261,998
Christianne O'Malley
RE/MAX Realty Affiliates - Reno, NV
Exceptional Service - Delivering Results in Reno!

This is happening in our Northern Nevada area and the way they are doing it is they get the current owner to sign over 1% of the home ownership to the 'investor'. This way the home never goes in the MLS with the investor purchase, but the investor can then put the home in MLS as a sale to effect the double end. Really weird stuff in my opinion. I just can't get my arms around why a bank would agree to an untested below market price. We have a hard enough time getting them approved ast market value.

Oct 01, 2009 10:35 AM #17
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

Christianne - That is very smart. However, how they hold title with original seller might cause lawsuits. To answer your question, the investor tries to get the property cheap by intercepting the bank's BPO and showing low comps and giving the BPO agent estimated costs of repairs. That's how you buy them cheap.

Oct 01, 2009 11:50 AM #18
Rainmaker
1,076,550
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

I really like this series, Rob. Every agent needs to have at least a basic understanding of this process - and know to stay away from it if they don't have a good grasp on it.

Oct 01, 2009 03:33 PM #19
Rainmaker
224,021
Laurie Mindnich
Centennial, CO

Rob, this is very interesting. I noticed a few short sales that were "flipped", using the same agent that initially listed them, sold them to an investor, then re-listed right after closing. If the investor fixes them up (even superficially- paint, carpet) is there still a question mark? I guess it boils down to the integrity of the bpo provided (?)- but when it occurs more than once, with the same investor, it would seem that red flags would be raised. And what's to stop the original homeowner from crying foul, particularly if they brought $ to closing, if the property is relisted within weeks at $100k higher? Scary.

Oct 02, 2009 12:25 AM #20
Rainmaker
399,939
Andrew Monaghan
Your Phoenix Home Source - Glendale, AZ
CRS, GRI, EPro Associate Broker

Very interesting and very well explained, looking forward to parts 2 & 3

Oct 04, 2009 05:10 AM #21
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Rob Arnold

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