Short sales and double closings – the good, the bad, and the ugly – Part 2

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

Short sales.  Everyone is doing them.  They are all the rage right now and will be for several years to come until all these foreclosures and distressed properties get through the system.

short sale double closing    

In my last article Short sales and double closings - the good, the bad, and the ugly - Part 1, I discussed the basics of what a short sale double closing involves.  I also discussed "The Good" things about these transactions. Before you proceed with reading this article, I do suggest that you read Part 1 as this article is simply a continuation of that one.

There is an absolute necessity for investors to legitimately conduct and close these deals the right way - legally, ethically, and with full disclosure to all parties including the lenders and mortgagor. There is simply too much inventory to be bought up right now and there are even more foreclosures on the way. In this Part 2, I will be discussing the more questionable "bad" side of these transactions.   

The Bad -

Some investors (just like some Realtors, some attorneys, and some mortgage companies) will do things that are not win-win. Thus giving these double closing transactions a bad name.  The information below has not been run through any lawyer, it is simply my layman's opinion based on many hours of attending various seminars and classes as well as being involved with several hundred foreclosure transactions over the last few years.

One instance is when an investor puts a property under contract to buy, negotiates the short sale, but when they don't find an end buyer the investor simply walks away from the deal or worse lets the property get foreclosed.  I just don't understand the ethics behind indefinitely tying a property up with a purchase contract or an option contract and then not closing on it if you get the short sale approved, unless maybe you gave the seller some non-refundable money for doing this.  Especially in an option situation if there is no consideration that has changed hands between seller and buyer, then the option is more than likely null and void anyway.  You can't take away the seller's rights in a property (even temporarily) without paying for it.  Almost every state has laws regarding contracts, options, and consideration.  Florida is no exception. Check out Florida Statute 475.43 .  Without "substantial consideration" changing hands, then by law the contract or option is considered null and void.

Then we come to the practice of having the seller sign a deed over to put the property into a land trust with the buyer (or some entity or other person that they control) being the trustee and the seller being a beneficiary. The law in most states has clear limits on what a trustee is permitted to do.  After all, a trustee has a legal duty to be looking out for the best interests of the beneficiaries. Trustees are supposed to have a fiduciary relationship with the beneficiary.  How can a trustee realistically do this if they are trying to profit off the property by purchasing it?  Either you are acting in an arm's length transaction or you aren't.  Regardless of the paperwork you had the seller sign, judges have liberal discretion to throw it all in the garbage can if they think you are "acting in bad faith" or with a "conflict of interest" or doing something "unconscionable." In Florida we are talking about Florida Statute 736.0802 .  A trust is voidable by the beneficiaries for this type of nonsense because the trustee has a legal duty of loyalty to the beneficiaries. An analogy would be letting the opposing football team's quarterback be your team's coach - obviously they could not realistically be looking out for your team's best interests even if you made them sign a 20 page contract saying otherwise.

Next we come to title companies.  In nearly all 50 states, there are very few title companies that will even consider handling a double closing or an option closing on a short sale transaction.  The reason they will not handle these closings is because the title insurance underwriter typically will not allow them.  Check out these official guidelines.

From Attorneys Title Insurance Fund and Old Republic Title .

From Stewart Title.

Most other title insurers have similar guidelines and in fact nearly all title agents will require full disclosure to both the buyer's lender and the seller's lender before allowing a short sale double closing or option closing to take place.  Disclosure is the key in this instance.  Now if both the buyer's lender and the seller's lender know exactly what is going on and have given written approval of the entire transaction, there should be no problem.  Odds are extremely high that they don't know the exact details of the end buyer transaction. 

Lastly for Florida investors please be aware of the foreclosure rescue law Florida Statute 501.1377 that went into effect on October 1, 2008.  It made major changes to how investors can buy homes from people in foreclosure.  Pay particular attention to the "equity purchaser" part of this new law. Many other states have passed similar laws and the federal legislature is talking about passing one as well.

In the next article, I will get into the "ugly" part of the short sale double closing arena.  The way to cross the line and get into potential criminal mortgage fraud.  Yikes! 

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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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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
Topic:
Real Estate General Information
Location:
Florida
Groups:
Fixers, Flips, and Rehabs
Short Sales
Florida Realtor® Network
Short Sale REALTORS®
Florida Real Estate Investors
Tags:
short sale realtor
short sale double closings
short sale back to back closings
short sales and options

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Rainmaker
107,189
Mary Jo Quay
Remax Advisors - Minneapolis, MN

I've attended a couple seminars by investors looking for 'deals.'  They explain the option process a little differently, but do stress disclosure.   While there may be some companies who are doing due dilligence to disclose, it would be probable that most are not.

Let's not assume that because an attorney is doing a double closing it is completely legal, or illegal.   Not all attorneys are created equal.  Some are more versed in real estate, some are hungrier.  As with a purchase agreement, the paperwork can appear flawless, but the intention would be deceptive. 

Short sales are a relatively new phenomenen, but will be with us for a long haul.  The problem is that the banks are just getting a grip on what it is and what to do with it.  I listened in to a seminar hosted by Bank of America and Wells Fargo where they both committed to reducing forelcosure by doing a better job of processing short sales.  Bank of America plans to implement an online system this month where the listing agent and negotiatior both have acess to the file.   They also plan to adhere to a 45-90 day timeline from start to finish.  The better informed agents are to the changing demands, the better we can represent our clients, and help them get back on track.

Sep 05, 2009 02:00 PM #4
Ambassador
555,518
"The Lovely Wife" (Broker Bryantnulls Wife) The One And Only TLW.
President-Tutas Towne Realty, Inc. - Kissimmee, FL

Come on Rob...

Please don't ask me to work or even think :)

TLW...ROAR!

Sep 06, 2009 06:41 AM #5
Rainmaker
263,756
Jim Paulson
Progressive Realty (Boise Idaho) www.Progressive-Realty.info - Boise, ID
Owner,Broker

Many investors go after short sales trying to convince the owner that since they don't get to make any money off the short sale, to accept $1,000 to deed over their home and let them mess with it.  No payments are made after that point and if the "investor" isn't successful, that equates to an even larger deficiency judgement or "ghost tax" to the owner!

Maybe we need to start requiring 3 - 5% non refundable earnest money if the buyer defaults!

Maybe the title industry needs to start collecting for cancelation fees on their title policies?

Maybe people should be held accountable to the deed of trust's "due on sale clause"?

Maybe I should quite selling real estate and start marketing the new bib I designed for the class action attorney's?

Class Action Attorney Bib

Sep 06, 2009 07:29 AM #6
Rainer
76,071
Melissa Breeland
Residential Mortgage of SC - Charleston, SC

I believe all "double closings" on short sales are fraud... see FannieMaes newest memo regarding the topic. https://www.efanniemae.com/utility/legal/pdf/fraudnews/mortgagefraudnews0709.pdf

Sep 06, 2009 07:35 AM #7
Rainer
127,294
Lisa Ludlow Archer
Live Love Homes-Keller Williams, Charlotte, NC Ballantyne Area - Waxhaw, NC

What awesome information. Thanks for sharing. Can someone send me a msg as I just joined AR and dont know how to get my picture to show up when I comment on blogs. Sorry

Sep 06, 2009 08:32 AM #8
Anonymous
Charter Holdings LLC

Rob & Melissa, nice digging around. However, the items you referenced are exactly the instruction manual on how to do back to back closings. While as you mentioned briefly, double closings, simultaneous closings, land contracts, power of attorney or trust manipulations of any type are out of the question. Further,they will be exposed through escrow audits, title company audits by DOI and DOC audits. Any of the latter will have you calling counsel on the way to the BIG HOUSE. Happy Sales

Sep 06, 2009 09:09 AM #9
Rainmaker
563,723
Steve, Joel & Steve A. Chain
Chain Real Estate Investments & Mortgage, Steve & Joel Chain - Cottonwood, CA

Thanks Rob,  Considering all the new knee jerk regulations that have come down the pipe the last couple of years.  I think it's Best Business Practice to shun gray area transactions. 

Sep 06, 2009 09:37 AM #10
Anonymous
Crest Mortgage Company

Charter Holdings, great comment and legally correct for now, in an ever changing environment.

Sep 06, 2009 10:10 AM #11
Rainer
73,564
John J. Woods
Aardvark Appraisals - Palm Desert, CA

Rob, I think you are doing a great job of putting the whole 'short sale flipping' process into easily understandable terms.  Unfortunately, some of the same companies you mentioned in Part 1, who you can find online or int the phone book, are stressing how 'risk-free' these types of transactions are to fledging investors (their students) due to the fact that if the students work these deals the way they are taught, then if they can't find a buyer before the initial deal closes, they can just walk away from it (a sort of 'weasel clause').  These people are 'teaching' questionable ethics.  I, me, mine...

Sep 06, 2009 11:17 AM #12
Rainmaker
913,876
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Mary Jo - I would be thrilled to see the banks streamline the whole short sale process.  Currently I am closing one with Green River Capital.  Been negotiating with them for months and then in July, they decided to work it via their online riocentral.com website and streamline the process.  I did a BPO and dropped the price nearly $200,000.  We had 2 contracts within a weeks time and a month later the deal is closing with minimal effort now on our part. Very cool.

Jim - I'd be shocked if any investors are paying even $10 to get the seller to sign over the deed. Many are probably getting the seller to sign some long disclosure form, but I bet most of the investors are not explaining all the ramifications to the sellers. As for the buyers, if I am listing a short sale I always try to get the buyers to put some sort of deposit in escrow as soon as the papers are signed - most likely that never happens when a seller is on their own.  Due on sale clause - the banks seldom if every enforce these unless the homeowner is delinquent on their payments - the banks do not want to foreclosure on anyone that isn't behind on payments - seriously now. Love the bib!

Melissa - You are getting ahead of me.  I'm going to cover the fraud stuff in Part 3.

Charter - Yep I am "exposing" all this info into plain sight for all to see. However I like to think I am englightening or educating people instead. The whole industry is all under a big microscope right now.  There will be plenty of audits and look backs occuring in years to come.

John - Exactly.  I am amazed of all the shenanigans going on.  Risk free and get rich quick schemes have been around for decades.  This is just yet another pitch. 

Sep 06, 2009 12:14 PM #13
Ambassador
1,020,204
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Keller Williams Commerce - Commerce, MI
Michigan homes for sale ~ yesmyrealtor@gmail.com

I'm glad that isn't happening in Michigan.  Though I had one person that tried that adn it was a mess.

Sep 06, 2009 01:19 PM #14
Rainmaker
562,311
Chris Olsen
Olsen Ziegler Realty - Cleveland, OH
Broker Owner Cleveland Ohio Real Estate

Hi Rob -- My takeaway from your excellent post is a consumer needs to ensure they have a very knowledgeable agent handling their sale, as well as host of other allied service providers -- lawyers, title, escrow, etc.

Sep 06, 2009 04:44 PM #15
Rainmaker
75,285
Michael Cantwell
LoanDepot - NMLSR ID #644428 - Boca Raton, FL

Rob,

 

I want to thank you for this great information.  I am seeing more requested for funding on these types of short sales as well.  From a lenders perspective as you mention in your 1st blog, lending isn't possible on these transactions so the end buyer must be a cash buyer.  I am surprised that there are that many cash buyers that are willing to pay more than rock bottom price on a property since we still have such an abundance of property in our Florida market.  

I look forward to part 3!

 

Mike

Sep 07, 2009 12:25 AM #16
Rainmaker
51,443
Mike Weber
Keller Williams Realty Northern Colorado - Fort Collins, CO
40+ years in Northern Colorado

Thank you for your parts 1 & 2.  I have recently been approached by these types of investors here in Colorado.  They were wanting me list property and to represent them in finding the end buyer, even though they did not hold title to the property.  My instincts and business model both said "no".

Sep 07, 2009 02:04 AM #17
Rainmaker
390,720
Mark Brian
Silver Star Real Estate LLC - Anderson, SC
Anderson SC Realtor

We should be working harder to make these types of predatory scams punished. The sad thing is if this conversation was taking place on an investor forum the argument would be that what they are doing is actually in the sellers best interests! LOL

Sep 07, 2009 03:34 AM #18
Rainmaker
357,701
Lynn Pineda
Keller Williams Realty - Coral Springs, FL
Coral Springs REALTOR- Promises Delivered

Rob, as Michael indicated above the title seasoning is an issue and would demand the end Buyer to be a cash Buyer. Most of the Big Lenders have the title seasoning issues and I'm not aware of any who do not. So with these option contracts, I'd say Cash is King.

Sep 07, 2009 07:55 AM #19
Ambassador
1,994,344
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

It sounds like disclosure is key as is true of most things in real estate transactions, but just more parties to disclose to here.

Sep 07, 2009 04:28 PM #20
Rainer
41,109
Amy O'Laughlin
Saint George, UT

A title report a few months ago showed that property had been transferred into a land trust about a year ago.  The only problem is that the (alleged) Trust documents can't be obtained by the person (seller/owner) who was left out in the cold.  So, now this poor person can't even sell his own property without getting a court order to transfer title back into his name first.  I believe he is now in foreclosure. 

Referring back to your Part 1, the thought often crosses my mind and I am hoping you can provide some insight...how does the investor have the authority/right to enter into a contract (between B & C)when they don't own the property, and may never own the property?  Is it because they believe they have an equitable interest?  And/or how is that not fraudulent in itself (at least in some states, and depending on how the contract is worded)...the Utah REPC states that the "Seller represents that Seller has fee title to the property and will convey marketable title to the property to Buyer at closing". 

Thanks for the educational posts, Rob!

Sep 08, 2009 08:44 AM #21
Rainmaker
913,876
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

Amy - On these double closing types, typically on the 2nd contract there is a contingency for the seller obtaining title from the owner of record.  That is how it gets handled.  Bank REO contracts often contain similar contingencies.

Sep 08, 2009 09:24 AM #22
Rainmaker
399,036
Andrew Monaghan
Your Phoenix Home Source - Glendale, AZ
CRS, GRI, EPro Associate Broker

I see more and more of these types of transaction in the Phoenix area, I wonder would the banks end investors be happy knowing that they left a large sum of money on the table at close.

If buyer C was willing to pay $x over the short sale price why would they sell at the short price thus hurting the banks investors.

Oct 04, 2009 05:14 AM #23
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Rob Arnold

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