Short sales and double closings – the good, the bad, and the ugly – Part 2
Fannie Mae has become aware .and it deals with short sales double closings directly:
"The trend we have observed involves a perpetrator who submits a short sale offer to purchase a preforeclosure property at a price less than the current indebtedness. This perpetrator locates a second buyer, who may not be arms length, to purchase the property at a higher price simultaneous with the short sale or in rapid succession, concealing the second (higher) transaction from the lender approving the short sale. The second transaction may involve a new loan based on an inflated appraisal."
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.
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!
---------------------------------------------------------------------------------------------------------------------
(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.
---------------------------------------------------------------------------------------------------------------------
(Copyright © 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.
Comments(8)