Over the past year, I've heard variations of this scenario in the negotiation of Short Sale transactions. I call it Short Sale Parking. For all intents and purposes, the home for sale looks like a regular listing. An unsuspecting buyer contacts a real estate agent to write up a purchase agreement for what seems like a normal transaction.
When the counter-offer is returned from the listing agent, it contains a strange phrase informing the selling agent that the listing agent is actually the owner of the property by a vehicle known as the purchase agreement'. Up to this point I think most of us have assumed that purchase agreements were part of the sale process to buy a home, not the proof that a home was owned!
The remainder of the saga may have many variations, but the players in the drama are easy to identify. On the main stage there is always a homeowner in distress who needs to sell their home with the prospect of delinquency/foreclosure a strong possibility.
Enter the 'Solution'...either in the form of an individual or company who can solve the problem through the negotiation of a short sale. But first...the homeowner must relinquish the rights of ownership through a quit claim deed.
In some cases, the homeowner also agrees to become a renter and pays some upfront fees in addition to a monthly rental payment. The 'Problem Solver' aka Short Sale Specialist then proceeds to list the home and look for a real buyer. Miraculously, a 'real buyer' often shows up to put in an offer on a home which may be priced significantly below market value
WHOA...
But wait a minute...What just happened? The homeowner sold the home, but received NO MONEY because the home was sold by a document known as the purchase agreement and didn't involve a mortgage or cash. Yet, the homeowner continues to be on the hook legally because the title does NOT transfer until there's a viable sale on the table. In some cases, the home title is transferred to a 'holding company' but my conversations with representatives in the title industry suggest that this type of transfer carries significant liability which many prefer to avoid.
SOLUTION?
This problem is miraculously solved when a 'real buyer' shows up with 'real money' from a 'real mortgage company' at a price which is higher than the one offered to the 'real homeowner'. Variations of this theme include throwing out a ridiculous offer to the bank to hasten the lenders' understanding of the marketplace. One which is so low, it is likely to be ignored so the mortgage holder will presumably be more willing to act quickly when a 'real buyer' emerges.
Now, I dislike the time required to negotiate a short sale as much the next guy. But, I think there are aspects of these type of transactions that are cause for real concern. While every real estate transaction carries an element of risk, these types of transaction would seem to have 'avoid this like the plague' written all over them!
First of all, shouldn't there be a great deal of hesitation, in not downright aversion to participation in a transaction which leaves a client on the hook for more money than they might have owed as a result of a shortfall in funds from the distressed sale of their home because a middle person 'negotiator' stepped in?
Secondly, if an agent is so sure that a home can be Sold for more money when the distressed seller is approached with this novel solution...why isn't the home simply placed on the market for the 'real sales price' from the beginning?
Thirdly...if more money can be returned to the bank from a distress sale, isn't it FRAUD to pretend otherwise?
Lastly, at a time when many agents are seeing commissions fall from listing a home, there appears to be a significant financial incentive to negotiate this type of transaction. It seems that in addition to the real estate commission, the specialist (individual agent or company) is pocketing the differential between what the bank obtains and the amount mortgaged by the 'real buyer.'
And if the above issues don't give true pause, there is one more item which should be a concern if you're a Broker. Check with your E&O carrier about coverage on these deals. Many E&O carriers will not cover this type of a transaction on your standard coverage. The implications for any firm are enormous.
It doesn't make sense to me that we are willing invest time and energy in creating forms and forums to mitigate risk and keep our transactions within the confines of the law, yet fail to see that this type of transaction has huge downsides for a very temporary gain in the hands of a few individuals. Your thoughts?
*I wrote a Members Only Post about this topic in March entitled "Shenanigans are Shenanigans...aren't They? Unfortunately, it seems that this practice is becoming more firmly entrenched in the real estate marketplace.
Photo is courtesy of adactio's photostream on flickr
Lola Audu, is the Designated Broker & Owner of Audu Real Estate. Our company specializes in helping people buy and sell homes in the greater Grand Rapids, West Michigan area. We've had the privilege of helping hundreds of clients succeed in their goals of purchasing and selling property including demonstrated success in the negotiation of Short Sale Transactions. You can contact us via e-mail @ info@auduhomes.com or by phone at 616-791-0511.
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WOW, Lola. I can honestly (and thankfully) say I have never encountered this. Thanks for sharing...very good to know!