Short sales are all the rage right now.  They are a huge short-term trend for the real estate industry at this moment.  Many brokerages, Realtor associations, investment clubs, and self-proclaimed "gurus" are teaching how to do short sales to anyone who will listen.  I do believe there is a lot of money to be made doing short sales over the next 2 to 3 years.  However, there is also a "Dark Side" of the short sale business that I do not think many people are teaching about.  I want to expound upon this Dark Side at least a little bit just to hopefully open a few people's eyes about short sales. 

The first big issue in determining a short sale is, does the property owner have a legitimate hardship?  Things like job loss, divorce, death of a breadwinner, and health problems are legitimate.  Things like paid too much for the house, didn't realize that an ARM loan meant that the payment amount might increase, thought I would get a pay raise next year, and thought I could flip the property to the next sucker but now I am stuck with it, are not legitimate hardships.  The lender is going to be asking the question of why could the borrower afford the house in 2006 but now can't afford it in 2008.  If the borrower can't give a good reason, the lender most likely will reject the short sale and this wastes everybody's time and the borrower goes down the tubes.

The next big issue is the financial documents.  In order to consider a short sale, the lender is going to want to see the borrower's tax returns, recent paystubs, recent bank statements, and some sort of income/expense statement.  If the numbers the borrower put on their loan application do not match the numbers showing up on these recent financial forms, there is a serious problem.  In fact the lender might call it loan fraud. A smart Realtor is going to find out about the borrowers finances before forwarding this to the lender.

Another big issue is making sure full disclosure is given to the shorting lender.  If the seller, either Realtor, junior lienholders, title company, buyer, etc. do not follow the written instructions that the shorting lender is requiring, the lender might come back later and cry foul after the transaction closes. 

For instance if the shorting lender says that a junior lienholder can only receive $1000 for their lien but the junior lienholder says they need $2000 or else they won't allow a closing, nobody in the transaction is allowed to chip in that extra thousand.  If a listing Realtor agrees to reduce his commission by the thousand and give the money to the junior lienholder, guess what, that is considered fraud.  Loan fraud is a federal crime that has very stiff penalties including fines and jail time.

One more scenario ... if the seller needs $2000 in order to move out and rent a new apartment and the shorting lender says the seller is to get nothing, the buyer cannot "purchase" the seller's appliances outside of closing to pay this $2000.  If they get caught, guess again, it is fraud.

Another disclosure issue is flipping.  Often times these short sales take many months to conclude.  Sometimes an investor will get the property under contract and during the course of many months, they will shop the property around and find a new buyer.  Then they will close on the property at 100K in one room and the next hour or day, they will re-sell the property to someone else for 120K and pocket 20K profit.  There are a heck of a lot of investor gurus teaching this right now.  Well guess what, if this isn't fully disclosed to the shorting lender it is considered fraud.  The 20K profit is a very pertinent fact that the lender would have wanted to know about. (You can't tell them on the 1st transaction that it is only worth 100K, if in realty a buyer can be found for 120K. If it is disclosed in writing though, then no problem.)

Many title companies are cracking down heavily on what they will allow you to do in a short sale situation. So you may want to talk with your local title company rep before sending them an order. 

If you don't think there is any way to get caught, think again.  The real estate and mortgage industry is being looked at by lots of federal and state agencies with a giant microscope.  It is very easy to look through public records online and see the history of any particular property. Everyone knows this, and lenders are not stupid.  If you look back into the 1980s and 1990s, there are a lot of once rich and famous real estate gurus that have served prison time.  So don't believe everything they are telling you as gospel.  

This article is not meant to scare you, but it is meant to open your eyes to the darker side of this business.  There is a right way and a wrong way to conduct short sales. Learn all you can and be careful out there.

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(Copyright © 2008. Sand Dollar Realty Group, Inc. All rights reserved.)

Rob Arnold, ABR, CPL, CRB, GRI, Managing real estate broker, Licensed mortgage broker, Notary Public

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

Your full service and investor friendly Realtor in Orlando. Learn to invest in Central Florida real estate and Orlando real estate. Investor mentoring and counseling available. I also provide flat fee MLS listings, For Sale By Owner, and menu-based services in most parts of Central & South Florida, the Space Coast, and the Treasure Coast including Orlando, Tampa, Miami-Dade, Fort Lauderdale, West Palm Beach, Ocala, Volusia, and Brevard.

We buy houses cash, sell properties, and list properties in Central Florida including Orlando, Winter Park, Maitland, College Park, Ocoee, Winter Garden, Apopka, Pine Hills, Altamonte Springs, Casselberry, Longwood, Winter Springs, Oviedo, Lake Mary, Sanford, Deltona, Debary, Deland, Daytona Beach, Melbourne, Mount Dora, Eustis, Leesburg, Clermont, Kissimmee, Saint Cloud, Davenport, Winter Haven, Lakeland, and more.