As an author and speaker I am privileged to have high level contacts within some of the most influential organizations in real estate. Recently I had an enlightening conversation with the general counsel for one of the largest title insurance companies in the market and of course we discussed short sales and short sale closings in detail.
One of the items that came up is investor purchased short sales and double closes. For those of you unfamiliar with a double close the concept works in this fashion. I contract to purchase a seller's property for a discounted value because I know I have a buyer that will pay more for the property. I close on the property in the morning then I sell it to the buyer I already have lined up in the afternoon and profit the difference. Technically this is completely legal as long as I actually funded the first deal and was not using the buyers cash or financing to do so. This is great for the agent involved since they know I will close since I am highly motivated to do so since I already have an exit strategy.
Here is how the simple math works:
Purchase $100,000 at 10:00 AM
Sell $120,000 at 3:30 PM
Profit $20,000 less closing costs
Many investors have been using this strategy on short sales with or without an agent involved, according to my contact most of the time an agent is involved. Here is the major issue with this strategy - in order for a short sale to be approved, the lender is led to believe that a property is worth a certain value. In the case of a double close, this value is clearly less than the market will bare or there would not be a second buyer. This is troublesome especially when the agent knows of both the purchase and sale transactions since the agent is most likely involved in the negotiations with the bank. This essentially means that in the example above the bank is convinced that they should take $100,000 for a property when in reality it can actually be sold at $120,000. The title company I spoke to is no longer underwriting the title policy on the second closing due to the appearance or presence of fraud on the deal. I believe that once the dust settles, lenders (the ones that are left) are going to cry foul on these deals and agent's licenses may be challenged.
Here is the safe way around this deal. Full Disclosure. All that needs to be done is the lender approving the short sale needs to be informed that the purchaser (through extensive marketing efforts) has located another buyer that they will not disclose and they plan on reselling the property to this individual. This way you as the agent are protected, the investor is protected and the second buyer can purchase their property. If you as an agent are involved in both the purchase and the second sale - you need to disclose this and unfortunately the deal may not go through.
At the end of the day it is more important to be safe and protect your license than to get a deal and worry about it coming back to haunt you.
For more information on succeeding in today's market see our website, http://www.1cdpe.com/.
Alex Charfen
http://www.1cdpe.com/
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