SHORT SALE FLIP - QUESTIONABLE METHODS

Hey All,

This is Kevin Kim, author of SeattleShortSaleBlog.com

While flipping short sales is not "illegal," often times it is not in the best interest of the seller.  The only time flipping short sales is allowable (in my opinion) is when the deficiency is waived and the seller is exempt from the tax obligations. 

The "equity" created in such transaction typically equals a deficiency balance to the seller.  So if the investor eliminates the deficiency balance, I say, take the cake and have your reward.  If not, then know that the seller is paying your spread.

Just read the new guidelines for Short Sales in the new program for Non-GSE Mortgages (those other than Fannie, Freddie, etc.)

Home Affordable Foreclosure Alternatives Program

https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

An investor who owns the underlying mortgage cannot allow a Short Sale Buyer to re-sell the property for at least 90 days so the investor buyer can no longer do a same day flip--even if they have an ALL CASH buyer. HOOORAY! 

This is a new program with cash incentives to the underlying mortgage investor and the servicer so hopefully this will put an end to these fraudulent short sales.

I read Mike's extremely confrontational post and noticed the comments had to be turned off!  Wow. 

Can we all agree that in any industry there are good and bad business people?  Unfortunately, it is usually the bad ones (agents, investors, people and news) who get most of the attention and ink. 

I wrote a post on Qualifying Real Estate Investors that explains the difference between "real" investors and what Mike calls "Transaction Coordinators" because one of my business missions is to promote and foster relationships between good agents and real investors. 

I enjoye reading and agree with (most of) Richard's comments about disclosure of "Flips."  As an investor myself, I saw the writing on the wall early with double closing problems and went so far as to start a transactional funding company to help finance flip properties for other ethical investors who want to follow the rules.

As much as either camp would hate to admit it, investors and agents are not all that different in the way(s) we earn a living.  Everyone has to sell something sometime and all of us are "transaction coordinators" in one way or another.  Touche and peace,  -Paul

I have to comment about the attitudes of some of the realtors in this thread.  I've been a licensed realtor in CA for 18 years.  I am also an investor who uses the business model mentioned.  Transactional funds are used to purchase the property and re-sell it in a double closing, which is totally legitimate according to FNMA, Freddie Mac and now FHA based on their recent guideline change regarding legitimate property flips.

http://tinyurl.com/4f3bjo

The state of California is extremely protective of consumers and if it can be done here legally, it can be done anywhere.  (These deals in fact are happening around the country, every day) Here in our state the distressed seller has become a protected species and the utmost care must be taken to make sure they are represented and that the listing agent is not involved in any other part of the transaction and owes no fiduciary duty to any other parties involved.

AS someone else has alluded to previously, arbitrage occurs every day in business. Welcome to capitalism. 

"Realtors," in all their wisdom, often ask the question "how can a property have two prices on the same day?"

The answer is that a distressed property has a lower inherent value than a property which has been taken out of the distressed category. Realtors, ask yourself why buyers and their agents will pass up a short sale listing to pay a higher price for a non-short sale listing.  There is your answer.

THe one thing that really irks me about many who call themselves Realtors is that they don't realize that once someone is in default and heading for foreclosure, their fiduciary duty is not to get the highest offer for their property, it is to get them OUT of foreclosure.  The best solution to their problem is a quickcash sale.  The buyer who offers top dollar is often a marginally qualified FHA buyer who may likely fall out of escrow or lose interest in the property mid-escrow. As we all know, the banks usually keep heading towards foreclosure full steam no matter what the status of the short sale and often do sell the property out from under a homeowner despite them being in the middle of negotiations.

(I have seen this happen to so-called "distressed property specialists")

Realtors are really doing their clients a disservice when they stick to the standard "highest offer" mode of thinking while dealing with a client who has an impending foreclosure sale date. 

I'd go so far as to say they are committing malpractice, especially if the home is sold out from under the seller while he is waiting for his realtor to get the "highest offer."

http://getoutofforeclosurenow.com

The best offer is the one that will close.

Sorry, I inadvertently posted the wrong link for the FHA revision.

Here's the correct one.

http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-011

Mike,

Who has no clue?  It seems you need to brush up on some of the developments of the past 4 months.

Check out the Wells Fargo Policy change on lending on property flips, Freddie Mac Bulletin 2009-24, and the FHA Waiver on 90 Day seasoning that was signed in Jan 2010.

All 3 clearly point to short sales and one day property flips.  Some limitation on % of profit but they all point to one thing they are "legitimate property flips".   

I have done a lot of reserach in Texas and flipping short sales is not illegal. I have an attorney in standby that verifies all the information. If a bank is willing to take to less that mortgage amount that is business and sales period. Now we have found the buyers lender does need to know it is a short sale flip so we are not flipping any properties high enough for the buyer to get a loan. It is not much different than an investor that assigns contracts. Lets flip the coin here on a loss mit situation the bank orders and appraisal and come to find out the house with $100000 note on it is only worth $50000. Who gets the short end of the stick here? The bank says well yea well do work out arrangements. Keep in the mind this is all business. The feds coulnt try mortgage fraud cases unless the houses actually got foreclosed on, So the smart investors used their cash out cash as credit and sold the properties the next year. Business is business plain and simple and if you had time to post you have got way too much time on your hands. Go get paid.

I guess the Virginia Association of Realtors was wrong when they stated short sale flips ARE legal
http://www.varealtor.com/sites/default/files/SeptCommonwealth_web_0.pdf

Scroll to page 12

Listen, short sale flips are completely legal so long as everything is disclosed.  If there are narrow minded lawyers and Realtors out there that don't want to be involved, then DON'T because your competitors who work with investors are certainly making the money on it.

The lenders allow it if it's disclosed.  Do your research.  I am absolutely sure all of you here who are saying it's NOT legal and IS unethical have NEVER sat with an investor and discussed how it's done. 

Short Sale flips and the HUD 1 Settlement Statement…Your Key to Fraud Prevention

Recently I was invited to speak at the Palm Beach County Economic Crimes Task Force’s annual conference.  This invitation is truly a thrill given my affinity for working with law enforcement.  For over a decade, I have had the privilege of training and working on inter-agency mortgage fraud cases.  And so began my quest for new and exciting mortgage fraud data to dazzle these white collar crime experts.  I called my colleagues on the front lines to solicit their current mortgage fraud horror stories.  Recognized as an expert in this field for over 15 years, I pride myself on working closely with the handful of industry experts who have spent their illustrious careers in the mortgage fraud trenches.   They soon confirmed my findings that there is not much new in the mortgage fraud game. 

Do not misunderstand me.  According to the FBI, 2009 mortgage fraud Suspicious Activity Reports, SAR, reported an excess of $1.5 billion in losses for last year, a total of 62,190 reports.  Almost half as many, a startling 30,000 cases were reported in 2010 through February month end!  The FBI, and their 77 task forces, still account for only a fraction of actual cases for various reasons.  First, there are specific criteria required for a SAR to be opened.  Non-banking institutions are not required by law to file SAR reports, and this includes mortgage originators and mortgage backed securities investors.  Also, the FBI does not have the resources to investigate every claim they receive.  It is safe to say their numbers exponentiate dramatically when considering all incidence of mortgage fraud.  The other cases never reaching the FBI are estimated to double or triple those volumes.  Actual losses are reported to exceed half a trillion dollars and account for our current foreclosure/liquidity/real estate/subprime crisis. So what now?

An old fraud scheme in a new package is property flipping.  This new wave of fraud very prevalent in depressed markets is the short sale flip.  This is crime has all of the characteristics of the standard property flip but preys on markets that have lost substantial value, specifically Florida, Arizona, Nevada, and California.  Orchestrated rings under appraise, bid on and buy properties in various states of foreclosure in order to flip them for higher values, often times at the same closing.  Modeling flips of old, “investors” are being roped in by get rich quick in real estate artists, as are college students with fresh credit, and we are seeing a preponderance of identity theft victims involved.

Title insurance attorneys and agents are on the front lines of defense against this crime.  Interestingly, I speak regularly with title attorney colleagues who are kicking and screaming about the frequency with which they are seeing this occur.  Frustration is growing because their find their reports to lenders and law enforcement are falling on deaf ears.  Why is this?  Again, the same reasons with shocking regularity as though we have learned nothing from the past five years:  Lack of internal resources, focus on production, complexity of the fraud ring and lack of training to understand and identify the parties, and failure of implementing and enforcing internal policies and procedures, including training and technology, that can lead to mitigating 80% of these crimes.

The HUD 1 and red flags, Attention Title Agents, Underwriters and Closers!

Unusual payouts on the HUD 1 are the first big clue to short sale flips.  As mentioned above, this can immediately identify the tip of the iceberg leading to larger fraud rings.  When itimizations on the final HUD reflect variances from the estimated disclosures, payouts to individuals or questionable LLC’s or large payouts that cannot be sourced and verified, it is worthwhile to investigate further.  Another source of red flags for the closing agent is the Purchase Contract.  Assignees, LLCs, and non-arm’s length parties are clues to potential issues and should be examined.  Public records searches allow parties to be quickly investigated to uncover what businesses and properties they own, and with whom.  Chain of title on the subject and comparables will provide further evidence of collusion amongst parties to the fraud.

At the very least, if you suspect individuals, licensed professionals or other parties such as a loan originator, notary or builder, is a party to questionable transactions, create a record of their names, companies, license information, addresses and dates.  You can do this quickly and use it for future reference because you will come across these parties again.  It will be needed for future reference when making claims or filing police reports.  If you have the means, have an expert assist you in building an internal database to manage this information and run all new files against it.  If you don’t have the capability to create this, there are services available that can help you manage your data and aggregate it for you, along with criminal data from other sources, for your future reference and that of law enforcement.

No longer thought to be victimless crimes, just ask the tens of thousands of mortgage professionals out of work, mortgage fraud impacts banks, homeowners, and neighborhoods.  Cities lose tax dollars and have to cut services.  Banks are losing billions and the availability of capital for mortgage, car and credit card loans is greatly reduced for all consumers and business owner.  The impact of mortgage defaults is being felt worldwide and experts estimate we could be a decade away from a true market correction and rebound.  We all have to work together to stop these fraudsters, but being proactive in examining line item payouts and parties involved in short sale and foreclosure closings is a great place to start.

For more information on creating a mortgage fraud database, in house risk management training or establishing mortgage fraud mitigation procedures, contact Mela Capital Group at 954-675-2319 or Info (at) MelaCapitalGroup.com.

MCG, LLC has audited over $5 Billion dollars of mortgage loan products, has created and enforced underwriting policy for over two decades, and continues to provide expert witness testimony and consumer advocacy training nationwide. 

Mela Capital Group provides forensic securitization and fraud auditing and training for attorneys and law enforcement throughout the U.S.

Just my 2 cents,

Every body know that there are thieves with a Degree, ant the ones without it. Is ther any differience?

I'm trying to determine if the short sale flip is legal. In our situation: we are the end buyer the B to C. I have been waiting 6 months to find out if the bank will approve MY offer. My contract states that the property is not to be shown or marketed until the bank responds to my offer. We even have a short sale addendum signed by the trustee. I have spent six months thinking I was waiting for the lender's bank approval of the short sale and had no idea that someone else's short sale was being negotiated and if approved would then be sold to me at a profit. I would not be so bothered if there was disclosure to us, the end buyer, as to how they were handling the situation - at least then we would have a choice. Who knows, the bank might even have taken our offer of $$$, but I will never know because who knows what the investor is offering and what kind of profit they will make. How is this legal? We were never informed, the listing agent/seller/trustee did not reveal any of this, and nowhere in my contract did it say my sale was dependent on A - B transaction.