SHORT SALE FLIP - QUESTIONABLE METHODS
This article is a follow up to an issue discussed in December titled Short Sales and Title Insurance - Critical Look at Hybrid Closing Schemes.
I am representing an ultimate buyer on a short sale "flip" that raised some eyebrows and got me to looking carefully on how it is put together. The ultimate buyer came to me to assist in legal representation and I was very surprised on how it was structured to the utter disadvantage to the ultimate buyer. In this example, the ultimate buyer is my client; the seller is the flipping buyer; and the owner is the regular seller. Let me point out some interesting and I think important points:
1. The purchase and sale agreement is the Florida Association of Realtors / Florida Bar form 02/08 "AS IS" form.
2. The buyer is the ultimate buyer in this situation. The buyer is just defined as the Buyer in the contract as if it were a typical deal.
3. The seller (flipping buyer) is a company that we determined is not the current owner. They say they have a Power of Attorney from the owner, but we have not seen it. They apparently have some control over the owner since we were able to have a tour of the home, in which the owner is still living.
4. The contract does not disclose the power of attorney nor the name of the actual owner nor that the seller is not the owner. But that control may just be that the owner contracted with a realtor involved in the deal as the seller's broker.
5. The seller insists on their chosen title insurance company both hold the deposit and do the title and closing, even though the buyer is to pay for those costs.
6. The contract provides for the closing date of 3 weeks from now, but seller can extend for an additional 60 days after that.
7. The contract says that if the seller can't deliver title by the end of the extended 60 days, the buyer gets their deposit returned.
Here are the unusual issues that concern me:
A. The contract form assumes that the seller is the owner. This creates a problem in the enforcement of the contract because if the "seller" cannot deliver marketable title after diligent effort, there is no remedy for specific performance against the seller. Although there is no short sale addendum to this contract, the end effect is that if the bank does not agree, there can be no sale. But this is not a condition up front in the contract. End result is the buyer can tie itself up without the ability to negotiate with the lender and the original owner, and then end up after over 80 days with nothing but its deposit returned. Remember who the parties are - the real seller is not in privity (ie: direct contract) with the ultimate buyer.
B. The deal smells of the seller using the buyer's deposit as its own deposit with the owner. This could tie up the buyer's deposit in a contract dispute with the owner and the flipping buyer.
C. The deal smells of an undisclosed double contract, which is bank fraud in which the title agency is (unwittingly?) participating. The buyer is getting a mortgage, but the new lender has no idea of the simultaneous lower priced sale. The 1st American article reference above says, "Several variations of the short sale frauds we have seen involve multiple sales contracts at different prices - a low one to show the "old" lender when negotiating a discount and a higher one used for negotiating with the "new" lender. Knowingly making, issuing, delivering, or receiving dual contracts - only one of which shows the true purchase price - is a crime in Florida and a major red flag for fraud. See §877.10 Fla. Stat".
D. There is obviously no disclosure to the owner nor to the owner's lender of the double contract. Whether this is needed or not is a good question. See the quote of 1st American in the above referenced article where it states, "While there are no hard and fast rules, the single best guide in evaluating a proposed short-sale (or any other transaction) is to ask yourself -- "Would the lender take this discount (or make this loan) if they knew all of the facts that I do?" If the answer is yes, there is no harm in disclosing the facts to the lender(s) in writing and awaiting their written approval. If the answer is NO, then your hiding the information may sweep you into a mortgage fraud conspiracy. There presently is no bright-line rule as to how much profit is too much or how long the property should be held before making the profit. As such, it is best to contact underwriting when faced with this scenario"".
E. The contract requires the ultimate buyer pay all the seller's (flipping buyer) expenses including "but not limited to" title, recording and documentary stamps". This means that buyer could be involved in double everything - including the first closing expenses.
I have been involved in multiple contracts, and the selling lender has even approved of the "assignment" contract if handled in that fashion. The key seems to be to get the bank to agree first on the initial amount. Once that is out of the way, assignment of the contract seems not to be a problem. A fee for the assignment is not a contact that involves anyone other than the contract holder and the new buyer. The new buyer discloses the underlying assigned contract and the assignment fee to arrive a the "selling price" with its new lender. No harm no foul, and every one who needs knowledge has knowledge. In one deal we have the new buyer learned of a hole in the foundation that was not filled in with cement after some investigation. We sent the pix to the shorting lender and got the price lowered.
There are a myriad of "concepts" that are being tried in the short sale arena. Be careful of what you get involved in as a broker, seller or buyer. Just because it worked before does not mean it is legal or will work again.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales
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