As I just had a deal go sour last week because the "seller" failed to notify me that they didn't actually own the house yet - I think it sucks!  It is, however, legal, though not very moral or ethical (see my blog last week).  Now my buyer is scrambling to get into another home and looking at being homeless in 2 weeks (ack!).  I did contact legal hotline over the issue, and my buyer reported the agent to the Better Business Bureau - now the agent is crying foul and saying that because she didn't do anything "illegal" that my buyer reporting her is slander - whatever.  She did break a whole lot of disclosure rules by failing to notify that she was not owner.  Call your board office or legal hotline if there is a particular agent doing this!

I had to restart this comment 3 times because of what I wanted to call these type of people. It wasn't nice! I recently took a listing client from a similar situation where he was not getting anything out of his equity. The GURU PUKE (for lack of better  and disclosure words) was trying to use the seller as a profit center with nothing out of his pocket in short time. I see this often.

Luckily for my listing client the GURU PUKE was sloppy on his contracting end. I listed the home and sold it in 12 Days (yes seller and buyer dual agency) and netted 9871.00 for my Listing client.

Bottom line there should be stiffer laws on this!

They don't sell it to the company for a said price, actually the homeowners aren't supposed to recieve money from the deal per most banks (because the bank is lowering the price to the said company so the banks don't want the homeowner to make money when they aren't paying the mortgage). Also it is possible and some investors are willing to wait the 90 days to sell it FHA... Also the homeowner doesn't bring money in if the company knows what they are doing because of the short sale, the company gets the price lowered through the bank to where the homeowner signs and walks away. Hope this helps and clears it up for you a little more.

Alot of people don't go about doing the short sales right and that is where the confusion comes from. The home cannot be sold before the short sale goes through unless buyer or seller pays off remainder of mortgage. Also when listing the short sale home they should be listed as price subject to short sale(unless short sale has already been done on the home and company now owns it which techniqually it is no longer a short sale if co owns it and S.S. is completed)

Hello Carrie:  I think that I will call our local Realtor board office and the NC Real Estate Commission to see if they are aware of this practice and if it is allowed in our state. 

I'm sorry to hear about your client's situation, I hope everything works out.  Thanks for sharing!

Hi Laura: I guess that you spoke with the seller before the "investor" (or whatever they call themseves) got them to sign a contract or any other sort of agreement with them.  I'm glad that they contacted you when they did.  Obviously, since your seller client was able to walk away from the table with a profit, they didn't need to sell their home as a short sale.  That's GREAT! 

Hello Chris: Yes, I know that home owners can't make money from a short sale.  I understand that process completely and have represented buyers and sellers in the short sale process.

This "investor" won't take any risk at all, they only want to do back to back closings.  They back out of the deal if they can't find a buyer in time to make it work the way they want it to.

I just think that there should be something wrong with this practice of "flipping" a short sale, before you  own it or at the very least have a signed acceptance of the contract to purchase the property by the mortgage company. 

I'd love to be a fly on the wall during the discussions between these "investors" and the homeowners!  I'm sure it would be very interesting indeed!

Cheryl- If the investor waited for the bank before ever listing these homes they would be back to the bank before there was ever even a lockbox on the home, banks are slow but they are extremely slow when dealing with short sales. Maybe your investors won't take a risk but there are some who will buy the house from the bank on the short sale and hold it until they sell it or turn it into a rental home. Also, there are cases where the investor gets pushed out more than backs out on their own as the banks don't like to deal with short sales sometimes and would actually rather take the house back through foreclosure.

Also many distressed home owners like the short sale idea because even if the bank does ask them to pay back part of or the rest of the amount that isn't covered by the investors buying of the home from the bank it is still a fraction of what they could have to pay back by just losing it to foreclosure.

This is the exact situation that I wrote about in my own experience with a "FLIP" short sale. See my article Flipping Short Sales - Questionable Methods (click on link) here on ActiveRain.

Some seminars are obviously promoting this type of dangerous scenario.

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

Chris: I have no problem with TRUE short sales, where the property is listed for sale by the actual homeowner.  Short Sales are a great alternative for homeowners, who can't afford to stay in their home, to avoid foreclosure and lessen the damage to their credit.

My problem is with investors who MAY be using questionable methods to convince the homeowner into signing questionable paperwork with them so they can make money as a middle man in the process...listing it before they even have an accepted contract to purchase the property. 

Even if the home owner isn't required to pay back any of the shortage, it would be in the homeowner's best interest to keep the mortgage repayment shortage to a minimum.  It is my understanding that they will be required to pay income tax on the difference between what they owed the mortgage company and what the mortgage company actually received in the sale.

There is something that smells in this deal and maybe fraud. I know that there are many seminars that teach some of this stuff but that doesn't make it right or legal. The true test is when someone gets hurt and your caught in the middle of some legal battle.

The investor can't have it both ways, is he the owner or not? If he is not then thats fraud. If he purchased the property the he is responsible for all legal documents including all the disclosures signed by him not the residents in the home,or are they the owner? Which way is it. Who signed the listing contract?

Hello Richard:  Thanks for letting me know about your AR post.  My buyer and I didn't get to the point of actually seeing the investor seller's (flipping buyer's) addendum to the Standard NC Offer to Purchase and Contract.  So, I enjoyed reading the details contained in your post.

Cheryl- while while you are totally correct with.... it would be in the homeowner's best interest to keep the mortgage repayment shortage to a minimum.  It is my understanding that they will be required to pay income tax on the difference between what they owed the mortgage company and what the mortgage company actually received in the sale. (the tax part is pretty much up to the banks though)...

Many home owners that are in this situation do not even know about the possibility of doing a short sale still (kind of odd now that they are becoming so common in this market I know) so what would you propose they do? They wouldn't seek your help because they don't think you can help them sell it before it becomes foreclosed, and they don't know what to do other than just let the bank have it back.

What is so bad about it if in the comments or somewhere on the listing it states that the sale and price is subject to short sale??

Also why can't the investors back out if 1. the bank doesn't take their offers (or in some cases even get back with the investor at all), or no one makes them an offer that is decent (more than they will buy it from the bank for). Common sense tells me that the home owner would do the same thing unless they have plenty of money to bring in to closing when they sell it for (just a #) $20k less than they owe (or 20k less than their negotiated price with the bank) they are not going to sell it they will just let the bank have it back.... whats the difference?? (other than the investor hasn't lost anything)

In other words let me ask you this, if you were an investor and doing short sales, would you buy a house that you cannot sell or negotiate a fair value for knowing you will lose money if you buy it for more than it is worth and sell it for what it is now worth?

Chris -

A few corrections.  "The tax part is pretty much up to the bank" is a statement the United States Treasury does not agree with.  I don't know of any law that permits a payer of income to determine if the recipient has to pay income tax on the amount received. (That's a nice way of saying you are incorrect in that statement).

The buyer (it could be an investor buyer or user buyer) can back out if that ability is in the contract.  There should always be a short sale addendum for a short sale contract.  The short sale addendum needs to set forth all the terms about the short sale that the parties agree to.  Usually at a minimum it sets forth a window in which the bank has to approve the sale, after which the buyer or seller can terminate the contract or extend it, whatever they agree upon.

Lastly, your last paragraph question begs the same question - why buy something for more than you are willing to pay?  Most people, especially investors, determine what they want to pay, put that number in the contract and if it is not accepted, they walk away from the deal.  When you go into a short sale contract you should know in advance that (1) your contract is subject to being overbid by a subsequent contract while the bank is analysing the offer, (2) it is going to take you 45 to 90 days to get to acceptance and then closing.  So make your offer what you want to pay based on those factors, and let the best bid win.

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 and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

Richard- If the bank does not file the forms to tell the government there is an "income" (that there really isn't if you want to be techniqual) then yes it is up to the bank. I have heard of this happening (sorry I am not into commiting felonies and checking their mailboxes to see if they lying, and I am not their attorney so who knows but thats what I have heard). The whole having to pay taxes on the "profit" is B.S. anyways because they did not make a profit obviously if they are in foreclosure and doing a short sale. I can understand the banks claiming the loss of course, but homeowner making a profit and losing the home? lol

People can back out for any reason really if they know how to write a contract. I've met people who have backed out because the husband didn't like the paint color.... but it was possible due to the contract lol.

Also, wouldn't you walk away if the price you want to pay as an investor isn't accepted (or atleast countered back somewhat close)? Also when being the investor that is actually setting the short sale up your generally not going to be out bid considering you have a contract with the actual owner that you will be the one doing the short sale and do all dealing with the banks. Of course you hope someone will offer you more than you are going to pay the banks thats the whole point of investors doing short sales duh, your an attorney you should know about people wanting to make money lol. Also, here in MI, it takes the banks 45-90 days just to look at the investors short sale package before even accoknowledging they have it or anything.

Chris -

I'm not going to argue with you but making income is not just making a profit.  Here is the IRS concept, which is also general accounting principals.  You borrow $100,000 and buy (or refiannce) a home.  You now sell the home for $75,000 and that is all the bank gets.  What happened to the $25,000?  Actually and in reality, it went into your pocket.  Yes, you never saw it, but it was there and you used it to buy the house and you owed it back.  Now if you don't pay it back and the bank says "just forget it", you got income.

Check out my article on the subject of income.

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 and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

Chris: It seems to me that you are more than likely an active participant in this activity.  I think that it should be illegal, because in my opinion you shouldn't be able to list something that you don't own (or at least have an accepted contract to purchase).

The homeowner should be the one with the home listed on the MLS.  It has been my experience that the mortgage holder requires the home to be listed before they will consider a short sale.  I am assuming that the investor is getting around that issue by listing the home with themselves as the seller.

A fellow Realtor told me that there was a recent television special about Flipping Shortsales... I wish that I'd seen it.  I'd like to know what others think of this practice, especially the legal system and Real Estate Commissions across the county.

Ralph and Susan:  I love your point where you said, just because seminars teach this stuff that doesn't make it right or legal!  I'm really surprised that some Federal Agency hasn't pulled the plug on this practice already.

I believe that the investor (who doesn't own the property or have an accepted contract to purchase the property) signed the listing agreement.  The two homes that I saw actually listed the investor as the seller on the MLS!

Thanks for your comments.

Richard- I understand I was just saying it isn't really a true income thats all. yes accounting wise it is a profit, real world no it is a loss, as they lost their home, lower credit scores, higher interest rates etc don't see much good there (+ the banks got their money already anyways weather you paid it or not they sell the note... ever seen an original bank copy (not a copy of the original but the actual original) of the note even before homeowner repays the loan... bet it is stamped paid in full lol)

Cheryl- Techniqually the investor could be the "owner" with a quit claim deed. Again if the investors waited to get an accepted contract to purchase from the banks it would never get listed because they generally wait till last minute to accept the short sale and drag it out as long as possible for some dumb reason. I actually saw one that the bank wanted the closing 15 days after they accepted (which happened to be the day before the forclosure was to be finalized and the home seized)

Chris: If the homeowner signs their ownership over to an investor by signing a quit claim deed, when they are still responsible for the mortgage (paying it or not), that would be pretty stupid.  I don't understand how these investors are talking homeowners into this deal.  In the cases I've seen here in Charlotte the investor is NOT the owner of the property.

Chris: If the homeowner signs their ownership over to an investor by signing a quit claim deed, when they are still responsible for the mortgage (paying it or not), that would be pretty stupid.  I don't understand how these investors are talking homeowners into this deal.  In the cases I've seen here in Charlotte the investor is NOT the owner of the property.

Chris: If the homeowner signs their ownership over to an investor by signing a quit claim deed, when they are still responsible for the mortgage (paying it or not), that would be pretty stupid.  I don't understand how these investors are talking homeowners into this deal.  In the cases I've seen here in Charlotte the investor is NOT the owner of the property.

We have a situation here with some 'investors' having the property transferred into a trust to the homeowner.  They then have the homeowner transfer that trust to the 'investor' which is a corporation.  Two contracts are done.  One with the homeowner for an amount that is for the mortgage and any liens on it, then another one from the first trust to the 'investor' (which is a corporation) for a much lower amount.  While the investor is negotiating they are trying to sell the property to someone else at a much higher amount.  Is it legal?  Since they do in effect own the property, yes, they can advertise the property.  If the short sale can't be worked out, they walk.  They haven't filed their trust, so, who's going to find them anyway?  They just put it back where it was originally...at the homeowner's feet.

Do the homeowners know they are responsible for everything and anything the corporation does with the property?   I don't know.  Do they realize that their credit can be affected further?  Do they realize these investors can rent it out, collect money and walk?  Do they realize that the 'investor' can sell the trust to someone else and walk?  

Why do people do this?  Because they are scared, ignorant to the consequences, and are sold a bill of goods..."we are here to help you".

Power of attorney over the property is another way the investor is the "owner" giving them full right to list and sell the property subject to short sale.

Again.... if the bank doesn't want to do a short sale wouldn't you walk? Sorry but if you would stay and buy the home yourself for what the homeowner owes (which is more than it is now worth) you are a fool.

I don't understand why Realtors have such a big problem with these deals. Investors/Short Sale Companies are the ones that find these homeowners that are in a jam and give them options. They are the people that negotiate with the bank and walk these clients through this process (hopefully they're honest). They deserve to make a profit and best of all they contract the property and list it with a Realtor (go figure). Im just sayin......Maybe Realtors should target Investors/ SS Companies and get some listings :)

As long as it's legal, all is disclosed to all parties involved and none of the people are practicing real estate without a license I would assume none of us have a problem with it.  

I'm sure there are investors that are doing everything above board.  But at the same time there are 'investors' that aren't. 

Sergio- you sir are a wise man, why turn down money when things are being done properly and legally? Cherly doesn't get that concept. Yup I am a bad man because I want to help people while helping myself as well. I help the people going through the foreclosure process by generally paying more for the home through the short sale than the bank would sell it for after the foreclosure (meaning they have less owed in the end, less taxes to pay on it in the end) I help Realtors make their living (unlike what Cheryl claims some investors don't just walk, as my group has actually bought several properties for the group to sell later, or rent out, or fix up and sell) by listing our properties through realtors (eventhough in the past we have been sucessful on renting and selling on our own Realtors just make it easier and take away from what all we have to do so we can do more and get the realtors more, works great for everyone).

Cheryl- Yes there are investors who do things wrong, unfortunately there are also realtors who don't do everything right either, I don't bash realtors on a whole or call what realtors do illegal because I have had a run in with a bad one... think about it ;-)

Hmmm, way too many comments to read, but I read the post.

Even if this were 110% legal, I would stay away.

I know that investors buy with "and/or assigns" because they are wholesaling the deal.  However, with that, they are stuck with the property if they cannot resell it.  What they are doing, however, has no guarantee of working.  Short sales are tricky to get approved.  Anything can go wrong and put the deal on the skids.

If this is allowed, it should quickly be changed so that it is not. 

Chris: Obviously I'm not the only one who has issues with this practice.  You wouldn't be "helping" if you weren't making money.  They must teach investors to use the words "I just want to help" in the classes on flipping short sales.  That is the same thing that the local investor said to me.

I never said that all investors walk, that would have been a very stupid statement.

I'm not bashing investors, I'm bashing this practice.  I think it should be illegal.  If everything is above board, then I wonder why real estate signs aren't posted at these properties?  

I'm entitled to my opinion just as you are entitled to yours, so I guess we will just have to agree to disagree.

Cheryl- I know of quite a few of these homes that are listed with realtors and have signs in the yards.... Many of them are actually listed with the President of a local Association of Realtors, so yeah I would say that everything is above board lol.

Let me guess you also think it is illegal for a noninvestor who walks away for any reason is also breaking the law.

Hello Again Chris: Since you live in Michigan and I live in North Carolina do you think it is possible that there could be a difference in how short sale flips are done in our areas?  The only listings of this type that I have personal knowledge of in the Charlotte area, don't have a real estate sign in the yard.  I don't have any personal knowledge of these listings in Michigan.

Again, I say that I'm not the only person in the country that takes issue with this practice.

Also, I don't know why you keep bringing up people walking away from a deal.  That wasn't the point of this post at all!  

And of course, in the state of North Carolina any buyer can terminate a contract during the inspection period if there are structural and mechanical defects discovered AND either the seller won't do the repairs OR the estimate of repairs exceeds the repair contingency amount shown in the contract.  Additionally, in the state of North Carolina a buyer can terminate a contract if they are unable to obtain financing under the financing contingency in the contract.  If a buyer terminates a contract for NO reason in the state of North Carolina (when using alternative A) then the seller could sue for specific performance and force the buyer to perform (purchase the property) under the contract.

Are you a licensed real estate agent?  Are you an attorney?  The only profession that you mention in your profile is Lawn Care.  If you are a real estate investor then why don't you say so?

I participate in Active Rain to share opinions/information and learn from other Realtors and Real Estate Professionals.  I'm done arguing with you Chris!  It seems that the attorney that was going back and forth with you,  Richard Zaretsky, Esq. (Richard P. Zaretsky P.A.), gave up a long time ago!