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Pre-foreclosure Sellers Beware the Investor Option Purchase Short Sale Scams

By
Real Estate Broker/Owner with Jonathan and Associates, Inc

Over the last six months, our group has been approached by about a dozen "professional," non-licensed real estate buyers pitching to us a program that I've comfortable rejecting as a scam you need to avoid.  These are real estate investors who are trying to make a quick buck from your misery as a homeowner facing foreclosure. 

While each may do things a little differently, essentially you have an investor that may or may not contact the seller with an offer to purchase their home in distress.  They will work out the details of a short sale with the bank on the seller's behalf and if the home is listed, often keep that same agent in place.  The home is re-listed instantly upon a contract between the buyer and seller (still pending bank approval) in the hopes of finding another buyer to pay an inflated asking price for the property.  That's right: while the investor has your home under contract for $200,000, he is marketing it for sale for $300,000.

When the bank responds, the investor may adjust the price but never signs off on the paperwork UNTIL they find a buyer.  If a buyer is found, the investor moves to close the deal with the bank while at the same time, the buyer is closing the deal with the investor.  On the day of close, the seller and the investor closes in the morning and in the afternoon, the investor (now seller) and buyer settles.  The investor only owns the home for a few hours and for the trouble, they make a few thousand dollars.  

It seems like a win-win, right?  After all, in many other posts, I have expressed that any first offer on a short sale is great because it will allow the bank to work through the process, which can take 3-6 months.  Here are a few problems with this that as a seller and a buyer, you need to be aware of.

First, these contracts are very one-sided geared to the investor's protection.  Consult with an attorney on all documentation pertaining to your pre-foreclosure situation, especially if you are choosing to go down this road.  Often times, these contracts are extremely iron clad, allowing for only the investor the right to back out.

Second, they never intend on buying the home.  Remember that these guys are altruistic but are trying to make a quick buck off your pain and suffering.  Therefore, they are taking your market price and inflating it in an attempt to make a profit.  If that infestor (freudian slip) is attempting to set too high a margin for themselves or if your home isn't worth what they have it listed for, they can simply back out of the contract at anytime without penalty.  To me, signing one of these contracts is damning you to foreclosure. 

Third, their quick ownership may make the home unable to be resold.  Lenders, Title Insurers, and Mortgage Insurers are becoming very strict in their guidelines and anything fishy doesn't fly.  For the last few years, FHA has had a problem lending on homes where the current owner has owned the home less than 6 months.  With our work with bank properties, we have had to have many of our files manually underwritten because the owner (a bank) had only owned the home 3 months.  With all the regulation changes that are happening daily, I would not want to be anywhere near one of these investor-option transactions since a lender could choose not to lend on the home because of this quick purchase and sale. 

Fourth, as a seller, you have no recourse.  These investors are incredibly smart, figuring out how to scam distress homeowners under the guise of a purchase and using an option contract to do it.  In a normal real estate transaction in North and South Carolina, a buyer would put earnest money (otherwise thought of as good faith money) into an escrow account during the course of the transaction in case they defaulted.  If default occurred in a contract, the earnest money would be considered liquidated damages and usually dispersed to the sellers.  In an option contract, the buyer pays the seller directly for the priviledge of walking away at any time during the option period.  These contracts extend the option period well up and through the seller's foreclosure date, giving the investor the right to back out at any time...meaning they never have to buy the house.  Often, these investors will also not have a fee involved or a low-low fee that is inappropriate for such an ordeal. 

Stop and think for a moment.  If your agent struggled to get offers at the current price, what will increasing the price only serve to do? 

So my advice: continue to price your home aggressively and stay away from thee investor contracts. 

Jonathan Osman

Charlotte Short Sale

Comments (3)

Kerry Lucasse
eXp Realty - Urban Nest Real Estate Group - Atlanta, GA
Your Urban Nest Atlanta Real Estate Consultant

This has happened 2x in the last week!  I had a buyer who was ready to put an offer on the short sale property UNTIL we found out about this crazy investor situation.  I would almost expect to see this with $200K or $300K homes, but this property had a very hefty price tag.  Then a day or two ago, I received a call from an investor who wanted to purchase my listing sight-unseen and let it go through the short sale process until a buyer submitted an offer.

Bizarre.

Jun 05, 2009 03:22 PM
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

I can not believe you did not receive many comment on this article. I have written a very detailed post about this topic. Realtors and home sellers really need to pay attention to short sale investor mortgage fraud!

Aug 17, 2010 03:38 PM
EliSabeth McDermot
Andersonville, TN

There are investors out there who are helping people. Investors who are re selling the property still well below market value. A win win for all!!

Mar 06, 2011 04:46 AM