So here is the deal. Seller "A" signs up a contract to sell their short sale home to investor "B". Then investor B negotiates with seller A's bank to do a short sale for a low price. In the meantime during all the weeks and months of negotiating with the short sale lender, investor B finds a buyer "C" to pay a higher amount. Then when it comes time to close, seller A sells the house to investor B for $X and B immediately re-sells the house (either same day or a few days later) to buyer C for $X+++ . The spread in values is B's profit. I have heard some people making a few thousand dollars while other making over 5 figures on the spread.
Although, I have done some of these deals in years past. I have not personally done a short sale flip in a long time (prior to the boom and crash). But I know quite a few people that do this for a living and make serious bucks at doing it. There are many gurus out there teaching detailed seminars on how to do just that.
Almost everytime I hear about short sale double closings (or flipping), the word FRAUD is involved. Whether it be from lenders, Realtors, or government officers. However, when I ask people what they mean by "fraud" they talk about false documents, deceiving the BPO agent, and lying to the lenders. I think we can all agree that actions like that are fraudulent. But what about the transaction itself - assuming that everything was disclosed as necessary?
There was actually an article in the September 2010 Realtor magazine on page 12. Agent Found Liable for Short Sale Fraud. Basically the listing agent steered a seller into selling to a pocket buyer who then did a short sale flip with the property. The seller later filed bankruptcy and the bankruptcy court allowed the court trustee to void the sale. The court also said "that the agent and investor representative may be liable for punitive damages." The article does not go into specific detail on the various wrongdoings, so it is hard to know exactly what they did or didn't do wrong. It also does not say that anybody was ever charged criminally or civilly.
Now on the other hand, many of the short saling lenders do not prohibit double closings. Often they will get the sellers and buyers to sign an affidavit that the sellers won't lease back or buy back the property. Or that the buyer will not re-sell the property for 30 days after the closing. But that is typically the extent of the prohibitions. In fact many of the title companies have specific underwriting guidelines for insuring short sale flips. Here is a memo from Florida's leading title insurer, The Fund. Their memo actually goes into great detail on how to legally do these short sale double closings.
Short sales will be around for many years to come. So it is good to at least know the ins and outs of various profit centers. If you are going to do these deals, just make sure to keep everything legal. The key is to disclose, disclose, disclose, and then disclose some more.
Prior articles on this subject: