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Short Sales and Option Contracts

By
Real Estate Broker/Owner with J. Luis Properties, Inc.

The rave that seems to be making the rounds in the Real Estate community is the short sale option contract. It goes something like this: A Realtor gets a call from a prospect to list a property for sale which is worth less than owed (Short Sale Scenario). The agent does not want another short sale listing but reluctantly takes it and turns to an investor for help. The investor makes an extremely low offer with an option to sell. He then takes over the short sale negotiation from the agent who has agreed to let him do so.

The hitch is that the property is then actively marketed for a higher price while under contract. A buyer is found and a contract is written with the investor as the seller. Once it closes it is immediately sold to the buyer. Of course there are other variables and scenarios painted in different lights to try and masquerade what is going on but this is essentially what is happening. Oh by the way the listing agent is promised the second listing as well along with a reduced commission, but who cares the agent is getting two commissions days apart, nice!

The problem with that is the little thing called code of ethics. A Realtor has a fiduciary responsibility to get the highest and best price for the seller. The other wrinkle is this other little thing called fraud. If the agent knew full well he could get a higher sales price, why didn't the bank receive those funds? Especially when he listed it for the investor and sold it a few days later.

If this scheme is properly disclosed to all parties, I doubt the bank will accept the first offer, especially when they do their homework and find out what the property is worth. Most of the time it is not even called an option contract because that phrase raises red flags. You can see why the "investor" wants to control the negotiation process. This way he controls the information to the lender. He probably manipulates the BPO as well to get the sales price accepted. This is why the Realtor has to be in on the scam.

Most option contracts require either one of two elements to make them work ethically. The first is time, and the other more practical one is buying low with all parties aware of what is going on. The property needs to have enough equity and the seller needs to be sophisticated enough to know he is leaving money on the table in exchange for a quick sale.

Common sense should prevail here. Think about it, if the property can be sold at that much of a discount don't you think you can find plenty of buyers? Why use a middle man?

What I see happening is a bunch of Realtors being duped to buy a course that packages this type of transaction in the form of books, cd's and webinars in exchange for putting their license and freedom on the line. Heaven forbid an agent actually gets involved in a short sale option contract. The ones making the money are the endless amounts of gurus, so called investors and overnight experts. If it sounds too good to be true it usually is.

See this article for an actual case. http://www.nationalmortgagenews.com/fraud/stories/?id=289

 

Comments (9)

Associate Broker Falmouth MA Cape Cod Heath Coker
https://teamcoker.robertpaul.com - Falmouth, MA
Heath Coker Berkshire Hathaway HS Robert Paul Prop

Many banks also have disclosure after disclosure that they require which are intended to weed out these scenarios.

Jan 30, 2009 12:22 PM
Goodbye Active Rain
Out of Real Estate

Read the article I just posted on using the option contract for short sales and tell me if it makes sense.  As investors we do deals outside the box.  Take care.

Jan 30, 2009 12:24 PM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

Tony,

I read the deal you describe and it is not outside the box it's pretty easy to understand. I have too many questions and issues with it to list here, but if it works for you and you can sleep well at night good for you.

Jan 30, 2009 12:49 PM
Wendy Smith
Wendy Smith Real Estate - Clearwater, FL
Real Estate Advisor

Tony, where is your article about option contracts

Feb 04, 2009 01:22 PM
Anonymous
Anonymous

Here is Tony's blog on his deal:

http://activerain.com/blogsview/909092/Short-Sale-Using-the-Option-Contract

I have a lot of questions but they are not for this forum.

Noel

Feb 04, 2009 08:56 PM
#5
Nick Dailey
RE/MAX Affiliates - Union, KY
RE/MAX: Northern Kentucky Real Estate - NKY MLS - Short Sale

Your article for an 'actual case' was for a land trust deal.  Apples and oranges my friend...

Feb 09, 2009 03:47 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

Read it carefully, they tried to use a land trust to beat the system. The example was to show what is going on in the industry. Don't you believe the same or similar scenarios are being played out every day in the residential sector? I don't think the prison sentence will differ that much either.

Feb 09, 2009 04:42 AM
Patrick Schutte
Flex Realty - Prescott, AZ
REALTOR

Thanks for putting it out there, Noel.

I spoke to an agent (a CDPE) today that was doing this with an investor, and she said it was kosher as long as the listing contract was with the investor and that the seller was just part of the transaction.

My escrow officer said that their company would not do any double closes as it was mortgage fraud.

It seems as though there are some different takes on it.  A lack of case law?

Thanks again!  :) PS

Jun 05, 2009 10:30 AM
Noel Padilla
J. Luis Properties, Inc. - Kendall, FL
CDPE

I was almost hooked a few times but as the old adage goes if its too good to be true than it usualy is. I read a blog where an investor bragged about getting a contractor to draw up a phony estimate of repairs to get the price reduced. Like i said before option contracts are for the sophisticated seller who wants to dump a property but knows its worth more. This worked well in the 1800's and before but once the Brokerage came along, what was the point? If you think about it we as realtors are in the middle of option contracts all the time. We sell a home for a certain price. We find the buyer just like the option holder and flip it for a profit (commission). The difference is we never take ownership or cloud a title unnecassarily.

For the option contract truly to work, an agent can't be involved in the first deal, if one were, the property would sell over night at the discounted price on the MLS. The whole thing has to be a secret in order to profit a great deal. These investors prey on lazy agents who don't want to deal with short sales.

 

 

Jun 05, 2009 10:50 AM