Is short sale flipping illegal??

The answer is yes and no, and let me explain:

Different banks have different contracts with Fannie Mae and Freddie Mac.  That’s why Bank of America can’t do some loans that Wells Fargo can.    

The 90 Day Rule

Here’s a general rule.  When someone buys a home for a certain price, and tries to immediately sell it for more (immediately, here, means 90 days), banks have rules.  One of those rules is that you may not “flip” the property.  The key word, here, is “banks.”  Fannie Mae and Freddie Mac DON’T CARE if you turn and sell the property, immediately.  FHA Does!

Want To Turn An Immediate Profit?

So, what do people do if they’re trying to turn a quick profit?  Well, work with me, of course!  Here’s why!

What’s The Deal?

Fannie Mae and Freddie Mac’s guidelines are clear…you may purchase a home, fix it up, and sell it, promptly.  Even for a profit.  So, why don’t many banks allow a buyer to come in and purchase a “flipper” within the 90 days?  Let’s talk about FHA’s guidelines.

FHA “Flipping” Guidelines

 If you care, read about them, here!

Hey Investor, You Can Still Flip; However It Needs To Be Done Correctly!!

1) Adequate Disclosures: Proper and adequate disclosure is essential in order for a short sale investor to stay out of trouble. “Trouble” means accusations of fraud or other illegal activities.

2) Disclosure To The Homeowner: The most important and most detailed disclosures should be made by the short sale investor to the homeowner who is in default or foreclosure. These disclosures need to be in writing and need to be provided to the homeowner when or before any documents are signed. Please follow your state laws as well.

3) Disclosure To The Foreclosing Lender: This is a hot topic in the industry, and I will not conduct business without informing the defaulted lender of my intentions. There is a lot of terminology here in the contract, but it boils down to this. The buyer is a real estate investor, and the intention is to seek a profit( short or long term) by purchasing the house through a short sale. The investor plans to promptly resell the property for a profit, and the homeowner will not receive a dime of the proceeds.

4) Disclosure to Realtors, Brokers, Mortgage Brokers, and Attornies: At all times that the home is “listed” on the market by either the investor or homeowner it should be disclosed in the MLS listing that it’s subject to third party lender approval. If the discount has already been obtained, but the end buyer has not been found, then that information(written short sale approval received) should also be included in the MLS information.

5) Disclosure To The End Buyer: 1st it must be disclosed in the purchase and sale agreement that the transaction is ” subject to written short sale approval that must be satisfactory to the seller.” It should also be disclosed that “the short sale approval that must be satisfactory to the seller.” Also the language in the contract should say “the short sale transaction needs to be completed or closed before being able to complete the sale to the end buyer.” Another important point to disclose is that the legal basis the short sale investor has for selling the property, is that the investor must be able to provide appropriate and legally valid documentation verifying their position to sell the property. Such documentation could be a recorded notice of option that specifically gives the investor the right to list, market buy, and then resell the property during the term of the option period. Please use all your state specific real estate forms, and proper addendums.

6) Disclosure To The End Buyer’s Lender:

This is a must, so that your deal does not fall apart a week before your closing. This is where most short sale investors miss the boat. Please make sure you send a chain of title explanation to show that you will be on title. Other items that need to be disclosed in the title commitment are the nature of the investor’s relationship with the property. Do they hold an option to the property? If so, that must be listed as an exception to the title in Section 2 Part B of the title commitment. The funding lender may ask what the short sale price is and what potential gross profit the investor is making. If they ask Always, tell them.

I could go on and write another 13 pages, on the very small details of the transaction, but I won’t. If you want to learn more on this topic,  have it done correctly, and help you avoid jail, please feel free to contact me via email calihomeloan4u@gmail.com or call me directly at 310-918-9102.