I recently posted on this blog the following article Short Sale Heaven Coming April 5th 2010 . Out of it came several interesting comments including a post from an gentleman who sharply disputed my comments let me know that I’d “been schooled.” I delayed replying because I thought further discussion of the subject of the sustainability in this market of short sale quick turning might be deserve it’s own blog post. Please read the following comments:
This is great information. As a investor will I still be able to do these short sales or will I need some kind of certification.
Thanks!
Andy Morris December 11, 2009 at 8:50 pm [edit] According to this directive a investor who is completely arms length is free to make an offer on a short sale property that is allready listed by a real estate agent. No certification needed. The way the short sale agreement is written it will make it very hard for “option and resale investors” or short sale flippers. Many of these investors will get an option on a short sale property, record it to cloud title, find a buyer to buy it from them and negotiate lower and then only close the property themselves when their end buyer they are selling to it has brought the money and is ready to close. This is very common in the industry although frowned upon by most lenders and politicians. The following clause is in the short sale agreement required to be signed by all sellers “Under penalty of perjury, you certify that:
1. the sale of the property is an “arm’s‐length” transaction, between parties who are unrelated and
unaffiliated by family, marriage, or commercial enterprise;
2. there are no agreements or understandings between you and the Buyer that you will remain in the
property as a tenant or later obtain title or ownership of the property;
3. neither you nor the Buyer will receive any funds or commissions from the sale of the property; and
4. there are no agreements or offers relating to the sale or subsequent sale of the property that have not
been disclosed to the Servicer.”
Also the agreement of a short sale can be terminated if:
“You or your broker fails to act in good faith in closing on the sale of the property or otherwise fails to abide by the terms of this Request.” One example of such lack of good faith would be that a broker directs all short sale sellers to a single investor and avoids exposing it to the open market thereby artificially lowering the price and causing the lender to believe that it is worth less than what it is.
Also quoted from the directive: “Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you.” This effectively will remove quick flip investors from the mix.
Kevin Kravcak December 12, 2009 at 2:12 am [edit] Andy,
Surely you jest?
If the contract is written the right way investors will most certainly still be able to perform back to back closings.
Your line….4. there are no agreements or offers relating to the sale or subsequent sale of the property that have not
been disclosed to the Servicer.”……….
is the key to open the lock on that door. It’s all about disclosure and transparency.
and this line here…..
“You or your broker fails to act in good faith in closing on the sale of the property or otherwise fails to abide by the terms of this Request.” One example of such lack of good faith would be that a broker directs all short sale sellers to a single investor and avoids exposing it to the open market thereby artificially lowering the price and causing the lender to believe that it is worth less than what it is………….. more hogwash from our illustrius politicians……..first of all what if there is no broker, no one can force you to list your house with a licensed agent….(consumer and anti-trust laws)……… second of all and more importantly, the lender(s) does their own independent valuation of each property they have on their books, most of them use at least 3 -4 different sources (which is also why the ten day rule is ludicrous), they know what the value is and they approve short sales based on their own interior accounting systems.
Any knowledgeable attorney will tell you there is nothing illegal about doing back to back closings as long as you disclose what you are doing and the bank approves a short payoff, you will still be free to do as agreed. A contract is a contract, it can’t be broken and will be upheld in a court of law.
Now, if you are fraudulent in any way, then you will have some problems and certainly should be worried but that is no different than the way it is now.
AND…..Lenders are approving short sales on 2nd homes, development projects and commercial properties all day long……this new bill is just more political fluff that was thrown together without much thought to appease the masses.
How about this fantastic investment idea for you and your followers………Commercial real estate cramdown opportunities will NOT be affected by any of this “legislation”. Same lenders…..bigger financial burdens on their books……no public, political or Realtor negativity…..and much larger spreads of equity opportunity.
You’ve just been schooled….now go implement what you’ve been taught and help us get out of this mess…..
BTW – there is no charge but i do take donations…lol
I want to say that I entered the real estate business 10 years ago at 19 years old as an investor. At that point I walked out of 3 years in my electrical engineering degree with dollar signs in my eyes hoping to make vast riches in creative real estate with out using any money of my own. I have studied and read material from many investor gurus including specific short sale material from Jeff Kaller, Strategic Real Estate Coach, Mark Sumpter, Nathan Jurewicz and probably a half dozen other short sale invester gurus.
At this point most of the gurus are teaching a method of flipping short sales whereby the investor signs an option to purchase the property (basically a purchase agreement that is contingent on investor choosing to finish the purchase) from the homeowner wanting to sell on a short sale which they then notarize and file at the county recorders office to cloud title. Then they market the interest that they have obtained in the property using the purchase option (typically they list on the MLS with a realtor) and simultaneously attempt to negotiate as low as possible with the mortgage lender. Most short sale quick turn proffessionals will will wait until they have a solid retail offer before they finalize negotiations with the lender on the short sale unless they can absolutely “steal it” in which case if they have enough long term capital they will purchase it them to hold onto it. When an end retail buyer is in place with money in escrow they will close the short sale at a much reduced price from where they allready have an agreement to sell it at. Typically they will use special one or two day transactional funding and pay a one or two percent fee to do so. Then a day or two later they will finish the sale of the property to the end retail buyer.
Although if it is done right these kind of “flips” are legal in most areas (with exceptions), I do question the actual value that that investors bring to the market in most of these transactions. I say this as someone who has bought and sold short sales and negotiated as an investor on short sales using these techniques.
The upside of using a quick turn investor to sell your home on a short sale is:
1. Multiple mortgages- Multiple mortgage present a problem because typically 1st mortgages don’t want the jr. mortgages and liens to get almost any of the proceeds at all and they have negotiating priority. If the size of the junior lien is significant they may want to see more than $500 or $1000 that the the 1st mortgage wants them to settle for. If the junior lien wants $5,000 but the 1st mortgage will only allow $1000 to be paid from the proceeds often times the buyer can come to closing with and extra $4,000 and make everyone happy. An investor buyer who is making $50,000 at closing has no problem paying an extra $4,000. An ordinary retail buyer who has allready given his or her best offer might not be happy about bringin those extra $$$ to close.
2. Low dollar properties- most short sales realtors don’t even want to mess with a property in the really distressed areas of the country like inner city Detroit or inner city Cleveland. There you will find properties with loans for 100,000 selling for 10,000. A realtor will have a hard time making $300 on a property like that and will turn down such listings. An investor might be able to negotiate it down to 5,000 and resell it to another investor for 10,000 thus making what typical real estate agent might make in larger transaction. Come to think of it though most short sale investors don’t want to mess with these either… 
3. Immediate offers- Investors are ready to bring an immediate offer to the table. However a realtor who prices her listing right will typically have multiple offers with in in a week and from the open market which means that the offers will typically be higher.
4. Prenegotiated short sale- Probably the biggest benefit for using an investor is that they can get a short sale prenegotiated and typically before it is marketed negotiations are well on their way. An agent who has a retail buyer will find and lose 2 to 3 buyers before the bank finally approves the first submitted offer however a skillful real estate can bring some of the same results.
The downside is:
1. Greed- So much money can be made by negotiating lower (remember every extra dollar the investor gets the bank down is an extra $ in their pocket) that it is tempting for an investor to delay negotiations and jeapardize a transaction to really go for a home run rather than just complete a transaction for a couple of thousand dollars that could happen now. However a licensed agent only makes a percentage of the the total sales price. An agent typically will work to close the sale of your property to the first qualified buyer.
2. For some folks there will be an increased risk of 1099 tax exposure and higher risk of deficiency collection(in some areas) if the seller is very collectable. This would be mainly a problem for sellers of investment propeties. Especially people who have a low tax basis. Investors obviously are looking to make a profit first and foremost and they don’t have license on the line to worry about in making a onesided transaction.
3. Low offers can cause unnesesary delays. Lenders will often turn low offers down arbitrarily. Countrywide and now Bank of America are famous for this. If your negotiation cycle is 30+ days like sometimes it is with Bank of America, having a super low offer can signficantly effect the negotiation time which is dangerious in when you are trying to beat a foreclosure deadline.
4. Title seasoning issues eliminate huge percentage of buyers in many markets- Unfortunately in many markets FHA buyers make up 50% to 75% of the buyers. One of the requirements for a buyer to get a loan under FHA underwriting guidelines is that the previous owner have owned the property for atleast 90 days. There are some questionable ways around this requirement. However why would a homeowner tie up a property with an investor when they know that the investor is depending on an end buyer who has a good chance of not even being able to purchase home now that the investor has gotten involved?
To this point in this post I have just given you a back ground for some of my thinking about investor flips. I am not hater but but I think my negativity has some validity to it.
Kevin Kravcak makes a good point that if we fully disclose what we are doing then there are no legal issues. The quote here from supplemental directive 09-09 that “there are no agreements or offers relating to the sale or subsequent sale of the property that have not been disclosed to the Servicer” seems to indicate that there is a higher burden of disclosure than most investors currently do. Most investors will put some general statement into their option agreement that says something like, “All parties understand that buyer is an investor and may resell the property for a profit.” I am not alone in believing that there may be a court somewhere that says such a general disclosure or something similar to it is simply not enough. I believe that especially with the quote as stated that there may be a burden for the proffessionals involved to actually disclose accepted offers from the investor to the final buyer. I am sure this will be violently contested by some investor and we can talk more about that in the comments of this post.
However what was totally ignored by Kevin and I haven’t seen anyone address this is the line I quoted directly from the directive, “Any buyer of your property must agree to not sell the home within 90 calendar days of the date it is sold by you.” If a buyer is forced to sign that they will not resell the property with in 90 calendar days it is going to eliminate the simultanous closings that are so prevalent and hugely limit the properties that a short sale investor can buy.
Now in spite of all this I am not predicting the total demise of all quick turn investors. I suspect that investors will continue to find ways to quick turn properties. Also there is a good chance that many lenders will not choose to participate in HAFA because limitations may out way the benefits. Also Freddie Mac and Fannie Mae which make up a huge section of the market will be coming up with their own versions of HAFA which may or may not have these same restrictions on resale. However I suspect they will have some similar restrictions as Freddie Mac is in charge of auditing for HAFA compliance and Fannie Mae all ready puts deed restrictions on limiting the resale of its REO properties.
Regarding Kevin’s comment regarding regarding commercial real estate loans not being effected by that legislation I agree. And I think that is one niche that is hugely profitable precicely because no one will hate on you for making money. The problem we have is that it is not politically correct to even appear to make large amounts of money per transaction off the backs of banks that have loaned on homes. To do so doesn’t mean you are breaking a law necesarily yet, however it may very well make you a target.
I am going to get on a soap box here and also be a bit negative. In America there is far less justice than we would all like to believe. Things go on that we would like to ignore. A boston civil liberties attorney named, Harvey Silvergate recently wrote a book called “Three Felonies A Day.” In it he estimates that because of purposely vague language in the federal criminal code the average business person and politicion goes to the office and commits three felonies a day. These laws were written purposely vague because proffesional criminals usually are hard to catch doing crimes. However people that are not liked can now be targeted by federal investigators and be targeted with out any known wrong doing and then the loosely written code can be used to put them away.
I will say that right now it is not politically correct to quick turn short sale homes. My opinion is that there will be some really honest and ethical flippers that are prosecuted not for illegal flipping but for some technicality because they were targeted. This is just my .02. Please feel free to hate below…
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Andy Morris is an Ohio real estate broker and short sale expert. If your home is heading towards foreclosure or you owe more than your property is worth, please call Andy at 866-SELL-911 to see if you qualify for a short sale with your lender. Andy uses his knowledge to partnership with brokers and investors that can help him effectively short sale your home where ever it is in the USA.
{ 4 comments… read them below or add one }
I am investor in Georgia We buy both short sale and non shortsale homes paying as much as fair market value.
We do legal flips . The key is full disclosure. That is why we do our negotiations. When we submit our contract to the lender we tell them we are reselling the property for a profit and tell them how much we are making. We limit our profit to 15% which most lenders agree is a fair profit.
We demonstrate to the lender that our cash offer today is better for them than than a foreclosure and sale in 6 to 8 months.
The service we provide is the cash offer. In my county I see homes go to foreclosure every month when listed with realtors waiting for offer. Buyers in my area are not buying shortsales because of the time involved. And we have never refused to sell to a FHA buyer unless we have an offer from cash or conventional buyer. If Fha is all we have and we don’t want to hold property we step aside. The homeowner avoids foreclosure, the realtors get commissions and the lender gets out of loan. And just getting the liens removed makes getting an offer more likely.
While like in all areas of business there are greedy investors taking advantage of others please don’t lump all investors in the pot.
If we can not create a win for homeowner, realtors, lender and us we simply step out of deal.
Our experience has been that even if lenders say approval is for particuliar buyer we have never had a lender refuse a sale when we step out and submit another buyer.
If realtor is having sucess listing shortsales and finding buyers and stopping foreclosure they do not need us. But if realtor is seeing listings go to foreclosure then does it not make sense to do business with ethical investor? THEY DO EXIST!
I don’t deny that there are ethical investors. I have in fact met many ethical investors.
I think that most agents who let properties go to sheriff sale have either improperly priced a property or listed a property that can’t be sold at any price (i.e. inner city Cleveland and inner city Detroit).
Andy,
In reference to your questioning of the value that a quick-flip investor brings to the table, consider this…
Arbitrage happens in business everyday. When you go to buy a product at Wal-Mart, they actually don’t own that product until the product is actually scanned by a cashier. As soon as that product is scanned, ownership is transferred from wholesaler to Wal-Mart to end buyer.
What has Wal-Mart done to justify taking that profit? Place a product on a shelf? Basically, yes that’s the extent of it.
A quick-flip investor takes a piece of property a bank considers a toxic asset and removes it from the distressed category.
If a homeshopper sees two identical homes on the same block and one is s short sale and the other is a non-distressed property, is that shopper going to offer full price on the short sale property? Never. Buyers EXPECT a discount if they are going to deal with the uncertainties involved in the short sale process.
Short sale properties are most often sold as-is and without any warranty. Is it any wonder so many short sale buyers fall out on regular short sale transactions?
So, can a home really justifiably have two different prices on the same day? Absolutely. The investor buyer’s negotiator has increased the value of that property by taking it out of the distressed category, which makes the inherent value higher to any buyer.
Jay selling hardware, knick knacks and groceries is different than selling real estate. Also the situation of both the banks and the borrowers themselves being foreclosed is much different than a factory selling widgets to walmart that then marks them up and sells them to consumers.
I have been on the investor side and I simply don’t do it anymore. In general it is better for all primary parties if the house gets exposed to the open market and a reasonable offer is procured. It simply is more of a win for all parties. There is no need for an “investor” to come in control the deal and play a role that works very much the same as a broker but with out being bound by any licensing guidelines and who owes no fiduciary duty to the seller.
I am sure you will vigorously disagree. That is fine with me.