If you currently engage in that newly-demonized yet highly-productive, profitable and essential-to-market-recovery practice of buying properties via short sale and then (gasp) selling them off for a profit, then get ready for some more bad press. In Connecticut, two real estate agents are going to be sentenced in federal court in the next two months for fraud.
The fraud in question? Negotiating short sales with lenders without disclosing all offers on the property to the lenders. Once the properties were sold, the agents then flipped the houses quickly for a profit.
As real estate agents, these two parties absolutely could be argued have additional obligations to the lenders to disclose offers. After all, they are the agents and part of being an agent on a property is to disclose “all relevant, known information.” However, it is unclear for whom the agents were working – in this case, it looks like they were representing themselves as buyers rather than working for the bank. This makes things far grayer for real estate investors, who may be aware that they can sell a property with the proper repairs, marketing and time involved for a higher price than a lender can, but may not feel that it is necessary, appropriate or even demonstrative of any type of business acumen whatsoever to basically outline their action plan to the competition.
For now, if you flip – or flop – short sales, be very sure that you understand each and every aspect of your role in the deal. Whether you are negotiator, buyer, seller or all three, you must be able to demonstrate that you disclosed the increasingly high volume of information that you are legally required to disclose in any given geographic area before you did the deal and ultimately generated some type of wealth or profit.
Are you steering clear of short sale flipping, or have you figured out how to deal with these new issues?
Thank you for reading the Bryan Ellis Real Estate Letter. Your comments and questions are welcomed below.
This comment is for Carol. Hi Carol, there was an artilce that I read this morning on June 11, 2010 from Bloomberg.com titled “banks face Short Sale fraud as home”Flopping” rises. Did you see it? As a long time investor and owner of a LLC real estate investment company in Oregon, the article was very concerning and even makes me wonder of Short Sales are even worth the risk any longer.
My company has gone to great lengths with our attorney, real estate agents, Sellers, and disclosures included in every Sales and Purchase Agreements yet the article made it very clear Freddie Mac and possibly others consider it fraud to purchase a Short Sale and re-sell it for a profit without disclosing to the lender any other offers in place. In our case offers our agents have received from a C Buyer, whom we intend to sell the property to upon a successful short sale.
The very common practice of using A to B to C transatcional funding and re-selling the property to a C Buyer is becoming too much of a risk for what is perceived as fraud, would you agree?
thanks bryan all your (free information) is truly helpful because I am tring to be come a real estate investor with all the information I have learned this helps me retain it more so when I take my first step to investing I can go in there with confidence bryan I know I need to step up a power team private money buyers sellers other investor and I have to some point but the biggest part of all would be to get a mentor
with every good investor comes a good mentor but at this time I can not afford one I know this like going at with my head cut off and I wont let this stop so if you have any ideas or leads on mentors please let me know
thank you bob smith
Great feedback Carole.
Not only do I think this article invented a new term (floppers) for use in this business, but it’s another annoying fly in the ointment for folks who are actually out there and helping distressed homeowners. To your point, the real estate agents may have breached their fiduciary responsibility, it’s unclear if they did. Two things I am happy about is the fact that the article points out the lenders do lose less money with a short sale rather than a foreclosure, and that the total “loss” estimated to be cause by “flopping” is around $50mil. Um…$50mil, the government is bailing out these institutions in the tens and hundreds of billions, and we are talking about a hypothetical $50 million dollar loss. Glad to see they are spending their time wisely worrying about the possible loss of a few extra bucks due to a BPO that is probably on the low end of market value, but still market value.
Regards, Joel