How My Blog Kept Someone From Breaking the Law

Mariana, thank you for writing this. I know a few investors will disagree about this, but that is okay.

There is another aspect to this game that needs to be made known that involves the unwitting agent accomplice.

There is huge liability where the agent representing the seller deals with these types of investors. One broker here blogged that they are advising all of their short sellers to do this kind of deal with their investor, who will then resell the property through them.

Every dollar left on the table is a potential tax liability or deficiency judgment for the short seller. Unless the seller is represented by legal counsel with these, the liability to the agent is huge.

Any agent who convinces his seller to let a buyer negotiate the seller’s debt is also likely to get sued. I deal with several law firms and I can assure everyone that suing agents and brokers over short sales is a going to be a very popular niche for lawyers.

Mariana, I just did an interview with my title company rep on this very issue.

It is on my flip and hope to have it up soon.

They will not close these loans, and I am glad I have someone looking out for agents who don’t understand what mortgage fraud is.

Missy – I look forward to watching your interview.

Bob- lol. No kidding.

Eric – Thanks for your comment. When we first heard about this, I knew it was wrong, but it was hard to explain WHY. Once we figured out HOW to explain it, it made it MUCH easier to educate our home buyers and sellers.

I am always amazed how dirtbags can find a way to make money at other people’s expense in just about any market or situation. Is it so seriously hard to make a living by doing the right thing?

Marianna,

It’s posts like these that actually help people that make me glad to be a real estate blogger! Great Great Great Post!

Mariana,

Most of the tme I find your posts to be dead on. This one owever missed the mark so bad that it is borderline misrepresentative in nature.

Well actually you are correct in regards to the transaction as you paint it…but your brush in calling all short sale “flips” a scam..is a bit too broad.

Any competent and experienced investor knows the law in this regard and knows what needs to be done to be in compliance.

We buy and sell short sale deals all of the time and let me tell how it’s supposed to be done..which complies with the law.

Basically, without giving out proprietary information, we have a number of clauses that go on our contracts when buying short sales.

1. one of the clauses DISCLOSES to the seller that their may be tax implication and that they should seek the counsel of an attorney and accountant prior to acceptance.

2, we DISCLOSE that we may seek to immediately re-sell the property at our discretion after we purchase the property

3.we DISCLOSE that we are purchasing the property as an investment and that we intend to generate a profit and that said profit may be substantial and that neither the Seller or the Seller’s foreclosing lender are entiled to participate in any such profit.

4. we DISCLOSE that at the time of the submission of this offer, that we DO NOT have an offer in hand to purchase the property from us for a higher price than we have offered the Seller

5.pursuant to Florida law, we will give the Seller 72 hours to terminate the contract at their sole discretion

All of this is prepared in very clear and specific legal language and along with a few other clauses this is in the contract. Not in some ghost addendum..but the actual contract.

As you know, the contract must be submitte as a part of any short sale package given to the bank and as you can clearly see, we DISCLOSE everything regarding our interest in moving foward with this transaction.

Not once, ever, has a foreclosing lender had a problem. You see the error and potential fraud is purely a matter of DISCLOSURE. If the foreclosing bank approves the discount allowing one to earn a profit on a potential re-sale, it is wholly legal as long as the disclosure is open and readily seen.

As you wrote above, the problem is potentially fraudulent when the “scenario that appears to involve concealing important information from lenders”. The operative word being CONCEALING.

Also, you are quite wrong when you say “The “investor” lied to the bank by convincing them that the market value was only $A, when it was actually valued at what the final buyer paid, $B.”…this is really misrepresentative of the transaction. The “value” of the property is actually determined by either an appraisal or a BPO. Incidentally the BPO is usually performed by a licensed agent or broker.

When we negotiate a short sale, in this market, VALUE is the least of the issues that we resolve. We, as liquidators must show the bank that it is in THEIR best interest to accept the offered payoff NOW rather than waiting what could be another 8-10 months to sell a property…that and all that comes with the ownership of the property.

Any investor or real estate agent who “negotiates” based upon perceived value is incompetent and inexperienced. Maybe that’s why so many short sales fail. There is so much more information that financially influences a bank’s decision. Most of what we do has been developed proprietarily but suffice it to say, today’s value is never the jugular that we go after.

Any bank that we deal with ABSOLUTELY knows what we intend on doing with the property and they are actually HAPPY to work with us becasue we speak “bankerese”.

We actually teach investors and agents how to successfully execute short sales and we work with a bevy of the finest lawyers in the real estate world.

The re-sell of a short sale property is a big and legal business and is in very high demand by mortgage lenders.

I really wish more real estate agents would take the time to actually be thorough in their representation and execution of a short sale transaction.

If they did, more deals would move and be liquidated and there would not be a prevailing cheer from realtors who think that the big bad investor is doing something wrong.

Unfortunately, it is too easy foragents to cry fraud and scam instead of learning how to be proficient at short sales. It’s hard work and takes a great deal of due diligence.

We take it seriously and I can refer you to quite a few attorneys who can explain this at length if you need or desire further clarification.

Barry

I’m glad I read this. I have to say that I was not aware that it is a criminal offense for an investor to attempt to buy a property cheaply with the intention of selling it at a profit. Probably my lack of understanding of the “short sale” process, but in Canada it’s perfectly legal to try to buy a house from anyone for as little as nothing. 🙂 These actions would open a licensed person up to all kinds of disciplinary actions, and possible even civil litigation, but it is pretty much expected that unlicensed buyers and sellers will act in their own best interests.

In almost every case that involves a short sale, the lender is going to obtain their own opinion of value, so going after an investor for fraud is really a crap shoot, especially since value is opinion, not fact. The fraud would likely be in the contract between investor and seller.

The real liability rests on the seller and agent.

For the seller, the liability exposure is likely to be for taxes or a deficiency judgment. I have seen numerous agents and brokers make absurd statements that they are not seeing lenders seek a deficiency. Not only is it too soon to tell, but until the debt is actually forgiven, a deficiency is still a distinct possibility.

For the agent, the risk is equally great. If you do short sales and your client is not represented by counsel, or at the very least, their approvals are not reviewed by legal counsel, your risk is enormous.

The agent dealing with investor and seller may have the greatest amount of exposure as fiduciary comes into play. If you convince a seller to enter into a contract with an investor, who then flips it for a profit, are you really representing your seller’s best interests by exposing them to the potential consequences of greater (and unnecessary) forgiven debt, or a larger deficiency.

You make a very strong point, Bob.. Every short sale I had that went through had at least a BPO. Of course on one of the BPO’s the agent said a grossly ridiculously high price, most likely as a way to snatch the listing from me, but thankfully I was able to provide realistic comps and explain to the bank that what they were told isn’t necessarily true. I even had one lender counter the agreed on price AFTER a purchase agreement was signed. Again, the comps and my knowledge of the area saved the day.

I can understand Marianna’s point, but now, come to think of it, I can see that, at least in my experience, that lender fraud would be very hard to even be committed…

Thanks Bob for the reminder.

Is no one going to respond to Barry or I? We both should how we deal with these investments in our markets. We both showed that everything is disclosed to all parties of interest. Where is the fraud?

By the way, you can negotiate with the bank to not pursue the deficiency judgment. More often than not, in my experience, they will agree.

The outcome is directly related to knowing what leverage you have in relation to the lender (and/or MI company), type and terms of the loan, laws of the particular state, and your ability to negotiate. With most short sales, there are few agents who are actually negotiating – more often than not it’s pleading, begging or making empty threats. Frequently the agent request for no deficiency language in the approval is granted because the lender knows it can’t get it anyways. They just removed the boiler plate language that had no teeth anyways. Those situations where a deficiency is a no brainer for the lender is usually where they play hard ball.

I’m glad Barry is part of this conversation. What Barry said is dead on, but then Barry is only concerned about how he comes out in the end, and there is nothing wrong or illegal about that. Barry also knows more than most agents, and he knows that there are reasons for banks, particularly in states where recourse is alive and well, to want to negotiate with him.

For instance, in some states like mine, if a lender forecloses, that is their only recourse and the borrower is off the hook for any deficiency. That is why walk away plans are popular and in some cases, the borrower’s best option from a financial standpoint. If Barry can get a property via a short sale at 30-40% under FMV and the lender can still go after the borrower for the deficiency or sell the debt (for which there is a very active market), Barry wins and the lender wins, but it’s the borrower who is left fending for himself. It is also one reason why Barry is in Florida.

FTR, I am not condemning Barry’s business model or practices. As he states, there is full disclosure on his part and a 72 hour window for the seller get qualified legal and tax advice and walk if need be. My beef is with the listing agent or broker who rolls on his seller and fails to represent them or insure that they get the advice they need to make an intelligent decision – the ones more concerned with closing the deal than making sure that the best interest of the client comes first.

Any bank that we deal with ABSOLUTELY knows what we intend on doing with the property and they are actually HAPPY to work with us becasue we speak “bankerese”.

No doubt. I speak it fluently as well, but the thing is that the banker is the creditor, and my client is usually the debtor, so Barry and I would have different relationships with the same bank on the same transaction. Barry and the bank are not concerned about the borrower, and the truth is that they shouldn’t be. But they are not the ones with the fiduciary duty.

I read a piece a few years back written by a NAR president who chastised agents for trying to be the ‘champion’ of their client, instead of trying to just facilitate the deal. IMO, that attitude is part of the problem. My take is that if you are involved in short sales and making bank is the bottom line, then pay Barry to teach you how to do it right as an investor. Whatever he charges would probably be a good investment. However, if you are the listing agent with a legal fiduciary duty to the seller, then making bank comes second and there are some deals you can’t or probably shouldn’t do – at least not without a good lawyer.

*Note – Some comments are appearing out of order, and I plan to address each of you as your comment appears.*

Barry – You are right, and I am pretty certain I agree with all that you said.

You said “The operative word being CONCEALING.” BINGO.

The issue with what is happening in Colorado is fraudulent because it is all happening under a simultaneous close, and filled with all kinds of concealment.

IMHO, if an investor negotiates a short sale and Buys the property, walks out of the closing and right into a buyer who wants the home for more than the investor bought it for and sells for a million dollar profit it to that buyer LATER THAT SAME DAY, then that is NOT an issue. Nothing is being concealed and no one is lying.

Jim – BPO’s are an interesting thing … Derek and I are listing agents on a lot of short sales, and have found that we are consistently battling the BPO, as it is almost always coming in WAY higher than the home could ever sell for in the current market.

So, sadly, in my area I do not see the BPO as an real indicator of value.

We always recommend legal counsel, but, in the state of Colorado, real estate law is a different ball game and attorneys are rarely involved in the regular real estate transaction.

In California, we use escrow companies, not attorneys, so they tend not to be involved here as well. My point is that with a short sale, they should be. Proceeding with a short sale where the seller hasn’t gotten legal advice put the listing agent at incredibly risk, because the seller is likely relying on the agent for guidance, or at least that is what they are likely to tell the judge.

The issue (which brings this back to the point of the original post) is that the seller needs to know exactly what all the options are and what the potential consequences are with each option. Without legal and tax advice, that doesn’t happen.

Mariana,
It wasn’t clear (at least to me) in the original that the investor wasn’t using their own funds. Anyway, that distinction is VERY important. So the issue is not that the investor bought the home at a great discount, but that they lied about where their funds were coming from.

Mariana I am standing and applauding your statement…There are too many non-qualified agents taking short sales, and jeopardizing everything, due to their inexperience. I would love it if there were a mandatory qualification that allowed agents to work short sales … no qualification, no short sale.”

If you spend any time on Active Rain it would make you absolutely cringe with what some of these people are doing….or not doing.

The simultaneous dry closing is a deal killer. That can get you silver bracelets for sure.

We use transactional day funding (big business by the way) and we take down the deal, actually have a real closing, record the deed and THEN as you said..later re-sell at a profit.

Bob is somewhat right. I may be the bank’s best friend, but we’re not exactly the Seller’s worst nightmare.

I can’t tell you how many Sellers we see go down the tubes because their agent “advised” them against doing our deal.

Bob, you mentioned attorneys salivating..I think you are right. Very soon I think we will see a host of lawsuits against agents who mistakely thought they were helping their clients when in fact they rode them into foreclosure becasuse they had absolutely no idea what they are doing.

Often times we are the Seller’s ONLY option. But when the Realtor says don’t do it we ask..”are you sure???” then we check the records and find out the house was taken back by the bank.

Many times, since we have relationships with the bank they call us after taking possession and just tell us to give them a number.

I’m telling you, with first hand knowledge…it is REALLY easy to have $100k months in this and it’s only going to get better.

Yes..I said better. As far as we are concerned this carnage is an absolute cash generating blizzard of opportunity. And the forecast (i.e. 60 Minutes last week) is for continued heavy snowfall!

These are the times millionairs..billionaires are made of.

“The time to buy is when blood is running through the streets”.
-John D. Rockefeller

They’re running dark red here in South Florida and business is incredible.

Why would anyone be a short-time player by being fraudulent when there is so much opportunity and the banks LOVE cutting deals?

Mariana if they are being fraudlent up there then they must not be in it for the long haul and are bit players trying to make a quick buck.

Barry, the lack of agent fiduciary in a transaction makes a big difference.

The “investors” that have approached us that we chase away and other agents latch on to are all attempting dry closings.

yea, but I know at one FL attorney who is arguing that the transactional listing broker still has liability issues with short sales if they negotiate on behalf of the seller with the lender. the premise being that you cant negotiate on their behalf and still claim that there is no fiduciary. I know where you are coming from, but the thing we both know is that too many agents don’t know where the line is.

The irony here is that they need to leave that to you or the seller.

Mariana,

Your blog is a good reminder to anyone planning to buy a home now from an investor. Many investors are professional and ethical but there also are a few who are not. It’s crucial to have professional representation in these situations before any contracts are signed. To go through the extra effort to get that can be a life saver. Purchasing a home involves a large sum of money and no one should take that lightly, no matter how appealing the deal may seem.

Also, with respect I dissagree.

What is the federal statute that declares reselling a property (FLIP) a crime? you should look it up, and once you can’t find it, retract this blog. Where is the law stating double closings are illegal? this is a myth rooted in someone saying so..

Once an investor buys a property, it is his to sell and is has nothing to do with the previous owner’s note holder (bank).

The only possible illegal aspect of fraud would be a scenario in which someone works in conjunction with an appraiser and materially inflates the price above market.

Investors can and do buy properties at a market discount from banks. then turn around, rehab/clean and sell them at market. Where is this fraud? To claim all short sales from investors are fraudulent is downright irresponsible, and defamatory.

Last but not least, an example. I buy a car from someone who needs to sell it today. I offer him 500 in cash on the spot. we both agree knowing the car is probably worth 800, but this person needs it sold now and hasn’t found a buyer. He takes 500 for it.

I then take the beat up car, replace the failing alternator and polish and wax it. It is now a driveable car. I list it for 1200 and sell it for 1000. Where is the fraud? this is not fraud. Did I have to call the bank that financed the car to tell them I was going to sell it for 1000? That is what is called After Repair Value or ARV and is and cannot be valued the same when it was a beat up/broekn dirty car.

I hope this helps shed so light. by the way the FBI page on mortgage fraud only exemplifies the insider appraisal. That does not occur now when banks perform multiple BPO’s and second appraisals on new financing, that is the true way to counter insider appraising where the root of mortgage fraud is, not investors.

One last thought to reiterate, The bank does not take the investors word as far as how much the house is worth. they perform at least one, and typically two independent broker opinions on price and take a discount on that, based on THEIR guidelines, and their need to get the house off their books today.

Double closings, are not illegal either. it is simply a more complex escrow transaction with 3 parties in escrow. No laws against it.

Finally, Investors disclose. I actually make it a MLS comment that my buyer’s lender must not object to a 3-party closing. none have, nothing is hidden in the double close, its right there on the table, it is in fact disclosed well before closing on the MLS, also to the other investors post, our contract with all disclosures goes to the bank.

Charles/Maurice – Please re-read the post before asserting blanket statements like this. PEOPLE IN COLORADO ARE GOING TO JAIL FOR mortgage fraud BECAUSE of scenarios like this. I AM NOT MAKING ANY OF THIS UP. Thank you. – Mariana

Everyone that is correct has had their say.

Disclosure of immediate resale to all parties eliminates any fraud allegations.

Back to back closings at title where each transaction closes irrespective of the other eliminates any fraud allegations.

Value is a matter of opinion – if only realtors could grasp the concept of marketable title. Your home is worth less if title transfer is challenging or can not occur due to short sale.

I am an investor that deals with this daily. Realtors that complete zero investigation and simply grasp onto the fraudulent or unethical bandwagon.

I wish they would realize what a disservice they do for their clients due to their unwillingness to educate themselves.

Sorry, you are off the mark on this one… how about thinking before blogging?

We have differing opinions, sorry did not mean to be mean.

Anyway, we do back to back closings so funds from end buyer are never used to close on property purchase. Each deal must stand on own without depending on funds from another closing.

No reason to lie to a bank as our intent to purchase and re-sell for a profit is disclosed in advance on purchase agreement. We don’t have to lie to a bank as they know we are purchasing at a discount….THEY KNOW THIS.

“Value is what a ready, willing and able buyer is willing to pay for a property. THAT is the true definition of value.”

I agree and I am sure you agree that an offer on a short sale or REO property will be less?

I thought so.

1. “Each deal must stand on own without depending on funds from another closing.”
2. “disclosed in advance on purchase agreement”
In this situation, nothing is wrong.

However, this is NOT the situation that is occurring in my area and thus the reason for this post.

I have had it to here [imagine my hand placed well above my head] with all the uninformed people in this industry (agents, investors, lenders …), as well. My post was not as detailed as it should have been, and I agree that what you, specifically, may not be wrong at all in how you are approaching this situation.

Unfortunately there are too many “opportunists” out there trying to make a quick buck off of desperate homeowners and it is my job, as a professional, to help protect the public from these people.