Short sales are all the rage right now. They are a huge short-term trend for the real estate industry at this moment. Many brokerages, Realtor associations, investment clubs, and self-proclaimed "gurus" are teaching how to do short sales to anyone who will listen. I do believe there is a lot of money to be made doing short sales over the next 2 to 3 years. However, there is also a "Dark Side" of the short sale business that I do not think many people are teaching about. I want to expound upon this Dark Side at least a little bit just to hopefully open a few people's eyes about short sales.
The first big issue in determining a short sale is, does the property owner have a legitimate hardship? Things like job loss, divorce, death of a breadwinner, and health problems are legitimate. Things like paid too much for the house, didn't realize that an ARM loan meant that the payment amount might increase, thought I would get a pay raise next year, and thought I could flip the property to the next sucker but now I am stuck with it, are not legitimate hardships. The lender is going to be asking the question of why could the borrower afford the house in 2006 but now can't afford it in 2008. If the borrower can't give a good reason, the lender most likely will reject the short sale and this wastes everybody's time and the borrower goes down the tubes.
The next big issue is the financial documents. In order to consider a short sale, the lender is going to want to see the borrower's tax returns, recent paystubs, recent bank statements, and some sort of income/expense statement. If the numbers the borrower put on their loan application do not match the numbers showing up on these recent financial forms, there is a serious problem. In fact the lender might call it loan fraud. A smart Realtor is going to find out about the borrowers finances before forwarding this to the lender.
Another big issue is making sure full disclosure is given to the shorting lender. If the seller, either Realtor, junior lienholders, title company, buyer, etc. do not follow the written instructions that the shorting lender is requiring, the lender might come back later and cry foul after the transaction closes.
For instance if the shorting lender says that a junior lienholder can only receive $1000 for their lien but the junior lienholder says they need $2000 or else they won't allow a closing, nobody in the transaction is allowed to chip in that extra thousand. If a listing Realtor agrees to reduce his commission by the thousand and give the money to the junior lienholder, guess what, that is considered fraud. Loan fraud is a federal crime that has very stiff penalties including fines and jail time.
One more scenario ... if the seller needs $2000 in order to move out and rent a new apartment and the shorting lender says the seller is to get nothing, the buyer cannot "purchase" the seller's appliances outside of closing to pay this $2000. If they get caught, guess again, it is fraud.
Another disclosure issue is flipping. Often times these short sales take many months to conclude. Sometimes an investor will get the property under contract and during the course of many months, they will shop the property around and find a new buyer. Then they will close on the property at 100K in one room and the next hour or day, they will re-sell the property to someone else for 120K and pocket 20K profit. There are a heck of a lot of investor gurus teaching this right now. Well guess what, if this isn't fully disclosed to the shorting lender it is considered fraud. The 20K profit is a very pertinent fact that the lender would have wanted to know about. (You can't tell them on the 1st transaction that it is only worth 100K, if in realty a buyer can be found for 120K. If it is disclosed in writing though, then no problem.)
Many title companies are cracking down heavily on what they will allow you to do in a short sale situation. So you may want to talk with your local title company rep before sending them an order.
If you don't think there is any way to get caught, think again. The real estate and mortgage industry is being looked at by lots of federal and state agencies with a giant microscope. It is very easy to look through public records online and see the history of any particular property. Everyone knows this, and lenders are not stupid. If you look back into the 1980s and 1990s, there are a lot of once rich and famous real estate gurus that have served prison time. So don't believe everything they are telling you as gospel.
This article is not meant to scare you, but it is meant to open your eyes to the darker side of this business. There is a right way and a wrong way to conduct short sales. Learn all you can and be careful out there.
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(Copyright © 2008. Sand Dollar Realty Group, Inc. All rights reserved.)
Rob Arnold, ABR, CPL, CRB, GRI, Managing real estate broker, Licensed mortgage broker, Notary Public
407-389-7318 / 1-877-389-7318 www.SDRhouses.com/ www.WeBuyHousesFlorida.com/
Your full service and investor friendly Realtor in Orlando. Learn to invest in Central Florida real estate and Orlando real estate. Investor mentoring and counseling available. I also provide flat fee MLS listings, For Sale By Owner, and menu-based services in most parts of Central & South Florida, the Space Coast, and the Treasure Coast including Orlando, Tampa, Miami-Dade, Fort Lauderdale, West Palm Beach, Ocala, Volusia, and Brevard.
We buy houses cash, sell properties, and list properties in Central Florida including Orlando, Winter Park, Maitland, College Park, Ocoee, Winter Garden, Apopka, Pine Hills, Altamonte Springs, Casselberry, Longwood, Winter Springs, Oviedo, Lake Mary, Sanford, Deltona, Debary, Deland, Daytona Beach, Melbourne, Mount Dora, Eustis, Leesburg, Clermont, Kissimmee, Saint Cloud, Davenport, Winter Haven, Lakeland, and more.
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Rob Arnold - Your full service and investor friendly Realtor ® in Orlando and Central Florida.
407-389-7318 / 1-877-389-7318 www.SDRhouses.com www.WeBuyHousesFlorida.com
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It scares me to death to do a short sale on the listing side and the sale side. I avoid when possible because I like my license!
Amen. I try not to do short sales or foreclosures. Money to be made or not, I always walk away feeling a little dirty for trading in the financial demise of others. I honor and respect those that do what needs to be done, and I leave that business to them. The ten or so I have done are enough for me!
I am not scared of it, I just prefer not to participate. I also believe that there will be long term ramifications of short sale and foreclosure business, especially for those of us who do a 100% referral business. These sales have negative feelings, which will not result in lots of repeating business. Clients are embarrased and hurt...not likely they are gushing to their friends and family about the great REALTOR who helped them out of a jam. So, on the "client for life" scenario which was all the rage just a few short years ago, I would rate handling short sales as a low priority.
No...I have been blessed to work largely with people who typically avoid such financial issues, and I am thankful for that.
Heather - I can't say what to do, but if the senior lienholder finds out about it, they may cry foul and say that additional money should have been paid to them. The title company and the brokers might end up fighting with their E&O insurers.
Shane - There is a right way to do it and a wrong way to do it.
Gene - Yep, I was trying to point out the side of short sales that nobody seems to want to talk about.
Renee - It pays to be careful.
Chuck - I think there is plenty of good that can be done with short sales. Somebody has to work them. If not, they turn into REOs. A short sale puts a big ding on someone's credit for a few years. A foreclosure is much more damaging to credit and stays on the credit report for 10 years.
Robert - Thanks. Cool name.
Konnie - That signs like deceptive advertising to me. They shouldn't be advertising the property for sale unless the bankruptcy trustee's are permitting them to put it up for sale.
Wendy - I don't think there is anything wrong in selling personal property or furniture or appliances separately from the real estate. However, if the seller sells the personal property to the buyer and nobody else and the sale of the personal property is contingent upon the buyer also buying the real estate, that sounds like they are doing a cash under the table deal to me. If it walks like a duck and quacks like a duck, you get the idea hopefully.
Rob, Great post! I have had a couple of short sales lately and got more grief from the buyers agents than I did the banks involved. Agents that have not dealt with short sales don't understand the time it can take from the lender and that the lender approves the commission to be paid. Even though it states under Realtor remarks about the commission, they still wanted a higher percentage than the bank would approve. My sellers were in dire straights financially, so the paper work and qualifying was a breeze for them, sadly! Thanks for all of the information. Elizabeth
Rob:
Thanks for sharing your knowledge on short sales. It is such a growing issue in every market. It's good to see there are people out there who know what to do and how to do it.
Rob,
I've been looking all over for a scenario similar to what you have just mentioned: The first only will only give the second $1,000 but the 2nd wants $10K. An agent I know is working with a "short sale negotiator" who is proposing the buyer paying an extra $9,000 directly to the second. I've been saying no way can they do this! This is the first place I've seen this mentioned!
Good information. I'm meeting a lot of investors who say they are making a fortune in short sales, but I don't see how. I've got a listing now that will need to go short sale or end up in foreclosure. It's really hard being the agent.
These are all good poits, but I will take exception with afew:
Hardship: While the lenders "require" a financial hardship, the reality is that they will accept a short sale on virtually any situation. The resoning is this: The lender can't make anyone pay their mortgage, so if someone wants out for whatever reason, what choice do the banks have? In cases where the seller has assets, or good credit, or income, the lenders may approve a short sale with strings attached, such as promissory notes.
Financial Information: Great point about whether or not the income/assets the seller discloses on the short sale application matches what they put on their original loan application. I always ask if they have their original loan documents and I compare them. If they do not, I simply ask them is anything has changed. It is not really my problem if they commited fraud, but I will warn them of the consequences. The lenders don't seem to care or even realize there are sometimes differences, but they may start paying closer attention in the future.
Flips: Flips are not illegal. Period. Full stop. End of story. A lender agrees to a short sale with the understanding that there may be a re sale and or profit in the future. The only time a re sale needs to be disclosed is if there will be a simultaneous close, which most title companies won't do anyways.
To be safe, always disclose, disclose, disclose everything to every party.
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The short sales industry is in it's infancy. . I'm sure as time passes by, most Realtors will do short sales like a regular sale. . when contracts are present, the liability factor is always high.
I disagree that realtors will be doing the short sale negotiating. The listing and selling, yes, but the negotiating, no. Short sales are a banking issue, not a real estate issue. Unless you have a dedicated staff, an agent simply cannot put in the required time, or aquire the legal/banking knowledge to be successful. Short sales are a full time business to do any more than "onesey-twosy."
Fernando - I don't know about short sales being in their infancy. I did my first short sale way back in 1999 and have done plenty of them over the years since then. They were nothing new in 1999 because I know several Realtors that did them in the 1970's and 1980's. In 3 years or so, short sales will probably be an old fad just like 100% financing is a thing of the past now.
Joseph - I would love for the short sales to be negotiated by 3rd parties. I'm not sure if that is fully legal though. My understanding is that only licensed real estate brokers, mortgage brokers, and attorneys are allowed to do this for 3rd parties for a fee. Anything else might violate license laws.
unless local or state legislation prevents it, short sales can be negotiated by anyone. Typically, agents and attorneys do it. what most don't realize is that short sales are not a real estate issue, it is a banking issue, so unless the attorney, agent, or negotiator has mortgage lending knowledge-short sales will just be atrial and error undertaiking (unless specific education has been taken)
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