What’s So Bad About Short Sale Flips?
By Anne L. Weintraub [1], Esquire
Anne Weintraub P.A. [2]
REALTORS®, buyers and sellers are being approached by vendors on a daily basis to participate in short sale flips. Short sale flips occur when a third-party individual or business negotiates with the seller’s lender to take a short payoff. The lender relies on the vendor’s package from the seller which includes an offer from a buyer-who may actually exist or not-when it grants the short sale approval. The buyer allegedly closes on the property, the lender gets paid off, and then the buyer sells the property to another buyer for more money. The lender never knows the end buyer exists and sometimes, the first transaction is funded with the end buyer’s money.
It sounds so good-everyone gets paid and life goes on, right? Wrong. Why would any lender agree to accept less money in settlement of a debt when they know they could have received a higher payoff from the end buyer? When a lender issues an approval for a short sale, it usually includes language that prevents this very scenario. The approval letter restricts the buyer from selling the property again to another buyer and the seller and participating REALTORS® also have to sign an affidavit that they are not aware of any outside agreements regarding the sale of the property. In the event the lender reviews the public records and/or learns about the flip, they have the right to seek damages for fraud and misrepresentation from the parties involved in the flip. The lender also can notify federal and state investigation agencies about the flip-if the parties had knowledge or should have had knowledge about the flip, they can be subjected to civil and criminal penalties, including the loss of a real estate license and money damages.
So, what can you do to protect yourself and your customers? Be wary of third party vendors who contact you out of the blue and tell you they have run the scenario by an attorney who found nothing wrong with the flip. Call the attorney they reference and find out if such statements are true. When an offer is presented and it contains language requiring the end buyer not to contact the seller’s lender and includes language that the parties must use a certain title company- beware. If the vendor tells you the lender is aware of all of the buyers and is “fine with it”, ask to see proof. Finally, listen to your gut instinct and if you think something smells of trouble, it usually is trouble.
There are plenty of opportunities to make good money in this market by following the rules and laws we are required to abide. Buyers, sellers, and REALTORS® must be aware of mortgage fraud and its many faces. If you are a REALTOR® and encounter a situation that is uncomfortable or just wrong, discuss it with your broker. The only time a short sale could be legal is when the seller’s lender and buyer’s lender are aware and approve the flip and each time the property closes, it funds on its own. This situation would rarely occur because the seller’s lender would not agree to accept less money when more money is available. Also, most lenders require that title to the property is seasoned, i.e. the seller had title to the property for a certain period of time before they sell it to another buyer. No money can be used from the end buyer to fund the first purchase and sale. If you are asked to participate in a short sale flip, think before you act.
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Anne L. Weintraub [1] is the driving force behind Anne Weintraub, P.A. [2] practicing in Residential Real Estate Closing, Issuance of Title Insurance & Title Services, Refinancing, Contracts & Deeds and Short Sales & Alternatives. Her practice covers Sarasota, Bradenton, Lakewood Ranch, University Parkway, Casey Key, Siesta Key, Bird Key, Longboat Key, Lido Key and Downtown Sarasota.
Anne Weintraub, P.A. is located at 1800 Second Avenue, Suite 882, in Sarasota. You may reach Anne via email at aweintraub@anneweintraub.com [5] or via phone at (941) 685-4300.
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