As they should be…
I really am a free enterprise guy, but like in so many crisis situations, the vultures start to circle and sometimes they actually kill their prey, versus just looking for the carcasses. Today’s big idea is short sales will allow you to avoid the stain of a foreclosure on your credit, and in some cases these plans can be approved and actually provide benefits to all parties. Much of the issues we originally saw that led to the early stages of the foreclosure crisis were rooted in an environment that allowed fraud to be an option. Fraud ended up costing all of us, via bailouts, lots of money and seem to be forgotten and not mentioned as much today. Fraud now seems to be finding a new friend in short sales.
The bottom line in a short sale is not to sell the home for less than it is worth, but less than the outstanding mortgage indebtedness. Short sale flips essentially take us back to the flips of old where no improvements were made, and a buyer somehow ponyed up and paid over market value for the property. Then the seller split the proceeds of this sale all around and the new buyer never made a payment.
With short sales, the same scheme can develop..except now the seller has to convince the bank to take a loss on their mortgage. As we all know, the bank is likely using taxpayer funds now so the loss is essentially out of all of our pockets. Therefore, we should all be glad to see that short sale flips are being stopped in their tracks. Here is the news from the Tampa Tribune.
TAMPA – June 12, 2009 – It may be a bit tougher now for investors to flip short sales for big profits.
Attorneys’ Title Insurance Fund notified its 6,000 member lawyers this week that it will not insure deals made with a popular – but controversial – method for closing flips of short sales. A short sale occurs when a mortgage holder agrees to allow a home to sell for less than the mortgage balance so that foreclosure can be avoided.
The Orlando-based fund is a major underwriter for lawyers who write title insurance in Florida. In a letter to lawyers, the fund said it has become aware of short sale programs advertised on the Internet that promise to make investors lots of money with little or no work.
The letter says they involve investors entering option deals with homeowners for “the exclusive right to purchase their property for a period of time.”
The investor negotiates a short sale with the mortgage holder by convincing it that the price it is offering is the market value of the property. The investor then finds a buyer for a much higher price. The sales happen simultaneously, and the investor pockets the difference.
The problem is that “the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property,” the letter states.
The fund’s decision could have a major effect on short sale flips because many investors use lawyers to close deals when traditional title companies won’t.
The option contract method has been gaining steam as a way to work off inventory in a bad real estate market.
Critics say mortgage holders are misled and don’t realize they could be selling for more. Some real estate agents and buyers complain that the option contracts lock some buyers out of the market. That’s because some types of loans forbid flips.
Some lawyers have raised concerns that sellers may have to pay the difference later.
But proponents say investors can make money and homeowners can avoid foreclosure. They say mortgage holders would lose even more money if they foreclosed on the home.
Copyright © 2009 Tampa Tribune, Fla., Shannon Behnken. Distributed by McClatchy-Tribune Information Services.
