Short Sale Abuse
Unfortunately, there are people who will try to take advantage of other people’s misery in a real estate short sale. I get emails daily by “coaches” who want to sell me a program of how to short sale a home in order to make money off shorts sales in a manner that I find distasteful. This is not the kind of Realtor training that I want to be involved in.
The schemes have two basic approaches for the property for sale, one by using an option to purchase and another using a trust. Basically, they start by teaching their students to find people in trouble with houses for sale, then put those people in even more trouble. I do not think it is right to do that to one of my neighbors in Raleigh, or anywhere in North Carolina.
The student is supposed to approach someone selling a home who needs to short sale their home and tie up the property using an option or a trust agreement. In other words, the student looks for a MLS listing that should sell for $200,000 and makes an offer of $160,000 to a family that is desperate to sell. Using the option, the student pays as little as one dollar to have the option to purchase the home, and gets the owner to sign the contract. Remember, this is an option to purchase, not a promise to purchase for a traditional sale.
The student submits a short sale package to the lender, saying that they are paying a reasonable price. At the same time, the student puts the home back on the market, tries selling the home for $200,000 or more. If the student can get the mortgage loss mitigation department to take a short payment based on the price of $160,000 and if the student can find another buyer to pay $200,000, then the student exercises the option, buys the property and immediately resells it for a profit. In short, the holder of the mortgage does not get the payoff it deserves, the property owner does not get to the equity they deserve, and the student takes the money that should be paid on the home mortgage. In stead of loss mitigation, this is loss maximization for the lenders who make mortgage loans.
So, what is wrong with that? If all the other parties are willing to let the student take advantage of them, why shouldn’t the student profit?
Lets analyze a completed sale first. The student is telling the holder of the home loan that they are paying off as much as possible of the loan on the home. Also, the student may be leaving the people with homes for sale with the obligation to pay the balance of the money that is not paid on the home mortgage. The owner of the home may also have an obligation to pay income tax on the amount that the payment to the bank is “short”.
After the sale closes, there will be some mortgage lender that will take a simple look at the tax records and see that the home sold for much more than the lender saw on the HUD-1 or closing statement. Then, the mortgage lender will get its lawyers to work to recover the ill gotten gains, as well as any other damages they can claim. The government prosecutors may get involved to teach the student what happens when you mislead institutions that make home loans.
Next, let’s analyze sales that do not close. In today’s market, a well priced home sells, an overpriced home does not sell. When the student raises the price to try to make a profit, the chance that the home will sell decreases dramatically. The family that owns the home is expecting a normal home buying experience, possibly hoping to stop foreclosure when the student buys the home. That family gets an education on the difference between an option and a sales promise when the property does not sell. When the student does not get another buyer to pay an inflated price, the student leaves the option money behind and does not buy the home. In many of these schemes, the option money is one dollar. So, the family does not get to stop foreclosure, they get to endure a foreclosure sale, and have one dollar for all the heartache they went through. Also, America gets more foreclosure homes.
I have a hard time with teachers who tell students to find people who are begging for a life preserver to keep them afloat. Then, they teach the student to throw them an anchor that is disguised as a life preserver that will drag them under. These teachers have stories about a few of their students who have made large amounts of money taking advantage of uneducated sellers and mortgage lenders that are so desperate for cash that they will approve a low short sale. This is not how you do a real estate short sale, this is how your increase your chance of a foreclosure. We should provide Realtor training to prevent foreclosures.
When someone approaches you with a scheme like this, just remember “thou shalt not steal.”