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February 9, 2010 |
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| August 14, 2009 |
By: Paola Iuspa-Abbott |
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hort sales are tough enough. And flipping a short sale for a quick profit is becoming a daunting challenge for even veteran real estate brokers.
“I am sure there are people out there doing it,” said Laura Graves, with Coldwell Banker Real Estate in Bay Harbor Islands. “But I’m staying as far away from it as possible because it doesn’t work.”
Under short sales, homeowners sell their houses for less than they owe on the mortgage. Lenders have to agree to take a loss of the spread between the sale price and the remaining loan balance.
Under the best of circumstances, lenders can often take months before signing off on a short-sale deal. Worse, many lenders are doing everything they can to block deals with quick sellers because they help to push down the price of the property and increase their loss.
Graves knows the pitfalls. She recently tried to help an investor buy and quickly resell a property being sold as a short sale only to see the deal killed by a lender’s fine print.
Graves represented the seller and would-be buyer of a house in Miami. The lender agreed to allow the house to be sold for $1.8 million. Graves would not identify the lender or how much was owed on the loan.
Meanwhile, the buyer found a third party willing to pay $1.83 million for the property, which would have given the investor a $300,000 profit. The investor even arranged simultaneous closings in order to avoid having to put any money down.
But days before the closing, Graves learned the lender had inserted a clause in its short-sale approval letter that barred the re-sale of the home within a month of closing, an increasingly popular tactic.
With the rise in short sales, banks’ attorneys have geared up to make sure lenders aren’t “screwed on the back end,” Graves said.
Most banks, including SunTrust and Chase, now require that buyers hold on to a property for a month before re-selling them, Graves said.
Other lenders are demanding sellers and buyers obtain a bank’s approval for a quick resale of a property, real estate broker Patty Da Silva said.
If buyers and sellers don’t disclose resale plans, lenders can go to court to void deals or claim the profit from the sale, said Da Silva, a short-sale specialist with United Realty Group in Cooper City. Da Silva says she doesn’t deal with quick-sale buyers.
Further hindering dealmaking, Attorneys’ Title Insurance Fund in June said it would not insure titles of short-sale properties that may have resulted from flipping. For example, it won’t handle sales where the real value of a property isn’t disclosed to the lender or where two closings are held at the same time with the first buyer using no money to close the deal, according to the fund’s alert.
To determine property values, lenders are insisting on appraisals or broker price opinions.
FANNIE MAE WARNING
Last month, mortgage finance company Fannie Mae urged lenders to require that all contracts pending on a property be disclosed.
Chase, one of the industry’s largest mortgage lenders and servicers, is following Fannie Mae’s advise and won’t accept a short sale offer below the fair market value of a property, spokeswoman Christine Holevas said.
Chase also requires sellers, buyers and their agents to sign a document affirming that the deal is an arms-length transaction.
“[It] states that there are no hidden terms or hidden agreements or special understandings between the buyer and seller and their respective agents,” she said.
Wells Fargo Home Mortgage won’t approve a short sale if there is a plan to immediately sell the property for profit, Wells Fargo spokeswoman Debora Blume said.
NEGOTIATING TO FLIP
In a short sale, the seller and listing agent are expected to negotiate the highest offer possible for the lender.
Real estate broker Sergio Rebollo Jr. with EXIT Prime Realty in Coral Gables claims some investors work with sellers and agents to arrange for lenders to be offered 60 percent to 80 percent below market value for some properties.
Despite the resistance of lenders, investors defend the quick resale of distressed properties and say deals are going through.
Tom Nosky of Fort Lauderdale said he has sold five houses purchased as short sales this year. He said he always informs lenders of his strategy. Some banks have accepted that, others didn’t, he said.
“There are some short-sale approval letters that make it impossible to resell the property,” he said. “So I stay away from those banks. It’s being knowledgeable of who will and who won’t.”
Nosky said he doesn’t close on a sale and purchase at the same time and pays cash at closing to avoid the appearance he is using the second buyer’s money to close the deal.
WARY INVESTORS
Lenders aren’t the only players wary of short-sale flips. Investors like Nosky are taking steps to avoid getting stuck with properties for the long term.
Nosky requires purchase contracts to allow him to opt out of the deal if he can’t find a buyer in a set time period.
“[Flipping] is not wrong per se,” said Marisa Pia Capua, president of EWM Title in Coral Gables. “There is no reason why someone can’t enter into an option contract and then find a buyer willing to pay more. But the lender approving the short sale needs to know that there is a buyer out there willing to pay more.”
Capua said EWM has refused to handle short sales that involve option contracts.
Rebollo, who often represents sellers, said he turns down buyers seeking to flip properties, despite offers of enhanced commissions.
“[Investors] try to entice [listing agents] with a 9 percent commission to handle multiple transactions,” Rebollo said.
An excessively low sale price could eventually hurt the original seller. Lenders have the right to go after sellers to recover the difference between the mortgage and the sale price. The lower the price, the higher the sellers potential obligation to the bank, he said.
“My primary responsibility is to the seller,” he said. “So, when a seller agrees to sell a property under market value so an investor can flip it, it is a win-win situation for the investor and the Realtor but not for the seller.”
Nosky disagrees. He said investors like him help sellers get rid of unaffordable mortgages and prevent them from being foreclosed upon.
“It is a win for the homeowner because [a pending] foreclosure lawsuit will end and it won’t ruin their credit,” he said.
“The win for the lenders is that they get money in the bank instead of having to pay property taxes and insurance on the house. The win for the investor, me, is I get to buy a house at market value or less. But it only works if the seller, the buyer and the real estate agent are on the same page.”
Paola Iuspa-Abbott can be reached at (305) 347-6657.
Marisa Pia Capua photo by Richard M. Brooks
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