Beware of the Perils of Short Sales

I see a lot of people going into Short Sales these days and it really surprises me. A lot of these deals always seem to be more trouble than they are worth. But with decreasing inventory as we work through the last of the foreclosures from the 2008 recession, a lot of people are looking for the next niche to make their money on. I am going to go through some of the thoughts on this.

A lot of attorneys are wary to take on short sales. They require a lot of up front work (title, preparing prelim HUDs) for a deal that may not even get approved by the Bank. Do not be surprised if the attorney asks for money up front to cover their work in case the deal does not actually go through. Also many attorneys charge a “short sale fee” at closing that can be as much as their original attorney fee. So when you go into a short sale expect your costs to be higher, and likely to be required up front.

One you get approved, you would think yourself in the clear, but don’t be so sure. Banks have taken a beating on these short sales and they have learned that some people are lowballing the offer to the bank and turning around and wholesaling it to another investor for significantly more than the short sale offer. Banks feel they are entitled to your wholesale price as a payoff and so they have made arrangements to try to get that money.

The first thing they did was go and cry to Congress who then put pressure on the FBI to prosecute “short sale fraud” when people turn the properties fast. The FBI has put out a statement that it is fraud to wholesale a short sale property even if nothing is signed to suggest this. Slightly more reasonable banks include a document in their short sale package that must be signed by all parties, including the closing attorney, where they state they are unaware of a higher offer for the property and do not plan to sell the property for at least 90 days. Note that in the eyes of the bank, signing a purchase and sales agreement before the 90 days is out would qualify as a “sale” so the simple solution of waiting 90 days and then selling can still be risky!

So what is an investor to do if they see a short sale they cannot pass up? Ideally they would buy the property, perhaps do some minimal rehab on it, and then sign a contract on the 91^st day and close within a week. That is clearly the safest way to handle the deal. More risky ways include: Buying the property as an LLC and then selling the LLC only to a third party. This is risky to me. I would never buy an LLC. You can’t get title insurance and you cannot know what liabilities may end up attaching themselves to the LLC. In my opinion you are playing with fire. You can “rent” the property to someone for 90 days and then sell it to them on the 91^st. The issue you have here is that something could go wrong during the 90 day “rental” period.  You could just close on the property but hold the deed for 90 days. The issue then is what happens during those 90 days if there is a new lien or judgment against the old owner.

All of these methods are risky. If the bank finds out that any of them happened, you could find yourself facing civil charges for the balance of the loan and criminal charges for fraud. Be very aware and consult with an attorney before getting too creative. To my knowledge there have been no convictions for short sale fraud in Georgia yet, but no one wants to be the first.