In The New Flipping: Short Sales, the Herald Tribune relates the emerging practice of structuring short sales on distressed properties to the old practice of house flipping. The rush of amateurs, professionals, and opportunists into real estate short sales has caused backlash from both lenders and lawmakers. Here are 3 tips for keeping your short sales business on the right side of the law:
With lenders issuing nearly 63,000 notices of default to Southern California homeowners in the 3rd quarter of 2009 (up 18.7% year-over-year), short sale vultures are increasingly on the prowl for quick profits.
A short sale occurs when a lender agrees to sell a property for which it holds a mortgage note for less than is owed. This makes sense for lenders when distressed homeowners have little chance of meeting debt obligations. A defaulting homeowner could cost a lender far in excess of what they could immediately recoup from a short sale. Short sale investors are stepping in to fill the void, picking up properties at discounts to market value.
Real estate certainly has its vultures, most of whom are simply shrewd business people, but there are those who follow unethical, sometimes illegal practices. Lenders are stepping up efforts to prevent the unethical behavior, while lawmakers are scrambling to pass regulations to prevent fraud. If you are one of the tens of thousands of new short sale investors entering the business it is important to keep in mind that sound, ethical business is far more profitable in the long run.
Here are 3 tips for running an ethical, legally compliant short sale business:
- Divest conflicts of interest from all parties: Use an independent real estate professional to construct your Broker’s Pricing Opinion (BPO). This mainly holds for short sale teams that fail to disclose that the BPO originating real estate agent is, in fact, part of the short sale team. Lenders are increasingly sensitive to the practice of real estate agents submitting bogus BPO’s that understate real market value. Avoid the temptation to misrepresent a property’s value-this can be viewed as fraudulent, particularly when you immediately turn around and resell the property for more.
- Invest in repairs, reconstruction, and aesthetic upgrades. Few lenders could find fault with an investor earning a spread on a property after it has been refurbished. It’s the practice of immediately flipping properties without adding any value that is under legal and ethical scrutiny.
- Hold properties for at least 90 days. Lenders and lawmakers are targeting flippers who structure double escrows to immediately unload properties, earning a spread without creating additional value (other than finding a separate buyer). Holding onto properties for at least 90 days satisfies FHA seasoning requirements, which enables buyers to use FHA-sponsored debt sources, and affords investors the opportunity to make capital improvements to the property.
Following these 3 guidelines will keep you in the good graces of lenders and regulators, a position in which any long-term oriented business person would hope to remain. Profit may be the bottom line indication of business success, but creating value and improving society should be the ultimate consequence.
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