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Short Sale investors flipping homes – Good or Bad?

Over the past couple of years since “Short Sales” have been the hot topic in the real estate market I’ve been contacted by several mortgage brokers and investors/firms looking to get access to my clients who need to sell properties and who are upside down in their homes value.

These people offered to help my clients by making an offer on their home. (Banks are only willing to talk about a short sale if we have an offer) They will negotiate the short sale on behalf of the client and purchase the home (if they can get a good deal).

I was quite interested when I heard this the first time, because I know how hard it can be to find a buyer who is willing to wait 3-9 months before they can close on a home (these mortgage brokers who weren’t making money by financing homes now wanted to make a living from people’s hardship) It was pitched to me that I would make the commission on the listing side and on the buying side. After the bank approved the sale I would then market the home below fair market value to find a buyer quickly. (Banks typically give us 30-60 days to close the transaction once they have given us their approval) I would then get the commission on the listing side and maybe the buying side for the investor. WOW that could be as much as 12% commission for one deal! Who wouldn’t be interested in that?! (not me if it’s hurting someone)

After further questioning, I discovered these “white knights” looking to help my sellers get out of their homes make offers at 65% below fair market value minus repairs and tie up the home for several months negotiating with the bank. They had no intention of buying the home unless they can sell the bank on accepting this lowball offer, then finding an end buyer who will pay market value for the home. Once they find an end buyer they use a “Hard Money Lender” to close on the property, then resell the home the same day to the end buyer making a huge profit.

If no end buyer can be found or the bank doesn’t accept the low ball offer the seller could end up in foreclosure, plus during the time the home was under contract with the investor any real buyers miss out on these homes. These investors are not helping the turn around of the real estate market they are just taking advantage of desperate sellers and banks, ultimately you and I as tax payers are fitting the bill for these guys because its our tax paying money that has been bailing out the banks from their losses.

Example: At the end of last year a client of mine made an offer on a home in Crescent Heights, we received a counter offer where the sellers name was scratched out and an investment firms name was in its place. The investor had gotten the seller to sign a contract which allowed the investment firm to control the sale as described above. We did come to terms on a sales price after going back and forth for a couple of days. At the closing the investor walked away with over $13,000. The seller could still be on the hook for any unpaid balance of the mortgage.

I feel the banks and/or the government need to set rules to prevent these investors from taking advantage of our down turned real estate market.