house short saleA short sale is where the sale proceeds fall short of the loan balance owed against the property. It is common to see references to “short sale” situations in advertising for real estate listed for sale. Many homeowners who are experiencing job losses or mounting debt are now forced to sell their property only to find out that the property is not worth as much as it was when they purchased it. When an offer is received it is often for less than the debt owed on it thus creating a short sale situation.

There is a current short sale scenario to be cautious of which involves investors who are flipping a property for profit. Flipping property means buying and then quickly reselling it for a much larger profit. Typically in a short sale situation the mortgage lender(s) are often asked to forgive a portion of the debt owed against the property in order to make the transaction close. In some cases the “flip” investors are making false representations to the mortgage holders to obtain favorable release of liens.

Mortgage lenders that agree to release some of the debt in a short sale situation have a strict policy that the borrower can receive no proceeds from their short sale. They also assume that the property will not immediately be sold for a higher sales price. Many “flip” investors are enticing sellers to enter into a transaction where they will give money to the seller after closing. This is considered illegal and should be avoided at all cost.

Farmer Home Administration (FHA) and Fannie Mae (FNMA) have strict rules that they will not grant a new loan on a flip transaction. The deed has to be “seasoned” where the owner of record can demonstrate that he/she has owned the property with a chain of title for the last 12 consecutive months. This is verified by a preliminary title report which all lenders require.

Here are some common red-flags

  • Non arms-length transaction: seller is relative, employer, etc.
  • Seller is not currently reflected on title
  • Seller has no interest in property, but possesses an Option to purchase the property (flipper has no right to offer the property for sale)
  • Home owner shown to be tenant or unknown
  • Seller owned property for short time
  • The distressed homeowner has quit claimed title or signed a warranty deed to a third party
  • Investor not allowing subsequent buyer to pursue FHA financing due to title seasoning requirements by lender

This list of red flags is courtesy of the State of Idaho Real Estate Commissioner.

For more information on buying bank owned properties or short sale properties give us a call at (541) 686-8246. The real estate brokers at Pacwest Commercial Real Estate, Inc. are here to guide you through the process.