Wow, how times have changed. I remember that just a few years ago, most short sale listings were hard-pressed to get even a showing, let alone an offer from a committed buyer. Back then, short sales were considered the real estate of last resort. But market conditions are very different now than they were before, and short sales have come a long way. In many areas, like here in Las Vegas, short sales have even come to dominate the market. Many of my previous blogs contain predictions that this would happen, by the way.
Since available inventory has dropped to virtually unprecedented levels in Las Vegas, buyers who do not consider short sales have exceedingly few options. They can purchase a new home from a suddenly overconfident builder; they can join the bidding fray for a foreclosure and buy a home that may have been vandalized, stripped or destroyed; or they can willingly overpay for a traditional sale. But make no mistake: we are in a clear seller’s market, so short sales must be considered by buyers.
Many buyers have come to realize that the immeasurable patience required to purchase a short sale property may be a minor concern compared with some of the other issues that have arisen.
Before I talk about these issues, I need to explain that short sales are required by lenders to be “arm’s –length” transactions. What that means is that all parties (seller, buyer, real estate agents and Brokers) must sign an Arm’s Length Affidavit prior to the close of escrow. That document states (and it varies somewhat by lender) that the parties are not related (a short seller cannot sell his property to a relative or friend, as an example). It also says that the seller may not remain on the property after the close of escrow (no leasebacks, as they are called). It states that there can be no arrangement or understanding that the short seller can regain control or ownership of the property in the future. And, it says that there may be no other side deals between the parties.
We all know, including the lenders, that in reality, short sellers do sell to relatives and friends. If the buyer has a different last name than the seller, it is not easily detected by the lender that the parties may be related. Of course, this would constitute mortgage fraud if it were discovered. I am not advocating this strategy in any way; I am simply acknowledging that it is happening all over the country. One might argue that without this sort of (illegal) transaction, the real estate market would have been even more depressed than it was.
When it comes to sellers staying on the property after the close of escrow, we run into other issues. Oftentimes, sellers feel rushed into packing and moving, and they ask for a few days, weeks or more as a grace period. This is also a clear violation of the arm’s length provision, even if it is for only a single day. It’s incredulous that some sellers have not paid their mortgage for many months, yet they are still unprepared for moving. What did they think was going to happen? They had to have known that would be a short sale or a foreclosure, but in any case, they could not stay. It is important to know that sellers may not stay on the property past the close of escrow, period.
Sometimes, buyers of short sales, typically investors, are happy to extend an invitation to the former owners to sign a lease. Sellers might be happy to stay and not have the hassles of moving, changing school districts, etc. Buyers are happy to start collecting rent from the moment they take possession, rather than have to spend time and money to prepare the house for the rental market. Real estate agents who facilitate this sort of arrangement are in clear violation of the arm’s length provision, and are putting their licenses at risk.
There has been some talk of short sale lenders experimenting with leasebacks, but as of this writing, I am unaware of any lender that has instituted any official policy permitting this.
Another wild thing we are seeing, which is surely a reflection of current market conditions, is buyers offering sellers “incentives” to choose their offers over other buyers. In other words, there can be so much competition for new listings (yes, even for short sale listings now), that sellers can be presented with 10, 15, maybe even more than 20 offers on their property within days of listing it for sale. Well, short sellers must net out at zero on their closing statements (means they cannot make any profit whatsoever). Whether the property sells at one price or another is of very little consequence to the seller. With so many offers on the table, which one should the seller choose? He may be tempted to choose the one that offers him a leaseback. Or the one that offers a month free time to vacate. Or the one that offers him some moving money. Or the one that offers him some inflated price to buy his furniture. All of these are violations of the arm’s length provision, and may be considered by the lender(s) to be mortgage fraud.
And still one more thing has come to light: it is a strategy whereby the buyer is an LLC, and there exists a side deal that allows the short seller to “repurchase” the property back at a later date. What happens is after the close of escrow, and upon some payment to the new owners, the former owners are allowed to become the registered managers of the LLC, and the former managers of the LLC subsequently resign their position. So prima facie (at first sight), it appears that the buyer, the LLC, simply bought and retains ownership of the property. But behind the scenes, the ownership of the LLC has changed. And you guessed it: this is yet another violation and most likely constitutes mortgage fraud.
Banks have been inundated with short sale requests over the last few years. And as such, they have fallen way behind both in their workload and in their diligence. But rumor has it that they might be catching up. In fact, I have been overhearing at the water cooler that banks are starting to check on these side deals, and will consider prosecution in the event mortgage fraud is suspected.
During the short sale process, many lenders send field inspectors to check on the properties, which banks love to refer to as their “assets”, even though the banks do not legally own these properties (at least not yet). They check for occupancy by owners or tenants; they check condition; and in some cases, they even change the locks. I have been hearing that these same field inspectors are now being sent back after the close of escrow to ascertain whether the former owners are still residing in the properties. And if this is discovered, a recommendation to prosecute may ensue.
There is one other thing to keep in mind. Short sale approval letters state in one form or another that the approval to sell short may be rescinded in the event of fraud, deceit or misrepresentation. And, that right survives the close of escrow. Although it would be highly unlikely that a deed could be “unrecorded”, it is far easier for the bank to rescind the terms of the short sale approval, meaning that the lender would have the right to call the balance of the loan due and payable. Any “full satisfaction” would be off the table, and banks could sue for the amount of their loss and then some.
I have a feeling that there are many other versions of short sale fraud that I have not covered in this blog, and that more scams are being hatched every day. I can say with absolute certainty that the last chapters in the annals of short sales may not be written for quite some time to come.