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Brad comments today on short sale option contracts.

As part of my research for today’s blog, I Googled “short sale option contracts”. I read numerous web sites and blogs that address this topic. Clearly, this is a topic that needs to be addressed, so I thought I would comment. Although I formed my opinion on this subject years ago, these contracts seem to be coming of light more and more. And I can state unequivocally that the overwhelming majority of industry professionals agree with me: THESE ARE SCAMS!

In order to know what I am talking about, you first need understand these contracts. And although they vary, here is the gist of it.

An “investor” locates a homeowner who is in some degree of financial distress, behind on his mortgage payments. Maybe he is already in pre-foreclosure. The investor talks to the homeowner about doing a short sale, and getting the homeowner out from under his payments (sounds good so far, right?). In order to accomplish his ostensible goal, the homeowner needs to sign a contract with the investor that gives the investor the unilateral right to purchase the home at some point in the future (or the right to flip it), if the terms are to his liking. He pays the homeowner a token amount of option money (usually $10) to make it legal, and with that payment and contract, the investor can then record the option in the county courthouse, creating yet another lien on the property. These contracts usually state that the homeowner cannot do a loan modification, cannot refinance, cannot list with a real estate professional, and cannot do anything while under contract, since the option money he accepted gives the investor the right to completely tie up the house. The poor homeowner can now do nothing except wait and trust the investor.

Now, the investor attempts to negotiate a short sale with the homeowner’s lender, which as we all know, is no easy feat. The investor’s goal is to obtain a short sale approval that is significantly below market value (an even more difficult feat). If the investor is successful, and the lender grants approval, now the investor will either buy the house himself (doubtful) or begin the process of finding a buyer. But the buyer he finds will be quoted a higher price than the short sale approval. The investor will either resell his option or flip the property (double close), and pocket the difference between the new purchase price and the lender’s approved price. In this case, the investor never even takes possession of the property. Some could even argue (rightly, I believe) that this would require a real estate license. Very few of these scammers are licensed, I assure you. And in Nevada, just negotiating a short sale with a lender on behalf of a homeowner requires either a real estate or mortgage broker’s license.

However, in the vast (and I mean vast) majority of the cases, the negotiations do not result in an approval that is significantly below market value, in which case the investor decides not to exercise his option to purchase. He simply walks away and abandons his $10 (what a loss!), and moves on to the next sucker. So unless he can find a super-great deal, the investor will not buy anything.

One of the reasons that this is so highly unethical is that the investor, while diddling with the short sale lender, has robbed the homeowner of one of his greatest assets: time! The homeowner is delinquent, and foreclosure is imminent. The homeowner could have attempted a loan modification, or listed his house for sale and procured a serious buyer who was willing to pay a fair price. But now, that time has been lost (stolen, I say), and he is most likely out of solutions. Foreclosure is staring him right in the face, while the investor simply has nothing to lose except his $10.

Statistics show that except in VERY few cases, homeowners who sign option contracts overwhelmingly end up in foreclosure.

Most of these contracts lack the proper disclosures. In addition, the investor has little if any motivation to try to eliminate future deficiency judgments against the homeowner, because once the property records and changes hands, he just doesn’t care what happens to the former homeowner.

I am not a lawyer or a professional writer, and I just don’t know if I have explained this well, but I did my best.

TRR has a policy that we do not allow any documents, contracts or addenda that are not authorized by NRED (Nevada Real Estate Division) or GLVAR (Greater Las Vegas Association of Realtors). It is too risky and fraught with complications and liability. I do not allow these options in my company, either. No way.

I read today that there are lawsuits flying left and right from coast to coast over these short sale option contracts. More are sure to follow.

Bottom line: BEWARE OPTION CONTRACT SCAMS!

Date posted: October 6, 2010