For almost two years now, the buzz in the real estate community is the new answer for staying in business (if you are a Realtor) and more importantly, saving American housing, has been the short sale. Briefly, short sales are when a homeowner is able to get their mortgage company to accept less than the balance of the loan in order to complete a sale of the home.
For years we have struggled with short sales and I feel that experience gave me some insight others may not. For a long time, I have been skeptical that short sales will be a big part of the housing solution. Primarily because there are so many stakeholders in the game that have to agree, it is basically selling a home by committee..and a large committee at that.
Earlier this year the federal HAFA program began and with it I believe we have the most significant step in creating a process to assist people who need to sell with a short sale. Unfortunately, simply identifying who NEEDS to use a short sale for a sale of their home is not as easily done as said. HAFA goes a long way toward placing some boundaries on identifying these parties. The primary one is the owner must have tried first for a government loan modification and failed to qualify. While this parameter had to be built in, many homeowners are barking because they simply DO NOT want to stay in their home and DO NOT want a modification. Yet..they are underwater on their mortgage and few think they should be required to use any of their own cash in order to settle on their debt. There are also many innocent people who HAFA can assist because they do not have any resources so they are not going to qualify for the HAMP modification, clearing their path to a HAFA short sale.
It is the group of people that have the resources to settle some part of their unpaid mortgage balance that are now seeking creative ways to complete a short sale. Besides the attempts to hide assets, a new game is playing itself out where the short sale is orchestrated by several parties, outside the lender’s awareness. Simply, sales are being created that are not arms length. For the players in this scene, the banks are eventually finding out and prosecuting. The most comon scheme is known as “Home Flopping”. Federal agents say these schemes are on the rise.
“Home Flopping” involves the listing agent for a home convincing a bank to complete a short sale for an amount the listing agent recognizes will allow a second sale to a third party for an increased amount. In other words, the increased amount is what the bank should have accepted and received in the short sale. The parties to the transaction (Seller, Realtor, Buyer #1, and the Broker Price Opinion agent) all split the profits. The FBI is prosecuting one of these right now where the Realtors have pled guilty of convincing Regions Bank to accept a short sale of $102,375 and two month later selling the property for $132,500. Profits were likely distributed to all parties.
The biggest challenge for short sales? Greed! All the parties to the transaction, and I can think of about eight possible ones, all have their motivations and the committee rarely can totally agree. Throw in a few of the parties who have additional profit schemes in mind and you can see why I remain skeptical about the success of short sales ever really being a large part of the solution to the housing crisis.
The best solution-a revived economy. Next to that, modification or a controlled Deed In Liew of Foreclosure. Modifications allow people to stay in their home with a new payment plan, orwith a Deed In Lieu they may leave their home and the bank avoids the laws that cause homes to deteriorate sitting vacant for months to years awaiting foreclosure. Two simple solutions that take the greed factor out of the equation. Time will tell..but this is a message I have been putting out there for two years now and so far, little has happened to prove me wrong.
Tags: Foreclosures, Home Flopping, Joel Wilmoth, Loan modifications, short sales
