Honesty in Flipping – What to Disclose

By: David Reinholtz

This article is about flipping short sale properties, and the parameters associated with this are much different than other types of property sales and investment and should not be assumed to apply to other, more traditional forms of sales. Short sales, as most people are now aware, occur when a property owner is behind on his or her payments and makes an arrangement with their mortgage lender to sell the property for less than its assessed, or true, value in order to avoid foreclosure, the stigma that goes along with it, and the credit damage that can come from it.

If your client, or someone you know, is in the business of short sale investing, meaning they intend to purchase short sale homes and immediately turn around and resell them for a profit, there are legal questions that go along with the process, many of which have never been addressed, but will undoubtedly come to light in a court of law at some point in the foreseeable future.

While buying a short sale home at a bargain and turning around and selling it at its regular price, or slightly less than its assessed value is completely legal, the term ‘fraud’ is being tossed around lately and it may behoove the serious investor to make every effort to offer full disclosure, or at least a modest modicum of disclosure to all parties involved.

The scenario

Imagine this scenario: You’re a homeowner who has fallen on hard times. You or your spouse may have lost his or her job and despite your best efforts, you can’t keep up with the mortgage payments. You are facing the barrel of foreclosure and work out an agreement with your lender to go ahead with a short sale. You know your home is in great shape, the lawn is meticulously maintained and you added a new kitchen and bathroom.

You have no choice but to let go of this home because you want to buy another one as soon as you recover from your financial setback, so the short sale seems fair. Several interested buyers flock to your house immediately and within a few days, maybe even that same day, you have an offer on it. The bank agrees and you sell the home, getting out from under your financial burden.

Two weeks later, you learn that your home suddenly sold for near full value. Perhaps forty thousand dollars more than you sold it. This is enough to feel as though you were taken advantage of. Maybe it’s enough to consult a lawyer. After all, if your home sold for its assessed value two weeks after the short sale, you could have made that sale directly.

Putting yourself in someone else’s shoes is the best way to determine what level of honesty should be used during the process.

Letting the homeowner know the truth

In most cases, homeowners who partake in short sales don’t have a choice, so whether you are going to turn around and sell their home at a profit or not, they don’t have the luxury of hanging onto any longer. Being upfront may sting for the homeowner, but you are protecting yourself legally.

The same holds true for the lender. Mortgage lenders make loans based on long-term earnings through interest rates. If they are aware of the intention to flip the house, there are some lenders that would not be willing to make the loan. Posting a statement of your intentions within the contract (which, as we all know, can be upwards of 100 pages or more), will cover you legally. Remember, loan officers don’t tend to read the contract thoroughly. You’re covered nonetheless from any legal action that uses the phrase ‘fraud’ in the future.

No legal obligation

While investors intending to flip short sale homes are under no legal obligation to disclose their intentions, most, if asked, wouldn’t want to become the guinea pigs in a legal dispute over a fraud allegation. Full disclosure is always a safe bet.

David

About the Author

David is the Founder and CEO of LoanOfficerSchool.com, an approved education provider for The Conference of State Bank Supervisors and The National Mortgage Licensing Systems’ (NMLS) required pre-licensing education and continuing education.

(ArticlesBase SC #3040471)

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A foreclosure auction occurs when the owner of a mortgaged property defaults on the loan and the property is sold to the highest bidder. The amount of the sale is disbursed to the lender. Here is a step by step description of how a foreclosure auction of a home takes place.

Find a property and Prepare for auction:

Any person with interest in buying a home at a foreclosure auction must be up-to-date on the information and act on it as quickly as possible. Once you find a property, you must collect as much information as you can about it. You must also determine whether there are any liens or judgments against the property. These can include unpaid personal property taxes, civil lawsuit judgments and state or federal tax liens.

Financial arrangements have to be made to bid at the auction. In some states, the entire amount must be given at once. In others, only a percentage of the amount must be given at the auction and the rest must be paid in a set amount of days.

It is a good idea to have some experience with such auctions prior to making your first official bid. You will feel much comfortable while bidding and you will have an idea of how the auction is going to proceed and you can decide accordingly.

Confirm Details of auction:

There is always the possibility of the owner stopping the auction by paying off the amount owed to the lender. A scheduled auction can also be postponed or cancelled. Although cancellations and postponements are announced at the time and location of the originally scheduled auction, you can call the trustee to find out beforehand. Since the bidding procedure is different in every state, you should familiarize yourself with your state laws on cancellations and postponements.

Prepare for Potential bargain

Before your first bid you need to have information about the market value of the property, liens against the property, and the amount left in the mortgage to be paid off to the lender. Usually the opening bid amount will be the total amount to be paid off to the lender along with the expenses to meet the foreclosure auction. If no one bids over that amount the possession of the property will be taken over by the foreclosing lender. It is very important to know all of the liens against the property and their priority before you bid, because if you are the highest bidder then you are responsible to pay off them.

Decide on the bid amount

After taking into consideration the above factors as well as your financial capability, you have to decide on the amount you can will bid on the auction. In states where the full amount must be disbursed at once, your bid will not be considered if you do not have the required amount ready with you. Even in states where you do not have to give the full amount at once, you might get caught up in the heady auction atmosphere and overbid – leaving you stuck in a bad deal. Also, if you are not able to pay the full amount before the prescribed date, the deposited amount will not be refundable. Other factors to consider when deciding on a bid amount are the rate of real estate appreciation in the area and the potential for increasing the property’s value by making repairs and improvements.

Bid at the auction

Recheck with the trustee to find out whether there have been any changes to the schedule of the auction. Arrive at the location early and get a good idea of the environment. The auctioneer will collect the name and amount possessed from each bidder. No one is allowed to bid above the amount they possess. Prior to the opening bid, the trustee will read aloud the legal description and terms of sale for each property.

Take Ownership

If you are the winning bidder, you will collect the necessary documents and enquire about further formalities involved in the sale. You should have a clear plan for when the transfer of ownership will be completed. Be sure to maintain a proper and regular follow-up. In the redemption period, the owner of the property can pay you back the full amount paid at the auction and retain the property. Therefore, it is wise not to do any reformation work on the property until you have redeemed the ownership of the property.

There is no doubt that foreclosure auctions can present some of the most attractive real estate buying opportunities available. This is due to the fact that the opening bid is based primarily on the mortgage balance and not on the market value.

Knowing exactly what to invest in when dealing with real estate transactions will determine a good or bad deal. When a good deal is made, it means that the seller, buyer and agent all walk away feeling as though they have won or made a bargain. Having what you want in line is the beginning to making a good deal with all that are involved in the process.

The major component that will make a deal and transaction good is the finances that are involved in it. This means that the right loan with the specific terms and needs should be applied. The right interest rate should be a part of this transaction. You should also have the buyer feeling like they got the home or property for a lower price than other places. The seller should feel like they made some profit for their next property for this as well.

The finances that affect the deal should also be a good deal in offering upfront fees and better rates. For example, some lenders or investors will offer prices but have other fees attached that will add onto the loan. Knowing to look out for these will help you avoid the extra costs that may not be attached to the initial loan. You can make sure that this part of the deal is good by investigating different lenders and seeing who has the best offer.

Another part of ensuring a good deal comes from the state that the property is in. The property maintenance performances should be done on the house. This means cleaning the floors and other places that have gotten dirty over time. It also means making sure that the property has everything running smoothly in it. A property manager or inspector will need to move around the property to make sure everything has been maintained. If it hasn’t, the investments need to be made before the final deal to fix these certain areas.

Finding the best deal for your needs will allow for everyone to get a good deal. Buying and investing in the property that you want without having the wrong types of costs and problems with the maintenance of the home will help you feel content with your decision for a long period of time. Investigating and knowing what you want is important in determining what types of things to walk into as well as what to avoid.

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