WARNING: The WRONG Way to do Short Sales
NASHVILLE, TN - What I call “the WRONG way to do short sales,” is a practice that is gaining significant popularity as of late but could land those who do it in some major trouble. I’m not usually one to be quite so negative and dramatic, but this is a serious matter. Plus, I’ve even seen a few short sale educators out there actually recommending this strategy and I felt it necessary to shoot out a warning so that no one gets hurt.
If the person you are taking advice from recommends the following technique I am about to describe…RUN! You’ll save yourself a whole lot of problems by not partaking in this technique. So here is the WRONG way to do a short sale:
1. A real estate agent has an active short sale listing with a listing agreement executed between herself and the seller.
2. An investor, listening to the bad advice of his short sale educator, contacts the agent and says, “Hey Mrs. Agent, I’m a short sale investor. I’d like to make a short sale offer on the property. I’ll agree to pay you your 3% listing commission and then an additional 3% commission if you’ll let me make a short sale offer on the property. You go ahead and keep it listed and when another buyer comes along, I’ll sell the property to that buyer.”
3. The agent contemplates that such an arrangement would completely violate her fiduciary responsibility with her seller client but also loves the idea of making 6% for doing close to no work. With some real salesmanship, the investor convinces the agent to move forward and off they go into the WRONG way to do short sales.
To the un-initiated, this may not sound like a big deal. But in the world of real estate, this is becoming a very hot topic. In fact, many lenders are beginning to put in their short sale approval letters language to prevent this practice. In addition, the National Association of Realtors just sent an email to all its members to steer clear of investors who want to employ this technique. Local brokers are feverishly trying to educate their agents to avoid these situations like the plague. The walls are crashing in on investors who are doing this and if you’re a part of a short sale program that is advocating this practice, I suggest you find a different short sale education course. There are plenty of investors and short sale educators out there that are NOT advocating this practice and doing this business the right way.
I can just hear the investors that are practicing this technique fuming from this post and prepared to defend there position. Let me save them their commenting energy…
When the NAR is blasting emails warning 1.2 Million Realtors across America to avoid these arrangements, all the disclosures in the world won’t help you. Let this startegy go. It’s over. Move on. Besides, you don’t need to use that technique to be successful with short sales anyway. We’ve never used it, we’ve never advocated it and we’ve been extremely successful with short sales over the past decade.
So how do you do short sales the right way? That answer would require a whole lot more time than we have here. Feel free to read some more articles on this webpage, view our Free Short Sale Training Video, sign up for my Free Short Sale eCourse, register for an Upcoming Webinar or better yet, take the best step of all and join my Short Sales Step By Step Mentorship Program. You’ll join an elite group of very successful short sale professionals that are making an absolute fortune, even in this down economy.
I hope this got your attention. Feel free to share your reactions to this post in the comments section below.
There are many flaws in that system, but it can be done legally and correctly. As of today, I have not seen a coarse that has it completely correct.
This info is clear and concise and timely. My one question is could not the investor represent himself as a customer and the offer still be made. Then it would not violate the seller/agent relationship as long as the seller understood the relationship of the invesor being a customer and not a client of the agent. What you are saying is the agent could not turn around and sell it for the investor at that point is this correct? If another offer comes in then that should also go to the bank and let the bank choose what they want to take and wouldn’t this take care of that situation for the seller. The main thing is to avoid the foreclosure for the seller and the bank and is not this correct? With a shortsale situation it is real risky to have a dual agency relationship even though this happens all the time in normal real estate tranactions. I personally try to avoid dual agency because I believe it is hard to serve “two masters”. Now the question appears how does the short sale investor find an end buyer when they do not have the property listed? Real interesting huh!!!!
So it’s imperative that the listing be removed and a new listing be created after the BPO comes back?
Hey Phil, Question. Not to play the devil advocate but why would the NAR not support this practice? We have a business right now that is setup as a short sale mitigation company and it does pretty much what you just described. We build a relationship with an agent/broker, when a short sale opportunity comes to the table, before another offer is submitted, we get a contract on the property. At this point we go to the bank and negotiate the short sale. This whole time the property is still listed with the original seller and we continue getting offers. Once we have the acceptance letter, we usually have a buyer in place. The property is closed in a land trust and we make a good profit. Now keep in mind we are not making $100,000 per property. Most of our deals are netting $7,000-10,000, the difference being that we are doing 20-25 per month. Power in numbers and we don’t have to do the marketing or worry about the exit. I understand that some banks are playing the wording game and not wanting to allow this to happen, the difference is, if you are sitting at the closing table and have a buyer in place, if you have a strong enough relationship with the bank, do you think they are going to walk away when they are only going to loose a small percentage of the deal to you? I’ve never had it happen. Keep in mind this is only one strategy we use with our short sales but to this point has worked very well.
For this answer I am going to recap the exact scenario in which you are currently operating:
- You make offer on the property and the seller accepts so that you and the seller now have an agreement together.
- Listing Agent keeps the property on the MLS as an active listing throughout the short sale negotiation process.
- New buyer comes along as a result of the exact same active listing and offers more than you.
- You get the approval from the lender, you buy it and close on it (we’ll call it side A) and then turn around and re-sell it to the new buyer (we’ll call this side B).
- In the end, you get the money in the middle (whether it is $1, $7,000, or $100,000) and the agent gets 3% on the side A closing as the listing agent and 3% on the side B closing as the listing agent.
Alot of people are doing this, not just you. And people have been getting away with this too. But those days are coming to an end. Proceed at your own risk because that is EXACTLY what I am saying is the WRONG way to do short sales.
It is already landing some people in hot water (Some sellers in Michigan have filed a lawsuit against a major real estate agency, for example)
There are two key places where things go wrong:
1. THE LISTING: When an agent gets an offer on a listing, they must present that offer to the seller. Once presented, the negotiations begin. If the buyers and sellers come to an agreement, the listing must then be adjusted to show that an offer exists on the property. In the Middle Tennessee MLS, the listing has a yellow highlight to show that the deal is tied up. Once a listing shows that yellow highlight, buyers stop looking at the property because they see that it is tied up. Then, once the lender approves the short sale, it then is supposed to turn to “pending” on the MLS.
When an agent doesn’t make these necessary updates to the listing, they are breaking all sorts of listing rules. Obviously, in the “WRONG way startegy”, the listing stays fully active to induce more buyers to make offers. So there is the first key palce where things go wrong and all parties can get in real trouble.
2. FIDUCIARY RESPONSIBILITY: The second place is that the listing agent has a fiduciary responsibility to their client, which is the seller. They are breaking their fiduciary responsibility by allowing a third party to slip in (you) and make money that should actually go to the bank, whether your profit is $7000 or $700,000. I know you may not look at it this way, but the National Association of Realtors does, the banks do, and those two massive groups are probably a whole lot more powerful than you are in court.
You have a few choices:
1. If you want to keep doing what you are doing, the listing agent will need to adjust the listing from active to active+contract (every MLS is different in how they handle this). This, of course, will scare off any buyers from making offers, but it is the right way to do it. Plus, the agent would have to decline that extra 3% commission on the side B transaction if you were able to find a buyer from some other means (say, for example, you put out some FSBO signs or other non-MLS marketing strategies). Why does the agent have to decline the extra 3%? Because they have a fiduciary responsiblity to their client. What you do with the property once you buy it is your own business, but the listing agent needs to avoid being party to the fact that their client is taking an extra hit for your benefit. Once again, you may not agree with that view of the situation, but I can assure you that the NAR and the 100 or so major lenders across the country don’t care what you think. (No offense, just being real with you.)
2. You play the role of short sale negotiator (you may already be doing this) and the highest paying buyer is the one purchasing the property. There is only one closing and you make a fee on the HUD for your services, whether that is $7,000 or $700. As you probably know, not all short sale lenders will allow your fee. Oh well, that’s just the name of the game if you want to do the business right.
3. You guessed it…join our program and we’ll show you how to do this business right and instead of you only making $7,000 - $10,000, you’ll make five to ten times as much per deal. The strategies we will teach you will not compete with your current business, but actually compliment it. You can still charge a fee on the HUD to negotiate short sales for Realtors in your area, but you can also add in the startegies we teach to make the massive checks as well. To get started, here are the details of our Short Sales Step By Step Mentorship Program
Rob,
Sounds like you haven’t seen ours. Not being arrogant, but simply stating that we do have it completely correct.
Also, read my response to Bobby as to the ways to do it right.
Jim, read my response to Bobby, that should clear it up for you.
Lynn,
You packed in quite a few questions in there. I hope my response to Bobby helps answer most of these for you.
Sorry, this is not response to the article, but I am looking for answers….any help would be much appreciated.
I am considering short saling my house. I am NOT in a financial hardship and am NOT behind on my mortgage. I am nice money and my debt is very low.
My nieghborhood is changing…..for the worse. I fear for my family’s safety. Plus my wife is pregnant with our second child.
Property values have dropped significantly in the area and comps are saling for $6000 to $12000.
!) Would Wells Fargo even consider me for a short sale?
2) would Well Fargo consider the comps only with the sale and accept mine based upon that only or do I have to be in a financial strife?
1.) Yes
2.) You do not have to be in financial strife.
There is a caveat to both of these points though. Most short sale investors (and agents) in this country can not pull off a short sale in your situation. But the people I have personally trained can. So to get help immediately, click on the following link:
SELL MY HOUSE FAST
and one of my personally trained short sale specialists will be in contact with you immediately to help you.
Thanks for the contact Ryan.
Phil
Phil,
i do personally believe that you have the best short sale program out there. I get e-mails and webinars from many, many short sale educators.
I thank my lucky stars that I have enough wisdom not to buy into the other educators’ courses.
Marie
1. Probably. Worth a shot to ask them.
2. Maybe. Worth a shot to ask them.