When attempting to short sale, should you always get the deed? If so, what is the best way to present this to the seller?
Also, is there also anything that should never be said so I don’t get myself into trouble?
You don’t need the deed.
And yes, there are many ways to get into trouble in this business. . .
As an investor who has done many a back-to-back short sale transaction, it’s time to set the record straight about the use of land trust to flip short sales.
Remember, the land trust was a tool initially designed to hide ownership information.
As a tool to buy and keep property long term, the land trust is fantastic; however, as a tool to do what many gurus have been advocating for years . . . well . . . the times they are a changin’.
Short sales are attractive to investors for a number of reasons, but initially because they represent a pool of motivated sellers.
I’ll discuss seller options in another post, but for now, let’s assume that the seller has missed his or her opportunity to complete a workout with the bank, and is heading to auction –– it’s not a question of if they are leaving the house, it’s a question of when.
An investor who understands how to negotiate a short sale can buy property at a steep discount, rehab and sell. Of course, this takes time, and a great deal of experience to get the house rehabbed (managing contractors) and sold.
It also ties up money and puts it at risk.
Moreover, there is never a guarantee that the lender will discount the property sufficiently enough to leave enough room to make a profit.
The alternative for the investor, is to negotiate an approval, and flip to an end buyer. This has been referred to as a simultaneous closing or a double closing or quick-turn.
In essence the negotiated property is being bought and sold by the investor in the same day.
Some investors will try to assign the short sale contract, but there are problems associated with this.
Likewise, conducting a quick-turn on a short sale transaction is also problematic.
Here are the major issues that the gurus aren’t saying:
Short sales cannot be assigned. Each lenders has put that restriction into their approval letters ––the buyer cannot be substituted. Short sales cannot be assigned.
Seasoning problems. When conducting a double close investors may run into seasoning problems with the end buyer’s lender that is providing the loan to close the deal.
To satisfy the seasoning requirements land trust have been heavily used by short sale investors (keep in mind that today, seasoning is only an issue with VA and FHA, when in the past it was the subprime lenders who were enforcing seasoning).
Seems like a good solution on the surface . . . except that there are some untidy loose ends.
Here’s one . . . many investors (B) will use the money from the end buyer’s lender (C) on the second transaction to pay for the first transaction between the investor and the bank (A to B) .
Remember, it’s A to B and then B to C
A= the bank
B= the investor
C= the end buyer
Over the past several years I’ve worked with many investors who said that this wasn’t an issue . . . In reply, I’ve asked them to mention to their buyer’s lender that the money that lender is providing will be used on a transaction that the end buyer’s lender knows nothing about –– how do you think that end lender will respond?
Here’s another . . . investors using the land trust to conduct double closings on short sales will assign themselves the beneficial interest to gain the profits from the transaction. Hmmmm . . . Investors do this to keep chain of title, but then switch it at the last possible moment to receive the profit on the transaction.
My other favorite is that, “My title company doesn’t have an issue with this.” I usually respond that they should stick with them . . . but they should also know that First American, Fidelity, Stewart and the other large underwriters, as well as many of the smaller underwriters will no longer insure these transactions.
There is a better way using an option to purchase that leaves both transactions totally transparent. I’ll discuss the mechanics and benefits in future posts.
Interesting…
How is a short sale done successfully with an Option to Purchase agreement?
And that method better than using a land trust?
Yes, it’s better, for the simple reasons that it’s transparent, doesn’t involve the beneficial interest sleight of hand, doesn’t involve wire fraud, and all the big underwriters will no longer insure land trusts.
I am prevented to be more direct in my explanation due to the guidelines of this site. Two companies teach this methodology. Google option contract for short sales and something should come up.
So the deed is not needed? Sounds good…One less document to worry about. Are there any other forms that these “gurus” stress you should have, but are not really needed?
One other method I’ve seen discussed (but not used): put the contract in the name of the LLC and then sell the LLC to another investor prior to closing. No double closing, no seasoning issues, no double realty transfer taxes.
Interesting method…Thanks for the info.