A short sale flip is when an investor purchases and simultaneously resells, at a higher price, a short sale property — a property selling for less than the current mortgage balance. For this kind of business to succeed, an investor must overcome a number of obstacles that do indeed make the business hard. For a well-prepared and knowledgeable investor, the barriers to success are not insurmountable but do require careful management and honest dealings.
The biggest operational problem is to find a suitable short sale property to buy at a low price and then to find an ultimate buyer who will purchase the property at a higher price — the price difference is your revenue on the deal. One of the biggest difficulties is preventing the short seller from striking a deal directly with your ultimate buyer, cutting you out of the deal. The solution is to buy an exclusive option from the seller for the purchase of the property.
A lot of legal controversy centers around short sale flipping. For instance, are you defrauding the mortgage holder by siphoning off the higher bid? Are you putting the seller or agent in a vulnerable legal position? The only way to avoid legal entanglements in the short sale flipping business is full disclosure of everything you are doing, including your option deal with the seller. The flipping is not illegal, but concealing or misstating important information is. Declaring your deal in writing to all parties will prevent legal jeopardy, but it also makes sense to work closely with a good lawyer.
You need to pay for the purchase of the short sale before you can flip the house and recoup your funds. How do you secure the purchase price without a mortgage if you are not wealthy enough? The solution is to take on a “flash loan,” which is basically a one-day transactional funding arrangement. Transactional lenders will lay out the cash to buy the short sale property if it is to be resold on the same day. The lender will charge a fee for this service and expect to be repaid by the end of business on the day of the double closing.
If you are a 100 percent straight shooter, then there is no problem here. But what if you are tempted to push a deal through by cutting ethical corners, such as not making full disclosure or understating the value of the short sale property to the mortgage lender? Some people give in to their less-than-honorable sides. If you are concerned about the ethical and legal problems you may precipitate in a moment of weakness, then perhaps short sale flipping is not a good choice for you.
- California Association of Realtors: Short Sale Fraud
- Flipping Houses 101; Meg Heart
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