All Forum Posts by: Tim Silvers

Much of what I question in the following post truly belongs in the hands of competent counsel, but we all know that can be more confusing than it's worth half the time!

Why isn't the buy-and-hold investor held to the same standards of mandatory disclosure if he or she suddenly decides that after buying, the rebab costs turn out to eat up all the profit or the rent doesn't pencil as well as originally planned - and the investor decides to dump it after a few days - for a profit? Because he really didn't intend to resell it but did anyway, he's off the hook as far as disclosing? And how is it determined that the investor really didn't intend to resell and just told everyone that? It's still a flip, isn't it?

So then, am I correct to assume the difference in terms of what necessitates mandatory disclosure between the investor who negotiates/purchases the short sale from the lender with the intent of simultaneously reselling it (simo flipping) vs. the investor who negotiates/purchases the short sale from the lender that plans to resell it at a later time is that the investor who does a simo flip knowingly negotiates the buy solely contingent on having an end buyer secured well before the close that has agreed to purchase the property at a profit above the price the investor originally paid and therefore MUST disclose all details of the transaction to all parties involved?

According to the author of article I previously posted, disclosing the basic intent to resell isn't good enough. The investor need also disclose to the lender the details of the sale to the end buyer as well, or as Justin stated, by simply making available the end buyer's HUD-1 statement:

"You may again reasonably retort that you disclosed your intentions to profit in the Option Agreement presented to the Lender along with your initial offer. However, your intentions don’t count in this case. Your intentions are rather something volatile and intangible. The written (2nd) Purchase Agreement and your new buyer, on the other hand, are substances very much tangible and physically palpable. Thus, you must disclose above facts before closing. This will relieve you from any further responsibilities. The only thing which worries me is if the Lender would accept your offer after disclosure that there is a very real person who is willing to pay for the very same property thousands more, or rather kills the deal."

(whether the author has researched the disclosure laws and knows for a fact this is true or whether it's just common sense is unknown)

I could see defense lawyers continuing to have a real field day with this because so much is based literally on subjective interpretation and intent or lack thereof - both of which ALWAYS become the exclusive province of all white collar cases involving fraud. Why the #$%^ innocent and ethical investors continue to be left without 100% clarification of this PRIOR to entering in transactions makes for a veritable mine field when it comes to doing business wherein any action can be potentially criminalized when in fact it was never the intention to defraud or deceive anyone - unlike those that are unethical that clearly did wrong. That line seems to be getting more and more blurred until we are given specific guidelines.

I just received this link on my google alerts and wanted some feedback. They are quick to stomp on the flip promoters, yet it appears they are doing flips themselves. Check out their website. It looked real flakey to me, especially when they're promoting other things that have nothing to do with real estate.

http://truthinsales.blogspot.com/2009/10/is-flipping-short-sales-mortgage-fraud.html

" Is flipping short sales a mortgage fraud?
The Feds will enforce the laws prohibiting short sale flipping.
Defrauding The Banks Means Defrauding The Feds!

Watch Video Here

There was a lot of controversy in recent discussions whether flipping short sales were to be considered ethical, beneficial for sellers and lenders, or a predatory hunt for easy profits by unscrupulous investors. Thousands of “Gurus†and “Coachesâ€, having proudly proclaimed themselves as saviors (or vultures) of the struggling housing market, created their own internet schools, training programs, universities, institutes, etc. where they pushed their students to trick lenders and sellers to complete a short sale deal and put a lump sum in the pockets. The tuition is not cheap: from $297.00 and up to $5,000 only sign-up fee.
In addition, there is a certain monthly fee always applied: for using their Web resources, or updated materials, or Webinars, or phone consultations, or Seminars - you name it, in average of $197.00 a month. Combine all the above and you’ll get a personal coaching program starting from $5,000 and up to $50,000. There’s no guarantee, though, that you’ll achieve any significant results. Your chances to succeed are equal to ones of some street smarts who just are knocking the doors of defaulted homeowners and offering their services to save the latter from foreclosure. But a level of annoyance by such mentors can only be compared with the perpetual ocean tide where a student is locked in the metal barrel surfing the stormy surface. Endless emails, calls, webinars will never let you focus on the practical activities since you’ll be always involved in some new technique or strategy that, according to your mentors, are absolutely essential to learn. The funny thing is, that all these “Gurus†are playing the same tune using different instruments. They would sell to you somebody else’s program for thousands of dollars just to get their share of the sales proceeds. They may not even know the content of such program. Is there anything that may help you to accomplish your goals, they don’t care. They are not interested in your success. The more miserable you are- the more useless stuff you would buy to get out of your misery. They can invite the lawyers, CPAs and other paid professionals just to show you a new move and/or defense from the most recent regulations imposed by authorities in order to prevent fraud or unethical actions by investors. They will teach you, actually, how to commit a crime and get away with it.
If only. They are not that smart as they want you to think they are. If they were, they would have never revealed their techniques to you, but rather made tons of money quietly, without these pompous parades. But they prefer to stay in the shadow and expose you to the all storms and thunders while charging fat lump sums from your credit card accounts. Because they know that you’re violating the Federal Laws on your way to the top. If these Laws had not been enforced by now does not mean they would not be soon.
And they will be! Please keep in mind that there is statute of limitations in each individual State for any criminal offence committed in the past. Some violations even don’t have such statutes and may be prosecuted indefinitely. However, lucky you, fraud is not one of them. But still, it’s a federal offence and may be punished by up to 30 years of imprisonment plus thousands of dollars in fines and penalties.

As you probably know, FannieMae and FreddyMac are now subsidized by US Government, and by defrauding them you actually defrauding the US Government.
You may reasonably ask, “How, for my deal sake, I’m defrauding my beloved Uncle Sam?†The answer is as follows: your deal actually consists of 2 separated deals: from original seller to you, and then from you to a new buyer. Failure to disclose existence of a new buyer and the second Purchase Agreement before closing is considered as a fraud. Why? Because the very existence of this buyer and the second Contract are the material facts that may affect the Lender’s decision whether accept or reject your offer. You may again reasonably retort that you disclosed your intentions to profit in the Option Agreement presented to the Lender along with your initial offer. However, your intentions don’t count in this case. Your intentions are rather something volatile and intangible. The written (2nd) Purchase Agreement and your new buyer, on the other hand, are substances very much tangible and physically palpable. Thus, you must disclose above facts before closing. This will relieve you from any further responsibilities. The only thing which worries me is if the Lender would accept your offer after disclosure that there is a very real person who is willing to pay for the very same property thousands more, or rather kills the deal.
What do you think?

This is a riddle, isn’t it?

Please post your comments below.

You may also ask your “Mentor†of how to sneak your way around it. If your “Mentor†is still there by then. “By then†I mean January, 2010 when all already existent laws and regulations will be enforced. There will be enforcement agencies formed to persecute violators as per banks request. And what is the most convenient, it won’t cost the banks a dime compare to the civil law suits since this process will be implemented by the Feds for free as a part of the Mortgage Fraud Program."

I am new to wholesaling and still educating myself, so please bear with me.

With respect to a wholesale transaction, I understand that it only makes sense to contract to buy properties which have enough equity for an end buyer. Obviously, properties with negative equity aren't going to work for the wholesale flip business model.

That being said, how likely would it be to locate such deals in declining markets such as mine (Las Vegas) in which the only apparent opportunities to profit at enough of a discount are dominated by short sales and REOs, as the majority of owners motivated to sell are those who are severely underwater (75% of every mortgage holder in Vegas).

My assumption is this: When it comes to wholesaling, it's not so much about the specific market and the sellers in it; it's all about the numbers, like what Carol stated about putting out 400 offers. There's always that white elephant or motivated seller out there, clueless as to how to pro-act.

The question then is: As time is money, does the amount of downtime trying to prospect for those few wholesale flips with enough spread exceed the time spent finding and putting together other types of flips, i.e., short sales and REOs???

Better yet, is anyone out there wholesaling successfully (or not) in Las Vegas or in similarly-distressed markets (Miami, Detroit, Phoenix, Sacramento)?

I also heard that you could do a quit claim from the seller to you or your LLC similar to doing it with a LT, but was told it doesn't get recorded. Not really sure how that works.

If they want more black and white than that, it'd have to be from the man upstairs!

And for that to be public record, I'm assuming it's a true arm's length wet close with real funds - whether it's 1-day dough or private $ or whatever, correct?

Excellent! This clarifies much.

Last (I hope) question: I realize that there's a general disclosure stating your intent is to profit to all parties on both sides on the deal, but is it necessary to disclose to both exactly what you paid and sold it for (the spread)???

Justin, thanks for the quick reply.

Question: Do you disclose that you are reselling the property at a profit to the end buyer and his or her lender (if there is one) as well???

Here's another issue: Wouldn't it be looked upon as possible a disservice and conflict of interest for a seller who does not qualify for relief under the debt forgiveness act to be subject to a larger tax liability on a short sale through an investor (as a result of a lower payoff to the bank) as opposed to through a realtor or other mitigator (resulting in a higher payoff)???

More on short sale flips taking a hit:

http://homeequitytheft.blogspot.com/2009/06/atif-refuses-to-issue-title-insurance.html

http://www2.tbo.com/content/2009/jun/11/title-insurance-groups-move-could-stymie-short-sal/news-realestate/

I wonder how many short sale flippers do actually disclose in writing their intent to resell at a profit to the short sale lender.

So, bottom line - are we sure disclosing to the lender (and seller) make the transaction 100% legal???

I would think most do not disclose to the end buyer or their lender that because it isn't any of their business, but how do we know that wouldn't be considered fraud as well?

Another thing: If you read the comments section of the 2nd link, even the so-called gurus soliciting their short sale programs are accused of using tactics
to make the appraisals come in where he needed them to.

Who is doing short sale flips and doing them successfuly, but with full disclosure? Is it even possible?

I mean, as soon as the lender on the A-B part is fully aware of the investor profiting, doesn't that KILL THE DEAL???

I think what the first link is talking about is what's commonly referred to as a dry close in which the funds from the end buyer are used to purchase the property for the investor. Therefore, not an arm's length transaction. That and the fact the intent to resell weren't disclosed to either the seller or the seller's lender. That's where the line is drawn.

The second link has nothing to do with short sales and is outright appraisal fraud. That was going on rampantly when the market was in an upswing.

What I'm concerned about is that the title companies/feds would start scrutinizing any deal that's back-to-back wherein the investor makes an immediate spread or profit. I've seen too many times that what's legal today is suddenly illegal tomorrow and no one tells you until it's too late.

I'm not defending these guys' actions, but how do we know whether the properties weren't already underwater and the owners already in default? It didn't state that. And the BPO, you're right. Why didn't the bank send their own agent to do the BPO?