The New Real Estate Flipping: Short Sales

This Southwest Florida article alleges that organized groups, typically made up of real estate pros (agents, attorneys, appraisers, etc.), are defrauding banks by convincing them to sell properties for significantly less than the mortgages owed on them, only to resell the house at a substantial profit, often in less than 24 hrs. AKA: short selling real estate for fun & profit.

Link to Article

Sounded like your regular garden variety capitalism to me at first, but apparently the FBI now officially classifies some of these activities as fraud. Admittedly, some of the methods are a bit ham-fisted. For instance, in some of the cases that this paper found, the original owner of the short-sold properties was also the realtor who acted as the listing agent for the short sale and the resale to a 3rd party within 24 hours. Basically that's like me approaching my own lender and saying "Man, you've got a real deadbeat on your hands. Why don't you let me sell that house for you to get you out of this mess." I then sell the house to a buddy at a discount, and resell the same house for him later the same day to a 3rd party (or 4th?) at fair market value. My buddy profits from the spread, I profit from the double commissions (not to mention by getting out of my under-water house).

I'm wondering if anyone really sees anything wrong with this, considering that the banks could avoid this trap by doing their own due diligence?

Real Estate professionals are well versed in finding appraisals which suit their purposes.

Banks allowed crappy underwriting to occur, which created half of this mess.
Now they are being duped on the way out too.

The only fraud I see is the real estate agents failing not working in the best interests of their clients in this case banks. Big surprise shady real estate agents and mortgage brokers.

Kanosh said: Banks seem increasingly clueless about how to handle basic real estate transactions.

Among foodies there is a "eat local" or "locavore" movement of those who support locally grown farmers by eating their crops. I don't know how much sense this makes. But I would like to see a parallel movement of banks which "go local" with lending. For example, a bank that loans to people buying homes in locations physically near the bank. That actually consider factors like reputation and how long someone has lived in the community before making a loan. Whose loan officers actually have a sense of where the local real estate market is.

I suspect if a bank actually stuck to the criteria above, among others, defaults would be few and far between.

I completely agree. Everyone's concerned about banks being "too big to fail" but this shows that they are too big to succeed. If you don't have the first clue as to the value of your own investments, you're in big trouble.

I have seen this in a few cases. Usually it's written up as subject to seller obtaining title. The reason they're able to flip in 24 hours is that they schedule the closings for the same day. I think banks used to require that the property be listed in MLS, but sometimes it isn't and then it gets listed in MLS and it looks like a flip in the listing. Banks usually do BPO's and also get appraisals, but I guess the ones getting fliped are ones where banks are skipping the appraisal or are using appraisers that aren't from the area and don't really know if a neighborhood is really good.

Also even if the real estate agent represents the seller, the agent still doesn't represent the bank. It's the seller that signs a contract with the real estate agent, not the bank.

dbond79 said:

While I can't say that these deals seem very ethical, real estate agents do not have a duty of loyalty to either buyer or seller under Florida law:

In a “Transactional” relationship, where there is in fact no agency relationship. In this relationship, the broker/agent is normally appointed and paid by the seller and has no duty of loyalty or confidentiality to either buyer or seller. Many real estate agents will only operate as transactional agents and under Florida law all agents are deemed to operate as transactional agents unless some other relationship is established in writing.

This "transactional" relationship is where an agent represents both the buyer and seller. A lot of agents who list for banks are listing agents who represent the bank only.

After years of lax underwriting and lax credit, we need fundamental changes in the system. Worms like those described in the system will exploit the system: before, now, and in the future.

We need to institute new rules to fix the problems now:

1. Lending agents work for the bank, no comissions. Just salary. Some countries have this model.
2. Bank has dedicated appraisers, chosen at random to do appraisals. Bank has the right to refuse financing if their own appraisal disagrees with negotiated price, amount on the existing loan, etc.
3. R/E commissions should have a non-linear payoff. E.g., start at $1K minimum, go up linearly at 3% up to $3K. From then on, there is no more increase.

How come there are maximum commissions for the sale of stocks and mutual funds, but not for houses?

Oh, poor banks, I feel for them so much. First they had to take it hard because they did not know people were not capable of paying their mortgages (of course, who could have guessed, right?), and now, they are being stood up again by those unscrupulous real estate professionals! Really, who in their right mind would expect a banker to have a clue how much their property is worth, right?

I'm in the middle of buying a short sale property right now, and the bank didn't let the realtor bring them an appraisal. Are these banks just accepting any appraisal that's brought to them? If so, then it's hard to feel bad for them for not covering their own ass.

blakwolf said: and the banks have always sent out their own appraisers to inspect the propertiesSo that the bank can create a BPO?

Is there any difference between a BPO and a Comparative Market Analysis?

rshot said: Kanosh said: Banks seem increasingly clueless about how to handle basic real estate transactions.

Among foodies there is a "eat local" or "locavore" movement of those who support locally grown farmers by eating their crops. I don't know how much sense this makes. But I would like to see a parallel movement of banks which "go local" with lending. For example, a bank that loans to people buying homes in locations physically near the bank. That actually consider factors like reputation and how long someone has lived in the community before making a loan. Whose loan officers actually have a sense of where the local real estate market is.

I suspect if a bank actually stuck to the criteria above, among others, defaults would be few and far between.

You can lend to all the people in the flood plains, on fault lines and in Florida. I will focus my lending in other areas!

You don't want to have all your eggs in one geographic basket, because catastrophe could do some real damage!

I don't think Kanosh understands how banks lend money. Typically banks have a certain amount of assets that they can lend against. Let's say it's 500 million. Once they lend out that 500 million, that's it, no more loans. However if they follow Fannie Mae or Freddie Mac guidelines, they're call conventional loans and they can now sell the loan they just made on the secondary market. They make a cut when they make the loan and when they sell it on the secondary market. Not only that, but it doesn't affect their 500 million so they can keep going and make more money. On the secondary market, investors end up buying the loans like 401k plans, foreign investors etc. because they're just bonds with a nice yield. Now if the banks make too many bad loans, they have to end up buying those loans back, but because they're mixed up with a bunch of other loans the theory was that it was unlikely it would reach a certain threshold where the banks would have to buy them back. Unfortunately for them, it did hit those thresholds and that's why you have sites like ml-implode which has 371 banks going under since 2006.

Local lending just means that they making non-conforming loans and they have to keep those loans in-house because they don't qualify to be sold on the secondary market. Banks don't like to do it too much because they can only do so many of them and they don't make as much money.

As for BPO's and CMA's, yes they're basically about the same thing. BPO's are more for banks and CMA are more for sellers.

dbond79 said: I don't see how local or regional lending has to mean they're making non-conforming loans. And as you pointed out yourself, if the national banks really had super-leveraged mortgage lending down to such a science then why have so many of them failed?

The answer is that they weren't as smart as you and they thought they were.

Also in order for banks to lend locally, the buyer has to go to the local bank and the local banks don't always have the best rates. As all FW people do, they look for the best deal and it's usually not local. Rates change all the time and sometimes when the bank is too busy, they raise their rates higher, when they need the business, they lower their rates. That's why people always shop around.

Kanosh said: Banks seem increasingly clueless about how to handle basic real estate transactions.

Among foodies there is a "eat local" or "locavore" movement of those who support locally grown farmers by eating their crops. I don't know how much sense this makes. But I would like to see a parallel movement of banks which "go local" with lending. For example, a bank that loans to people buying homes in locations physically near the bank. That actually consider factors like reputation and how long someone has lived in the community before making a loan. Whose loan officers actually have a sense of where the local real estate market is.

I suspect if a bank actually stuck to the criteria above, among others, defaults would be few and far between.

Maybe you're not old enough to remember a time when 20% down was a mandatory requirement along with a mortgage less than 3X gross earnings.

Simple rules worked for 30+ years.