Without knowing the specifics of any individual transaction referred to in Ashley’s article, I can concoct a scenario for such a situation that comes awfully close to the boundaries of what is legal.  The transaction works like this:

A real estate agent finds a homeowner who is underwater and sells the owner on the concept of walking away from the real estate without owing anything to the bank.  Obviously, a homeowner will be interested in this!  The real estate agent puts on the hat of “investor” and executes a contract to buy or an option to purchase the real estate from the homeowner (with a commission being paid to the real estate broker) with a long closing date or an option to close in the future.  The offer is then submitted to the homeowner’s lender, known as the “shortsale lender”, who “negotiates” the shortsale with the real estate agent’s short sale negotiation team (they are getting paid a percentage of the sale price here too).  Meanwhile, the real estate agent as “investor” lists the real estate for sale.  Remember, the real estate agent doesn’t own the property yet.  During this time, the short sale lender completes the negotiation and the real estate agent learns the price the bank will take for the shortsale.  The real estate agent now tries to get a price that is more than this amount from a third party buyer on the open market.  Once that happens, two closings occur.  One being the short sale between the original owner and the investor and the other being between the investor and the actual buyer.  In most cases, the shortsale lender knows nothing at all about the sale taking place later that day or shortly thereafter.  This is known as flopping and is, in many cases, fraud on the short sale lender.  In the process, the real estate owner gets a 6% commission on the initial sale, a 3% short sale negotiator fee, a 3-6% commission on the second sale, and pockets the difference between the purchase price and the sale price of the second sale.  Homeowners are helped and the real estate agent feels really good.  Why wouldn’t the agent feel good about all that money?

Homebuyers and sellers need to be on the lookout for these sorts of situations.  When everything is (properly) disclosed to the shortsale lender and the buyer’s acquisition lender, these situations can be legal, but participants need to take active steps to make sure that is the case.

A bill of sale is the title document that transfers title to personal property.  In a normal real estate transaction, a seller will transfer title to the real estate by way of a deed and title to the personal property by way of a bill of sale.   Personal property is the non-permanently affixed “stuff” inside the real estate such as a stove, microwave oven, washer, dryer, and blinds.  In a non-REO real estate transaction, the contract specifies what items of personal property are to be conveyed along with the real estate.  In most REO contracts, no personal property is specified or personal property is expressly removed from the contract.

This contract provision is taken from the "standard" Fannie Mae REO rider

Why does an REO Seller not want to provide a bill of sale?  The REO Seller does not actually own the property!  The REO Seller takes title to the real estate by way of foreclosure.  Foreclosure is the procedure that transfers title to the real property (not personal property) that is the subject of a security agreement (aka the mortgage being foreclosed) that secures the delinquent loan.  Thus, in most foreclosure cases, when the bank forecloses, the bank gets title to the real estate back, but not the personal property.

What does this mean in practice to REO home buyers?  It means that at any time up until closing, the previous owner or perhaps someone “in the know” could come to the real estate and remove (or even steal) the personal property.  In such a case, the REO Buyer would not have any recourse against the REO Seller and, in fact, would still be expected to proceed with a closing and would not be entitled to any compensation for the missing or removed property.

I have heard instances of prior property owners coming back days before a closing and removing their things.  In fact, I handled a transaction where someone came and took a pool table out of an REO property 24 hours before the closing.  Under the typical REO contract, there is usually nothing a buyer can do about this.  During attorney review, I try my best to change the contract to safeguard the property, but most REO lenders resist such a modification.

So, what is the REO buyer to do?  There’s only one answer.  Get a great deal.  The best REO buyer is the one who understands the contract, the risks, the costs, and, in the end, negotiates a price that makes the pain, headache, uncertainty, and delay of an REO purchase worthwhile.  Having an attorney with REO purchase experience, who can explain the contract, the common risks, the possible costs, and potential pitfalls can make an REO buyer an educated buyer who is ready to properly evaluate whether or not an REO purchase can be right for them.  If you are interested in purchasing an REO property and need legal assistance, please feel free to give us a call at 773-399-1122 x301.

Actually, that critique might be a bit harsh.  The Bank of America presenter, however, was doing some serious expectation setting (setting the bar quite low in my opinion) and was, in the end, a bit disingenuous about how decisions are made on the lender side of things.

To break it down, she brought those in attendance through the “steps” of a shortsale that are detailed in the short sale reference guide provided on Bank of America’s real estate agent short sale information website.  (the seminar is clearly originally tailored toward real estate agents, but was adapted, quite ably by the presenter, to the attorneys in attendance.) In essence, we saw the process from the bank’s side and saw what they need in order to give an approval.  It was good to get an understanding of their timing and what they are looking for.  In the end, however, and this is the bad news, Bank of America does whatever their investor wants.  Sometimes their investors act logically and sometimes they don’t.  It was estimated that about 8% of B of A’s loans are held “in house” and the rest are held by “investors”.  (One of the other attendees indicated to me his opinion that this is not quite right because when he makes “qualified requests” to find out an investor, it quite often comes back as some related entity of Bank of America as the investor, but that is neither here nor there).

Listening to the investor is all well and good.  I get it that a shortsale is a choice of the investor and a choice of the seller.  What I don’t get is that the investor does not seem to care too much for local custom, local law, or federal law.  So, the lender approves the short sale, but they don’t approve the amount of survey fees, title fees, a fedex fee or some other fee and now that fee can’t be shown on the HUD-1 statement.  So, they want me to break federal law to close the deal?  They want the title company to eat the fee?  That seems strange.  When the room full of attorneys (this should not be a surprise) asked about the growing move toward attorney’s fees being denied on short sales, the presenter suggested that the real estate agent should pay those fees.  That was a good one.

I understand that the lenders have a really difficult “job” in that probably every county in the country has its own local customs, but the short sale lenders need to understand the other side of the process just a bit better.  I now understand their side a bit better and, in the long run, I think that will help.  In all, Bank of America has at least streamlined the process.  It is no longer the “wild west” in the world of short sales (where there were really no procedures nor rules) and I can appreciate that as well.