Reporter Ashley Gross of Chicago NPR’s WBEZ radio did a recent story on some Chicagoland real estate agents who are making a killing on short sales. The article, which can be found here, explains that these agents, acting either as independent investors or as real estate agents are making big money by flipping shortsale transactions.
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.
