Dennis Norman
By:Dennis Norman
A recent study shows that 20% of homeowners owe more on their mortgage than their homes are worth. This,coupled with the challenged market we have been in the last year and a half or so,has led to a record number of “short-sales”.
A short-sale is something that was relatively unheard of a few years ago but is quite common today and refers to those sales where the sale price of the home is not sufficient to repay all the debt owed on the home and the lender chooses to accept a lessor amount to release their lien on the home.
Finding potential short sale listings in your local MLS is not difficult…there are plenty there. The abundace of potential short-sales has resulted in a whole new breed of investors (the more accurate term may be “non-investors”) out there,not to mention a plethora of webinars,seminars and online programs to teach you how to get rich buying property through short sales.
The reason for my “non investor”comment is it seems a popular trend that has emerged in the short-sale frenzy is the use of option contracts. Basically the way the deal works is the “investor”makes an offer on a short sale property by way of an option contract…usually an option for one year with only a $10 or so payment for the option. If the lender accepts the price in the option contract then the “investor”lists the property for sale at a price higher than his or her option is for. If a buyer is found then the “investor”closes on the purchase under the option and on the same day would close on the sale to the ultimate buyer. So basically the “investor”doesn’t really invest anything when it comes to money.
OK,maybe I’m showing my age…I’m not that old,48,but have been in real estate since 1979 so my age is “real estate years”is pretty old….I have always considered myself very innovative in my approach to the business but I have to admit this option approach is something I’m still trying to get my arms around. Granted,I have to admit that I’m pretty jealous of the process…the ability to speculate on property with basically no risk,no money,no lines of credit etc…pretty cool from that standpoint.
So what’s the downside? Good question. I have looked at this type of deal from many angles and here are my thoughts:
- Ethics –From an ethical standpoint I think if all aspects of the deal are fully disclosed to the seller,the lender,listing agent,etc,then I guess it should be hard for anyone to argue it’s unethical.
- Does the end justify the means? –At the end of the day,if the deal works (meaning the investor found a buyer and therefore executed his option) the seller has gotten out from under the debt on their house the were buried under,the lender got paid an amount that they had determined was “good”for them when weighing the alternatives
- The end buyer was able to buy a house at a price that was a good deal for them in the current market
- Does your state have a “good funds”requirement? Some state laws may require that the title company obtain the funds from you for your purchase and the fact that your buyer is bringing money may not suffice…you may have to actually produce the money for you closing even though you will get it back the same day.
So what is the answer to the question “Is using an option contract a good way to profit from short sales?” I’ll leave it to you…the jury is still out in my mind..
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One of the specialty of shortsale business is that it has no capital cost.
Well for all your years,where have you been? I’m 65,been a real estate investor since 1974,got my Agent license in 1986,Broker’s license in 1988,CCIM in 1989,NCE (Nat’l Council of Exchangors) gold card in 1988,and spent a bundle on continuing education. 1031′s,options,self-directed IRA’s,etc. Simultaneous close,ABC transactions had been around for 30+ years before I learned about them in the late 1980′s. These same people originated single agency as a concept for every transaction,coupled with rejection of subagency as a matter of fundamental ethics,decades before the mainstream joined them. None of them ever had a problem with the simultaneous close,regardless of whether they were “A”,“B”,or “C”and I still don’t. Playing the role of facilitating a transaction between willing participants and receiving compensation therefore is sound business practice,regardless of whether the comnsumation of deals is separated by 1 microsecond or 1 millineum. Not sure why “the jury is still out”for you. Your statement as to disclosure is really the essence of these,and all such transactions,pure and simple. Come on,get on board,even at the risk of running afoul of some PC do-gooder. JMO,YMMV
Bob H
Bob
Where have I been,where have you been? If I would have heard from you in 1979 when I got in the business and you could have showed me how to make money buying and selling property without cash and credit,and in fact without actually buying it you sure would have saved me a lot of work and taken a whole lot of risk out of speculating!
Seriously though,over the years I have definitely seen some pretty innovative approaches to buying and selling homes,and I like to think at times I had a clever idea or two,but until the last few years there wasn’t the plethora of short sales there are now and I really was not aware of many people using options as a vehicle to flip property. However,all of my experience has been in St. Louis a place that seems to have more than its fair share of professional “speculators”. Therefore from the time I entered the business there was always plenty of competitors out there competing to buy property and they were offering sellers non-contingent,cash deals,plain and simple. That may be one reason that some of the alternative methods have not had much of a presence here.
As for the options on short sales…the reason I feel the jury is out is I am not covinced that the majority of the deals are being done with full disclosure. In addition I wonder if at times there aren’t option buyers or even listing agents that find themselves assisting in convincing a lender to accept the option price and representing it as market value,only to find themselves later convincing the end buyer that it is worth the price being offered for resale by the option investor. That situation starts to get a little fuzzy to me. However,like I said,these are just thoughts…I don’t know for a fact it is happening widespread,which is my the jury is still out. As I become more aware of more of these transactions and how they have been handled I think it will become more clear to me. Call me a slow learner.
Thanks again for you comments..
Take Care,
Dennis Norman
OK,lets take a step back;option contracts as a form of real estate acquisition are age-old,both in commercial and residential markets,and not only are they trusted and respected by experienced practitioners,but absolutely essential to the process of aggregation for developments.
Short sales also have been around for a long while,but the current economy and real estate market has made them an essential mechanism for lenders and borrowers to avoid the pain and expense of foreclosure.
Combining the two,options and short sales is hardly new either. But the sheer volume of short sales has created an enormous opportunity for scam artists and others who look to profit by bilking the public.
That IS the new challenge,and the creativity of the scam artists has tainted the otherwise respected and established option and short sales processes. The jury quite literally should be very much in the picture in this regard,as these con artists have caused regulators and opinion-piece authors to come to well-intentioned,but knee-jerk conclusions.
There are two primary principles that I believe constitute a sound short sale transaction:there should be full disclosure of the nature of the transaction to every party (borrower,investor,lender,title company,Realtor,buyer,Realtor,and lender),and there should be NO FEE charged the defaulted borrower,period.
The juice in the deal for the investor comes from saving the current lender the cost of foreclosure,which runs between $50-80K in most places. So the lender’s loss is reduced,the borrower is saved the angst of foreclosure,the end buyer gets a discounted price,and the investor who facilitates the deal and conducts or contracts the negotiations and finds the end buyer,also gets compensated. The Option Contract method allows the investor to attempt the negotiation as part of the short sale process. If it is successful,the investor exercises the option at the price agreed to by the lender,which means the lender saved money with a smaller loss. That successful negotiation makes the property more marketable and thereby more valuable,so the end buyer is willing to pay a higher price (than the lender took as settlement) because it is now a clean deal. Negotiating a short sale is not easy,that’s why 80% of homeowner and Realtor short sales fail. Professionally negotiated short sales I know of have a record of 80% success however,and I am told by the negotiating companies that the majority of those successes are using full-disclosure Options contracts. What I believe is necessary is for people to stop finger pointing,for the regulators to create Safe Harbor transaction guidelines for the ethical practitioners,and to throw the crooks and scam artists in jail. JMO,YMMV.
[...] out there doing this and think it’s a great program,but I’m not one of them…I wrote a post about 9 months ago explaining why so I’ll spare you from the whole diatribe [...]