Beware of the Short Sale Flip/Flop in St Louis

Buyers and Sellers should both beware of the Short Sale Flip/Flop

If you are a home owner in St Louis and you are thinking about selling your home as a short sale, there are a few things you need to be aware of.  First and foremost,  there are a lot of good agents in St Louis,  make sure the agent you choose to work with is an experienced agent who understands banking,  the foreclosure process,  and how to successfully market and close a short sale transaction.

With almost 25% of all the home sales throughout St Louis considered to be a distressed transaction, real estate investors are back in the market seeking ways to pick up desirable properties.   On the surface as a seller, this is very encouraging; however you really need to make sure you understand the transaction before you accept any offers especially from real estate investors.

Let’s look at the transaction.

The Short Sale transaction is similar to any home sale transaction in that the seller lists their home for sale with a real estate agent.  The real estate agent then markets the property through the MLS and other conventional means in the attempt to find a buyer.  Typically the agent markets the home for sale at an attractive price typically slightly below the value of other homes in St Louis.

The buyer and seller can agree to any price on the contract.  However a short sale contract is always subject to the lender’s approval.   I see this time and time again where these transactions never close due to unrealistic low contracts accepted by sellers.    The bank in every short sale transaction will get an appraisal or broker’s price opinion completed before they accept any offer.  Once the bank understands the value, they will then review the contract and either accept, reject or negotiate the terms, specifically the price.  Let’s face it, banks are not here to give money away, most banks are willing to absorb some loss if their client can no longer make the loan payments, simply so they do not have to foreclose on the property.  However they are not inclined to sell the property too much below its current value or they would simply foreclose on the property, and then resell it to protect their investment in it.

Recently as previously mentioned,  real estate investors have been pursuing short sale homes throughout St Louis county, St Charles and Jefferson county.    If you are considering selling as a short sale, you really need to be careful of whom you are selling to.  As a seller, one of the biggest concerns you should have in the transaction should be who the buyer is, and what is their intent to do with the accepted contract and property.

Beware of the Short Sale FLIP/FLOP!  I see these transactions attempted throughout the St Louis area time and time again.   The short sale FLOP is when a real estate investor gets a property under contract with a home seller they have no intent of closing it with their funds.  What the investor does under a FLOP scenario is they market the property for sale at a higher price with the intent of reselling the property for a profit on the same day they are scheduled to buy it.  Here is an example:

Short Sale Sally we will call her owes 230,000 on her home loan.  The home is really worth 200,000 in today’s market.  She hires an agent and the agent markets her home as a short sale for sale for 180,000.  Investor Ike comes along and offers 150,000 for the home.  Short sale sally accepts the offer and the real estate agent sends the full offer and supporting documents to the lender for their evaluation and approval. (As this can take several months)  Investor Ike now begins marketing the home for sale for 190,000, still under market value, Ike is hoping to make a quick 40,000.  This transaction occasionally known as a FLOP is legal as long as it is fully disclosed to all parties.

The FLOP transactions represent risks to all parties in the transaction.

To the home seller, they have a couple of risks in the transaction.

First and foremost, all sellers in a short sale transaction are encouraged to seek legal guidance.  Sellers under short sales should fully understand how their lender may treat the transaction.  Some lenders will forgive the loan shortage and not pursue the seller for any deficiency amounts.  Other lenders may require the seller to sign a note and pay back the difference over time.  Additionally, Sellers should always discuss the potential transaction with their accountant to see how they may be affected by the short sale of their home.

The second concern for the seller of a short sale when working with any buyer especially an investor is their ability and intent to actually close on the home.   The seller’s risk of accepting any offer is the risk of time.  If the transaction does not close, for any number of reasons, the seller has lost valuable time, typically with the bank breathing down their neck getting ready to foreclose.  If the home is not priced correctly where the lender is willing to accept the offer, or if the buyer is not financially quailed to close on the transaction months will go by before the transaction is canceled, and the seller will be faced with reselling the home or most likely being foreclosed on.

The home buyer

under the flop transaction also faces risks.  Under the previous example if buyer comes along agrees to buy the home from investor Ike, their contract is subject to investor Ike’s ability to close on the home from short sale sally.   This could take months to complete as Ike does not own the home.  Additionally there is no guarantee that this sale will actually be completed.  If the Bank does not agree to sell to Ike, or if the bank decides to foreclose on the property, Ike does not have a contract or property to sell to the end buyer.

The Investor

also faces risks in this scenario.   Although it is perfectly legal to resell the right to a contract in real estate.  Every aspect of the contract must be fully disclosed to all parties.  Most of the larger banks have stopped the practice of allowing short sale flops by requiring buyers of their properties to occupy the property, or at least keep them for a certain length of time.   Most banks will require a variety of disclosures to make sure that all details of the purchase of the property is fully disclosed.  Any non disclosure of data by either bank buyer or seller is considered bank fraud.

In summation,  if you are in St Louis and are considering selling your home as a short sale,  make sure You hire the agent to represent your interests in the transaction.   Beware of any agent that approaches you with an offer as if you do not have your own agent to protect you.   If you are looking to buy a home in the St Louis Metro area, I would encourage you to once again find an agent you are comfortable with and has experience in the many complications of buying and selling a short sale home.

If you are looking to buy or sell a home as a short sale in St Louis, I encourage you to contact me to see how I can be of assistance to you.  I can be reached in the office directly at 314-480-3801.

I enjoy working in the following areas,  Sunset Hills, St Louis County, Warson woods, University City, Town & Country, Shrewsbury, Rock Hill, Ollivette, Mehlville, Oakville, Maryland Heights, Manchester, Kirkwood, Glendale, Frontenac, Fenton, Ellisville, Des Peres, Crestwood, Clarkson Valley, Ballwin, Eureka, Creve Coeur, Clayton, Brentwood and Affton