Monday, April 19th, 2010 at 9:27pm

Thinking About “Disclosure Chaos”

Posted by Ron Ballard

I’ve been thinking about the chaos that could be created if the disclosure of all pending offers a short sale investor receives were to become the law of the land. Keep in mind, I don’t believe it is the current state of the law and I don’t believe it would be good policy for it to become the state of the law.

Naturally, I’m writing with respect to the recent Freddie Mac online news article which has received considerable attention among the real estate investing community and which is the topic of several blog posts below. The article suggests that it is an act of “short payoff fraud” for an investor who has a property under contract which requires a short sale not to disclose the offers for subsequent purchase which the investor is receiving. The implementation of such a policy would create either total confusion for banks and home buyers or the exit of investors from the purchase and sale of short sale properties, thereby resulting in an increasing rate of foreclosures and a growing inventory of REO properties.

Before I continue, I must admit that the following comments will not be substantially more authoritative than those given in the Freddie Mac article which did not provide a byline and did not refer to the name of the “member of the Fraud Investigation Unit.” My comments will be anectdotal. Over the last year, in the course of speaking before thousands of real estate entrepreneurs and speaking with hundreds of real estate entrepreneurs and professionals who are involved, or want to be involved, with short sale investing, I have gained considerable insight into the challenges faced with sales and resales of short sale properties. I will not be able to name the sources because they are often from conversation on convention center floors, but I welcome comments below which affirm or refute my experiences and impressions.

In California, the most common legal forms used by real estate brokers and agents are published by the California Association of Realtors. The terms of the “short sale addendum” to the real estate purchase contract states that the seller will continue receiving and submitting subsequent offers to the lien holders even though they have entered into a contract for sale to the existing buyer. The results of this practice have been that the typical short sale has several potential buyers go in and out of contract in succession because they are in continuing competition with other buyers, much less facing the uncertainty of the bank’s approval. This denies buyers any confidence in moving forward with the transaction. These circumstances have created an important role for investors in facilitating short sale transactions in California and throughout the nation.

Historically, banks will not entertain a short sale approval without the borrower having received a valid purchase offer. Therefore, a real estate investor, as a committed buyer, makes an offer on the property prepared to stay the course of the potentially extended short sale negotiations. The investor is properly funded to close the purchase and will do so, provided the investor has a subsequent end buyer who is typically contracted around the time the lien holder approves a short sale payoff amount. The certainty of the payoff offer is what allows the investor to enter into a binding contract with the end buyer. The end buyer enters into a purchase agreement with a high level of confidence that the price is secure and the sale is likely to close in a short period of time, often less than 30 days. Short sale trainers and I have spoken with estimate that tens of thousands of homeowners have been able to avoid foreclosure by this process. It could even easily exceed 100,000. This is a private market solution that rivals, and probably exceeds, any program the government has created.

However, the investor is typically subject to the same difficulties that the original homeowner was subject to. Specifically, the investor may have one or more prospective buyers come and go during the marketing and negotiating processes. The key difference between the investor and the original homeowner is that the investor understands this process and does not get spooked by it. This creates more secure short sale transactions.

Enter the government concept of the investor disclosing all offers. This is a step backward to inject the same problem regular retail sellers have when their real estate agent keeps receiving competing offers and submitting them to the bank. Not only does this discourage the buyers who make offers but the input I receive indicates that the banks don’t want a succession of offers, as it only confuses their processing. The short sale negotiators I speak with advised me that the banks primarily want to see the best, most secure offer. Typically, an investor fits this definition better than a retail buyer who’s financing is insecure and who might need to sell their home as a contingency.

Which subsequent offers should the investor be required to submit to the bank? What is the investor to expect to happen after disclosing the offer? Would this entitle the bank to increase its short sale payoff amount? Would this entitle the bank to squeeze out the investor and take the end buyer? If so, why should the bank be immune to regular market processes? Is there any other party to any other kind of business transaction who can simply restructure the deal unilaterally to their own benefit?

I don’t think these issues have been thought out by the proponents of constant disclosure.

What if the bank establishes an allowable percentage spread for the investor’s profit? If the investor receives an offer for a higher price then the bank presumably can increase its short payoff demand. But what if this purchase falls through? Would a bank be required to accommodate a lower offer? Would the bank be required to further extend a foreclosure sale date?

The entire concept raises far more questions than problems it possibly resolves. Countless pages of policies and regulations would become necessary to regulate a market-oriented process that is currently working fairly well.

I am not denying that there are cases of fraudulent short sales. There are surely borrowers who lie about their hardship. There are certainly side deals that return homes back to the original borrower. There are other kinds of scams that take advantage of the homeowner, the bank, or both. I certainly do not defend these practices.

However, the role of legitimate, honest investors who help homeowners avoid foreclosure and banks to avoid increasing REO inventories with properly disclosed quick-turn purchases and sales of short sale properties should not be penalized or eradicated due to the improprieties of others.

Accordingly, Freddie Mac and other government sponsored entities and government regulators should focus enforcement methods on the truly fraudulent cases and acknowledge the legitimate overall effect of investors in helping to resolve the current housing crisis.

7 Responses to “Thinking About “Disclosure Chaos””

  1. Yves Baggi says:

    If it were to become the ‘state of the law’ it would also make it easy for anyone to blow a short sale transaction by submitting an offer during the process. Being that in that case the offer would have to be presented to the lender and probably would severely delay any progress made.

    Great comments Ron, always a pleasure to read your blog.

    Yves Baggi
    Short Sale System for Realtors

  2. Ron Ballard says:

    Yves,

    Good point.

    Ron

  3. cindy kipling says:

    Ron, I would like to request pdf file of slides with Cory. Where did you say to request that info at?

  4. Ron Ballard says:

    Hi Cindy,

    Hate to make you jump through hoops. Register for my other email list at http://www.theresi.com and then send me an email asking for them. (Since you asked, I’ll add you and send the slides via email.) Others can sign up and ask.

    Thank you for your interest.

    Ron

  5. Steve Pawera says:

    Hi Ron,

    Not withstand that the SSA only says a seller MAY present aditional offers received on the property, I have a few thoughts and a question;

    #1 – Is it any surprise that CAR, the organization purporting to represent Realtors, would create a document that hinders the short sale by dictating actions of a seller that benefit neither the seller nor the realtor?

    Reminds me a lot of the RPA effectively making management companies parties to the contract in transactions involving CIDs. Again, it doesn’t benefiit realtors when transactions are hindered by the management companies. That always made me wonder if there possibly was some kind of cozy relationship between CAR and CAI?

    And I’m still fuming over the current revision of the RPA. which places Agency Dislcosure in the
    MIDDLE OF PAGE 1. In a traditional Realtor assisted A to B short sale, lenders are quick to jump on a Realtor’s good fortune at occasionally double ending of a sale by saying, ‘Dual agent? Great! Your NEW commission is now [less[“. The Risk Manager who was a driving force behind this change justified claimed ‘it was done to address claims by parties who didn’t know their agent was a dual agent – even though we know those claims are ridiculous.”

    #2 – Wouldn’t submitting subsequent offers to a lienholder AFTER the seller seller has already accepted and submitted another offer, wouldn’t that open up a claim by the buyer for tortious interference by the seller?

    Regards,
    Steve

  6. Ron Ballard says:

    Hi Steve,

    As you know, the SSA (CAR Short Sale Addendum) does not represent the status of law. Unfortunately, too many real estate agents interpret the CAR procedures as “the law.”

    I am not too keenly aware of the CAR “political” dynamics. However, the forms and many of the statements it publishes do not appear to be designed to help Realtors close deals but to protect other interests groups — as you also point out.

    With respect to #2, I have no understanding about how CAR did not consider that sending subsequent offers to the bank is tortious interference with the existing contract. The addendum says the additional “offers” may be submitted to the bank — not contracts. That puts the agent at even higher risk because it implies that the seller does not need to accept the offer and create a competing contract. No matter what: the whole concept is all messed up.

    At some point, sharp litigation attorneys will pick up on this and go after the agents who are killing deals by submitting subsequent offers. I wish I was a litigator — you’d find me doing it.

    Ron

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