Real Value Blog

Real Value Group President, Blaine Feyen, talking about real estate appraisals on manufactured homes and modular homes.

Real Value Appraisal President Blaine Feyen talks about real estate appraisals and market adjustments vs dollar for dollar cost adjustments.

Real Value Group President, Blaine Feyen, explaining what an Appraisal is...and isn't.

Over the past year, I've heard variations of this scenario in the negotiation of Short Sale transactions. I call it Short Sale Parking.For all intents and purposes, the home for sale looks like a regularlisting.  An unsuspecting buyer contacts a real estate agent to writeup a purchase agreement for what seems like a normal transaction.  

When the counter-offer is returned from the listing agent, it contains a strange phrase informing the selling agent that the listing agent is actually the owner of the property by a vehicle known as the purchase agreement'.  Up to this point I think most of us have assumed that purchase agreements were part of the sale process to buy a home, not the proof that a home was owned!

The remainder of the saga may have many variations, butthe players in the drama are easy to identify. On the main stage thereis always a homeowner in distress who needs to sell their home with theprospect of delinquency/foreclosure a strong possibility.  

Enter the 'Solution'...either in the form of an individual or company who can solve the problem through the negotiation of a short sale.  But first...the homeowner must relinquish the rights of ownership through a quit claim deed.  

In some cases, the homeowner also agrees to become a renter and pays some upfront fees in addition to a monthly rental payment.  The 'ProblemSolver' aka Short Sale Specialist then proceeds to list the home andlook for a real buyer. Miraculously, a 'real buyer' often shows up toput in an offer on a home which may be priced significantly belowmarket value

WHOA...

But wait a minute...What just happened?  The homeowner sold thehome, but received NO MONEY because the home was sold by a documentknown as the purchase agreement and didn't involve a mortgage or cash. Yet, the homeowner continues to be on the hook legally because thetitle does NOTtransfer until there's a viable sale on the table.  In some cases, thehome title is transferred to a 'holding company' but my conversationswith representatives in the title industry suggest that this type oftransfer carries significant liability which many prefer to avoid.

SOLUTION?

This problem is miraculously solved when a 'real buyer' shows up with 'real money' from a 'real mortgage company' at a price which is higher than the one offered to the 'real homeowner'. Variations of this theme include throwing out a ridiculous offer tothe bank to hasten the lenders' understanding of the marketplace.  Onewhich is so low, it is likely to be ignored so the mortgage holder willpresumably be more willing to act quickly when a 'real buyer' emerges.

Now, I dislike the time required to negotiate a short sale as muchthe next guy. But, I think there are aspects of these type oftransactions that are cause for real concern.  While every real estatetransaction carries an element of risk, these types of transaction would seem to have 'avoid this like the plague' written all over them!

First of all, shouldn't there be a great deal ofhesitation, in not downright aversion to participation in a transactionwhich leaves a client on the hook for more money than they might haveowed as a result of a shortfall in funds from the distressed sale oftheir home because a middle person 'negotiator' stepped in?

Secondly, if an agent is so sure that a home can beSold for more money when the distressed seller is approached with thisnovel solution...why isn't the home simply placed on the market for the'real sales price' from the beginning?

Thirdly...if more money can be returned to the bank from a distress sale, isn't it FRAUD to pretend otherwise?

Lastly, at a time when many agents are seeingcommissions fall from listing a home, there appears to be a significantfinancial incentive to negotiate this type of transaction.  It seemsthat in addition to the real estate commission, the specialist(individual agent or company) is pocketing the differential betweenwhat the bank obtains and the amount mortgaged by the 'real buyer.'

And if the above issues don't give true pause,there is one more item which should be a concern if you're a Broker. Check with your E&O carrier about coverage on these deals.  ManyE&O carriers will not cover this type of a transaction on yourstandard coverage.  The implications for any firm are enormous.

It doesn't make sense to me that  we are willing invest  time andenergy in creating forms and forums to mitigate risk and keep ourtransactions within the confines of the law, yet fail to see that thistype of transaction has huge downsides for a very temporary gain in thehands of a few individuals.  Your thoughts?

*I wrote a Members Only Post about this topic in March entitled "Shenanigans are Shenanigans...aren't They?  Unfortunately, it seems that this practice is becoming more firmly entrenched in the real estate marketplace.

Photo is courtesy of adactio's photostream on flickr