The Ethical Dilemma with Short Sale Option Contracts.

My recent articles on this very subject have initiated a firestorm and, I am sure this next article will only throw nitro glycerin on the flames. Before you read this blog, understand that I have not been appointed as some ethical, moral guardian and, I know that. By no means, do I believe I am going to change your opinion or win you over, that is not my intention. Take what I have written and do with it as you please, I really don’t care if you think I am wrong, right or anything else for that matter. This is my opinion and if you don’t want to know it, then stop now and don’t read any further. Know this, I feel I am right not because of some statutory legislation or common practice but because I believe in a certain way of doing business and that is what I hope is exemplified in this blog. First let me explain what I believe a lie is. This will be important to keep in mind when you read the rest of this article. I believe a lie is when someone makes a statement or presentation that they know is false with the intent to deceive. I believe a lie takes place when an “investor”; as it pertains to Short Sale Option Contracts, tells the bank they will offer them “X” amount of dollars for a property, passing it off as true market value, when they are holding behind their backs higher and better offers with no intention to disclose them to the bank. I have heard others contend, that as long as you disclose the fact that the “investor” is going to resell the property expeditiously after the closing with the bank, then it’s not a lie but, in fact it’s full disclosure. My problem with this argument is that it’s based on the premise that the bank knows and agrees to the investor promptly selling the property for a profit from bids that were legitimately the banks but, the bank never had the option to consider. The bank was never able to consider the other higher and better offers because the investor intentionally withheld them. In many ways, I see this as equivalent to a bank heist. The investor stole money directly from the bank not because of what he said however, because of what he intentionally failed to mention. The investor engages in deception when he misleads the bank into believing the only offer on the table is the investor’s offer and it was the only offer received therefore it must be true market value. This is a lie of omission. Let me explain, for the investor to remain silent and withhold from the bank vital information such as the additional higher better offers, is deceptive in that it gives a false impression to the bank. Basically, this lie subverts the truth with the hope to manipulate the banks decision to the benefit of the investor and not the bank who is already coming up short on the sale of the home. If we really wanted to have a serious moral and ethical discussion about this type of lie, we need to understand that a lie of omission infringes or maybe even violates the banks right to self determination but, that is a totally different conversation for a different time. This is also a lie based on misinformation or in other words, the investor is perpetuating a falsehood with the intent to mislead the bank into believing something that just isn’t true. The investor is misinforming the bank by claiming they only received one offer and that offer is the one presented by the “investor”. This is a falsehood because the investor knows he has higher and better offers but is concealing them. In closing, I think I have made my points loud and clear. I really don’t think any educated counter argument can be presented. I do believe however many “spin doctors” or “investors” are going to come out of the wood work and speak only on bits and pieces of the truth with the purpose to get support for their seriously questionable and in my opinion illegal business practice however, be that as it may. The truth is, each and every one of you reading this far have to make a decision. I only hope that each of you make the right decision.

In general, I do agree with you on your opinion of the option contract. The truth is that if the banks were better at dealing with the short sales, there would not be the opportunities for "investors."

I thought I would write a few things that I would counter or add based on your blog.

I believe a lie takes place when an “investor”; as it pertains to Short Sale Option Contracts, tells the bank they will offer them “X” amount of dollars for a property, passing it off as true market value, when they are holding behind their backs higher and better offers with no intention to disclose them to the bank.

In the option contracts that I have worked with, the contract is very clear about the investor trying to sell it at higher price. In fact, in Georgia, the attorney require disclosure to the banks about the eventual flip that is taking place.

I don't think "THE LIE" takes place there. I think the LIE is that this is an INVESTOR making an offer when clearly ANYONE could do this. Transactional funding is based on the deal not on the investor. In fact, the term investor implies some sort of "strategy" - they are simply capitalizing on the banks and market's inability to do anything with these homes.

The rest of the discussion talks about the lie of omission. A few things here too.

THE CLIENT IS THE SELLER, NOT THE BANK.

1. My job as an agent is to do the best job for my client. In a short sale market, a low offer is more advantageous for the seller than a high one initially. After all, if the short sale gets approved at a lower number it's easy to go back to the bank with more money.
2. We all know that the two problems with short sales are dealing with the bank's buearcracy and the buyer's patience level. Ultimately, having a low offer initially, insures that my client will have a fighting chance (as long as the offer is not too low)

So where's the problems?

You have to know the investor, that's a must. If they aren't willing to walk away to let the deal close, then you could harm your seller by introducing them. Most problems occur when "option investors" are holding on for margin's sake and you have a closable buyer right there. That's not good for your seller.

Letting the Option Investor gain equitable interest in the property. This is a tough one. They are taught to do this and it protects them and makes the deals easier in the long run, but if they do this it's nearly impossible to get rid of them unless they voluntarily back out. See the point above.

The other lie is having an offer and marketing the property before it's actually, legally the "investors." This one is semantics and could differ from state to state. It's no different than Assigning contracts in my opinion.

Frankly, option contracts are nothing new. Assignments and land trusts have been doing this for years.

Finally, my take on option contracts comes from working with them and without them in the trenches of short sales. I don't have any active REOs and I do have regular clients but most of my 30 listings right now are short sales. Option contracts should be your last option to stop a foreclosure. I think that's their useful place. Everything else can be accomplished by hiring a closing coordinator or ex-loan officer that does not mind getting paid at closing to do the negotiations, which is pretty simple yet time consuming once the full package is in.

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Comments

Noel Cash May 31, 2009 at 4:23pm

..am I missing something? The bank involved with the seller's loan on the short sale is going to want bpo's, etc., and if you have bpo's that come in to meet the short sale A price and turn around and are in contract with sale B/investor as seller, at a much higher transaction price, isn't that bank fraud? I understand the bank isn't the client and the seller obviously still owns the property but bank fraud is bank fraud regardless of whether the bank is a client or not, am I wrong on how I see this?...sorry if I missed something in the blog posts.
Joshua Jarvis May 27, 2009 at 7:07am

In general, I do agree with you on your opinion of the option contract. The truth is that if the banks were better at dealing with the short sales, there would not be the opportunities for "investors."

I thought I would write a few things that I would counter or add based on your blog.

I believe a lie takes place when an “investor”; as it pertains to Short Sale Option Contracts, tells the bank they will offer them “X” amount of dollars for a property, passing it off as true market value, when they are holding behind their backs higher and better offers with no intention to disclose them to the bank.

In the option contracts that I have worked with, the contract is very clear about the investor trying to sell it at higher price. In fact, in Georgia, the attorney require disclosure to the banks about the eventual flip that is taking place.

I don't think "THE LIE" takes place there. I think the LIE is that this is an INVESTOR making an offer when clearly ANYONE could do this. Transactional funding is based on the deal not on the investor. In fact, the term investor implies some sort of "strategy" - they are simply capitalizing on the banks and market's inability to do anything with these homes.

The rest of the discussion talks about the lie of omission. A few things here too.

THE CLIENT IS THE SELLER, NOT THE BANK.

1. My job as an agent is to do the best job for my client. In a short sale market, a low offer is more advantageous for the seller than a high one initially. After all, if the short sale gets approved at a lower number it's easy to go back to the bank with more money.
2. We all know that the two problems with short sales are dealing with the bank's buearcracy and the buyer's patience level. Ultimately, having a low offer initially, insures that my client will have a fighting chance (as long as the offer is not too low)

So where's the problems?

You have to know the investor, that's a must. If they aren't willing to walk away to let the deal close, then you could harm your seller by introducing them. Most problems occur when "option investors" are holding on for margin's sake and you have a closable buyer right there. That's not good for your seller.

Letting the Option Investor gain equitable interest in the property. This is a tough one. They are taught to do this and it protects them and makes the deals easier in the long run, but if they do this it's nearly impossible to get rid of them unless they voluntarily back out. See the point above.

The other lie is having an offer and marketing the property before it's actually, legally the "investors." This one is semantics and could differ from state to state. It's no different than Assigning contracts in my opinion.

Frankly, option contracts are nothing new. Assignments and land trusts have been doing this for years.

Finally, my take on option contracts comes from working with them and without them in the trenches of short sales. I don't have any active REOs and I do have regular clients but most of my 30 listings right now are short sales. Option contracts should be your last option to stop a foreclosure. I think that's their useful place. Everything else can be accomplished by hiring a closing coordinator or ex-loan officer that does not mind getting paid at closing to do the negotiations, which is pretty simple yet time consuming once the full package is in.
Steele V. Propp May 26, 2009 at 7:48am

As I think that it is important to look at all sides of a discussion here is a recent article on the overall subject from the other side of things. I have been a member of our area real estate investors association for several years and this is a regular method of doing business (in addition to options our investors also use a short term loans for funding the first of the same day closings). Everything is up front and the bank knows the investor is buying in order to make a profit. These are honest and ethical people with a Code of Ethics and Professionalism very similar to that of the Realtor.

http://www.brokeragentsocial.com/article.php?article_id=332

Remember that the banks are not stupid. They sell bulk REO packages on a regular basis as well. And they know the investors are going to resell the properties, not hold on to them.

I neither condemn nor push this method. But while I can see how it could be abused I also see that it could be a tool that benefits all the parties. Do your due diligence and decide from there.

My humble opinion, of course.
Joseph Kipping May 24, 2009 at 4:45am

The Banks are Falling down on their Jobs because the Bank Negotiators are paid $15 dollars an hour and have 150 to 250 short sales in there pipeline at all times. They are under paid and way over worked. They simply want to be able to Approve the Short Sale so they can get Their Bonus or Deny it so they can move onto the next one. It’s that Simple. I bet you 65 to 80% of the Negotiators at Banks don't even know what an option contract is. They just see that they have a Contract in the file, a HUD 1 and a Price and they work it from there to try to get it approved. I can also bet that a handful of the Negotiators are even reading the option contract that these Investors are sending over. So they most likely don't know that the investor is flipping the property because they didn't read the option contract fully. I find it hard to believe that the Negotiators or Banks (if they were reading the option contract) would allow the investor to purchase the property for X and sell it to Y for a profit ON THE SAME DAY. That’s where I have the problem with this, Selling the property on the same day for a profit. If anything you should have to purchase the property with your own funds and resell it down the road. (That could be a Week or a Month I don't Care, Just not the Same Day) I can also bet you that someday soon Banks will NOT allow this to Happen. Any Option Contract that gets sent in for a short sale will be denied before it even makes it to the Negotiators desk. No matter how you look at it Bad or Good it all comes down to getting the property sold so the seller doesn't have a Foreclosure, the Bank gets rid of a Bad Asset and the Buyer gets a home under market value. But for me I will just keep doing my short sales the Regular way. A lot easier that way. I think anyways! Just my 2cents!!
Steve Adkins May 24, 2009 at 4:22am

I think every one is missing the point that Jesse is trying to make. There are lots of "legal" ways to conduct a short sale or use Options Contracts, which is not being discussed here. What Jesse is talking about is HOW these normal transactions are being conducted. You have to read the fine details and not the high points.

These scam artists are trying to bypass normal "legal" methods and procedures to defraud people. And if you knowingly or unknowingly get involved, YOU can be held liable in civil and criminal court! It's a lot like a shell game and where the pea is hidden. There is a lot of movement and hiding to try can cover up stuff that is not on the up and up. They make it sound like a win-win situation for everyone, but the only one who wins is the scam artist in the end.

Jesse was not trying to accuse anyone of doing this, but make everyone aware of the situation. Real Estate agents all over this Country are being caught up in this scam and some are being charged with this fraud. You can argue with Jesse or me all day long as to how you "think" this is legal, our legal system says otherwise. And guess who's going to win that argument? Ignorance of the law is not an excuse in the eyes of the court.

Everyone needs to be aware of this scam and be prepared. Not stop thinking of the high points of the process and look at the details. It may keep you out of jail!
Phil Hallman May 23, 2009 at 7:57am

Jesse,
I only use options in very few short sale situations, my structure of choice in a short sale is a beneficiary directed trust. Using options it is difficult to sell to FHA buyers because of the 90 day rule, I know there are many people who will say they got an FHA loan to fund on an option, I have too, but on average underwriting has an issue with it. But, you could not be more wrong on who the thief is, and that amazes me.

As for who is a thief, lets look at the facts, buyer A and seller enter a contract, before closing another buyer B comes along offers 50% more money to seller...Seller tells A "sorry I just got offered 50% more by B so I am going to tear up this contract and accepting the one that is %50 more."
Who was just stolen from? And who is the thief? If you get one of these answers right you are a keen Realtor, if you get both right you should sit for the state Bar.
Notice how much the property is encumbered has nothing to do with the ability to contract to sale and who stole from whom.
Vicky Chrisner May 22, 2009 at 2:12pm

Only one person made this point, and I am saddened to see that it is overlooked far too often: the Seller (aka the client) is NOT THE BANK. They are owed nothing by the agents. As another post references, sellers can be asked to pay deficits resulting after the short sale... so it seems in the sellers best interest to market & price the property agressively in hopes of obtaining multiple quick offers, negotiate the offers received, and take the highest and best (all terms should be considered), ratify it and send it to the bank for approval. I don't understand what is so hard about that?

Having said that, the agent can only present the contract the seller wants presented. AND, in the short sales I've done, the banks are not asking for statements from the sellers and agents involved that it was the highest and best offer received, or outlining what offers - if any - were received. Honestly, the banks are falling down on the jobs here. They are not consistently asking for statements that the property is being sold to a third party. They are not asking if there is a relationship between the principal and the agent. They are not asking if the buyer will be selling the property back to the seller in the future, or allowing the seller to continue to live at the property. The banks are falling down on the job here. Although I may morally agree with you, it is not actual fraud.

Besides, this investor flipping you're talking about (a consumer asked a question about buying from an investor and doing back to back closings) - would this not be a problem for the lender of the 2nd buyer?

I haven't dealt in these "yucky" transactions - I prefer to keep my nose clean, even if I make a little less money. For a long time, I've had the strict rule that I will not go to hell for something I did for a buck on this Earth.

Thanks for opening this dialog.
Jesus (Jesse) Gonzalez May 21, 2009 at 3:33am

Apparently, from reading all these comments and the comments on Active Rain, every Realtor seems to be doing Short Sales differently or according to their own process and understanding. I don't have a problem with that, frankly it's none of my business however, as I have outlined above, not everyone works ethically, morally or fiduciarily responsible and that is all I am saying.
Gina Duncan May 20, 2009 at 10:00pm

We always put forth all offers to the lender if terms/price is better, however recently Countrywide changed their guidelines and will only consider ONE offer at a time. So if we get an offer and submit even if a better one comes along we are required not to send on or else they will cancel entire process and start over again. Have one in with Countrywide since Sept 08. We are representing the seller not the lender on the listing agreement. It says terms of offers must be approved. It is up to the lender to say yes/no or counter for a higher price. Also the offers in HI aren't valid until lender approved so we aren't selling the same property multiple times as one commentor suggests. Also escrow isn't opened until lender approval so no funds changing hands.
Jesus (Jesse) Gonzalez May 19, 2009 at 12:14am

.....ok.

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