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.

Jesse, are you really equating investors to bank robbers? In your words, "The investor stole money directly from the bank..." and "...I see this [investor flip] equivalent to a bank heist" You call it an ethical dilemma to which no, "...educated counter argument can be presented." The counter need not be educated, I will give you that, it is a story even little children understand, the story of Robin Hood, who stole from the rich to give to the poor. It is a story of populism and the redistribution of wealth to an oppressed town. So even if investors were bank robbers, your argument is not sufficient for you to claim its infallibility.

But, they are not robbers, they are business people, not much different than a car dealership, which buys cars for much lower than another person will pay, and turn and sell for a profit.

Let me ask you, if you have a client in short sale, for 6 months with no offer, 1 week to trustee sale, and you get an option contract from some guy that wants to flip and negotiate the deal, would present the offer to your client? It is a brokers duty to present all offers, your client can decide if they want to accept or reject. It is a breach of your duty to deal with this any other way. Once the offer is accepted, equitable conversion takes place and the investor can sell that option to whom he wishes with or without bank approval. I suggest you read up on contract law, and real property transfer law, because I think you are conflating the parties to a contract, and that sort of thing is important for a broker to understand. You may be in the wrong business if you really think buyers are robbers.

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Comments

ROBB CASH May 18, 2009 at 4:47pm

You just can't water from a stone. Especially from someone who claims, "I just don't think any educated counter argument can be presented." Well, it doesn't even take much education since your thesis is completely fallible. Doesn't even make sense, "holding back? investors as scammers?" Please! Let me guess, when Baskin Robbins decided to make 31 flavors of ice cream, you found it unethical, they were cheating chocolate & vanilla? HAHA, "not to be rude, of course."
Phil Hallman May 18, 2009 at 1:30pm

OOPS. hit the comment button. I was saying ... to sell the same piece of property will be subject to fine in AZ and can have their licenses revoked.
Any way just read some cases on contract law and you will see that the courts will frown on the presentment of multiple signed offers to a lender in a short sale situation. There can be only one.
Jesus (Jesse) Gonzalez May 18, 2009 at 1:28pm

Phil:

In the example I have given, seller's don't have executed contracts and they don't have legal representation so, i am not sure which blog you are referring to.

Either you do business in the unethical and illegal manner as i outlined or you don't. If you don't, great...good for you but, if you do, then you're a thief...in my opinion.
Jesus (Jesse) Gonzalez May 18, 2009 at 1:27pm

Robb:

At this point, i am not sure if you read the original post. In the example I have given, offers are being witheld. Either you work in this manner or you don't. If you do, in the manner I have outlined above, then it's fraud.
Phil Hallman May 18, 2009 at 1:22pm

Jesse:
If a seller has executed a contract, all new offers are SUBJECT TO the executed contract, Since at the moment of acceptance buyer now has an equitable interest in the property, the buyer is the only party that can now accept or reject any new offers on the property NOT the original sellers bank.
The buyer does not have ANY affirmative duties to a third party, moral, ethical or otherwise. Do you know of any court cases that support that (unlikely, because of the parol evidence rule)? The beneficiary of the Trust Deed (The Short Selling Bank) has only two Rights under their Deed, a bare legal title deed (the history of these deeds starts in the time of the crusades to keep the king from taking soldiers property), 1) To foreclose by way of trustee sale, 2) To convey title back to original Trustor. That is it! Nothing about a RIGHT to review all offers. Nothing about the moral duty on the Buyer to disclose that they are minting copious amounts of cash.

Lets look at the inverse of your argument, does the bank have a duty to disclose to the homeowner how much the bank paid for the note, or how much it is valued at? Some of these notes are trading at pennies on the dollar and by your reasoning the banks are committing fraud against homeowners by not allowing them to pay the market price on their very own debt!

Agents who allow the same client to enter more than one contract to sell the same piece of property will
Joan Poulton May 18, 2009 at 11:10am

If Banks would accept " Assignment of Contracts" all this could be avoided. Making money in real estate certainly is not illegal. The Banks put up a wall for investors, investors will dig a hole.
ROBB CASH May 18, 2009 at 10:48am

I still don't get what offers are being withheld. There are no offers! The price is too high! It is the work of the short saler(investor) who brings down the price and makes it lower therefore attracting buyers. Furthermore, as the contract and/or option holder, the investor may field the offers and sell the property since he/she has control over said property. When the back signed the option, they gave up control until said option expires. What holding back? If you like your deals plain vanilla then that is fine but I still think you are out of line calling investors "scammers." Guess what, it these types, investors who are not afraid and will take some risk, that will help alleviate the current real estate glut and get this market back on track. The previous poster, Phil's analogy about the cars was spot on.
Jesus (Jesse) Gonzalez May 18, 2009 at 9:42am

Hi Phil:

I guess you missed one vital point in my original post and that is, offers are being witheld from the bank. So, when you say, "It is a dut to present all offers" yes, that is right just like the investor has a moral and ethical obligation to provide all vital information including those offers they are witholding, as outlined above.
Phil Hallman May 18, 2009 at 3:48am

Jesse, are you really equating investors to bank robbers? In your words, "The investor stole money directly from the bank..." and "...I see this [investor flip] equivalent to a bank heist" You call it an ethical dilemma to which no, "...educated counter argument can be presented." The counter need not be educated, I will give you that, it is a story even little children understand, the story of Robin Hood, who stole from the rich to give to the poor. It is a story of populism and the redistribution of wealth to an oppressed town. So even if investors were bank robbers, your argument is not sufficient for you to claim its infallibility.

But, they are not robbers, they are business people, not much different than a car dealership, which buys cars for much lower than another person will pay, and turn and sell for a profit.

Let me ask you, if you have a client in short sale, for 6 months with no offer, 1 week to trustee sale, and you get an option contract from some guy that wants to flip and negotiate the deal, would present the offer to your client? It is a brokers duty to present all offers, your client can decide if they want to accept or reject. It is a breach of your duty to deal with this any other way. Once the offer is accepted, equitable conversion takes place and the investor can sell that option to whom he wishes with or without bank approval. I suggest you read up on contract law, and real property transfer law, because I think you are conflating the parties to a contract, and that sort of thing is important for a broker to understand. You may be in the wrong business if you really think buyers are robbers.
Brad Spence May 17, 2009 at 6:46am

Seeing it here too. However, it is coming into the light and I hope more agents are getting wise to it. That being said I am sure it will be going on for quite some time.

Great stuff Jesse.

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