Avoiding Fraud In Back-To-Back Short Sale Transactions

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Did you ever ask a title company to close a back-to-back transaction on the purchase and resale of a house? What was their response? Was it yes, no, or maybe? When you’re dealing with short sales, you have to expect the title company to lay down some ground rules (if not completely resist working with you). Too many real estate investors have left a fuzzy paper trail during same-day closings, and they don’t want even the appearance of fraud in their office.

The truth is that investors can open themselves up for all kinds of trouble if they don’t know what they’re doing. Those closings may look like some huge shell game to people, especially those whose job it is to uncover fraud in the real estate business. Nobody wants to be accused of being a scam artist, much less suffer the legal consequences.

If you’re closing a quick-flip on a short sale, you can avoid even the appearance of fraud by carefully setting up each separate transaction with the title company ahead of time. The key is to be completely transparent. In each of the two transactions, everyone needs to know what everyone else is doing, and the title company just needs to follow certain protocols to keep everyone honest.

1. Prove that the property has zero or negative equity. Obtain letters from the lender(s) regarding the gross payoff amount and the discounted payoff amount on the property’s mortgage(s). When you subtract the amount owed on the property from the final sales price, you should get a negative dollar amount.

2. No cash back is allowed for the seller on the first (A-B) transaction. The purchase price, to be paid in full by the investor, is simply the total amount of all lien payoffs plus the cost of the conveyance fee for transferring the deed from the seller to the investor.

3. The second sale, or the B to C transaction, must be a completely separate transaction in that the C buyer must be an independent third party who is unrelated to the prior property owner.

4. The property owner, or the vested owner, must be present at the closing and sign a copy of that transaction’s HUD-1 stating that he or she has full knowledge of the sales price and the terms of the sale. The investor/buyer and the seller must agree to release the HUD-1 if the new purchaser’s lender requests written proof of the amount of the payoff of the underlying liens.

5. If the investor/buyer uses a lender to fund the purchase from the original homeowner, that lender must provide a statement in writing that the investor has fully disclosed the terms of both transactions in the “double transfer” or back-to-back closings of the property. Stay aware that the foreclosing lender won’t need to provide a similar statement, mostly because (as far as I know) that lender has no right to any information regarding the second (B-C) transaction.

Cover those five points with the people at the title company, and you will be able to quick-turn your short sales much more smoothly. This is what I love about my job – I can write about what I know and keep you from learning about legal troubles the hard way! Real estate fraud isn’t something you want to learn about firsthand. Listen to experienced investors and find out how to avoid committing fraud before you’re in the middle of it.

Protect yourself from legal problems in real estate investing. Keep reading attorney Jeff Watson’s latest words of wisdom about real estate law on the Strategic Real Estate Coach website!

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