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Venture
Venture: Flipping houses in a post-bubble world
As the housing market has tanked, investors have discovered new ways to make quick profits. We examine how some Realtors have been buying and quickly reselling distressed properties, in some cases, possibly to the detriment of taxpayers.
Ashley Gross | Nov. 29, 2011
The real estate market is moribund. Prices have plummeted. So who knew that people were still making big bucks from flipping properties?
Turns out, speculators have found new ways to profit amid the wreckage of the housing boom. And some real estate agents are navigating this post-bubble world for large profits - in some cases, at the expense of taxpayers and end buyers.
We stumbled into this world of post-bubble flipping by accident. WBEZ’s Susie An reported in July on her own experience as a first-time homebuyer purchasing a house. She found herself as the buyer on the tail end of one of these flips.
In March, An and her husband saw a 100-year-old, Victorian-style house in Chicago’s Avondale neighborhood and right away realized it was a lot better than anything else they’d seen.
“When we walked in, I think both my husband and I just had that feeling, that tingle inside that yes, we could live here,” An said.
The house was listed for $240,000, but they put in an offer of $250,000. An says it was listed as a pre-foreclosure. Their real estate agent told them that meant it was a short sale.
A short sale occurs when the value of a home has dropped below the value of the mortgage, and the bank that holds the mortgage agrees to take a loss and let the property be sold.
Almost a quarter of U.S. homeowners are underwater, and that has led to a wave of short sales – the housing data firm CoreLogic says the number of short sales has tripled in the last two years.
After they put in their offer, An says she and her husband didn’t hear anything for a month. They started looking at other places, but then they heard back from their real estate agent saying that now an investor was buying the property, and the investor wanted to quickly resell it.
An says they were told if they were still interested, that they should put in their best and highest offer and to do so quickly, because there was competition for the property and the investor wanted to get it done fast.
“A lot of rushing, a lot of rushing, and so we went with $285,000,” An said.
Their offer was accepted. But An still didn’t know what the investor had paid for the property – it hadn’t yet been posted on the Cook County Recorder of Deeds web site.
When she and her husband got to the closing table in late June, they found out in passing from their attorney that the investor had purchased the house for $160,000 in cash. She says at first she didn’t trust her ears – she had the lawyer repeat it and she wrote the amount down.
“We were shocked,” An said.
Housing flips redux
Why would the bank have accepted an offer that was $90,000 less than her and her husband’s offer of $250,000, even if the lower offer was in cash? Granted, real estate agents say that cash deals are often preferred these days because they can be closed quickly. But still, An says that didn’t seem to justify accepting $90,000 less.
And here’s another puzzle – An discovered that the investor she bought the house from, Marcie Schmidt, is a Realtor who works for Exit Strategy Realty, the company that had listed the house.
That raised all sorts of questions.
Because the Realtor and investor work in the same office, it seems like they can get first crack at these properties. And then the other question is: Who is the Realtor really working for if the investor is a coworker? Is the Realtor trying to get the best deal for the homeowner or the investor?
Their interests may not be aligned. But state regulators say there’s nothing that bars Realtors from acting as investors.
After An’s story ran, we got comments from listeners saying the circumstances sounded fishy. We decided it merited a follow-up story. But we emphasize that we didn’t choose to continue the story out of any desire to settle a personal gripe of An’s on the air. We felt that it was newsworthy and wanted to understand how these transactions work.
The mystery deepens
And we soon learned that this wasn’t an isolated transaction. CoreLogic tracks ‘suspicious’ short sales, which it defines as short sales that may have caused unnecessary losses to the lender, because the properties were resold quickly for profit, without allowing enough time to do much rehab to justify a higher price. CoreLogic forecasts that ‘suspicious’ short sales may cost banks as much as $375 million this year.
“There have been a couple of industry surveys of fraud, trying to identify fraud in short sales, and this practice of flipping houses is the practice identified as being most harmful to banks and to the ultimate investors in mortgage loans,” said Diane Thompson, an attorney with the National Consumer Law Center.
I contacted Schmidt as well as the Realtor who listed the property. Neither of them responded to my emails or phone calls. I also contacted the original homeowner, who declined to comment.
I called Citibank, which held the original $370,000 mortgage on the property, to ask why the bank would accept a much lower cash offer than a financed offer.
The spokesman, Mark Rodgers, told me that the bank wasn’t aware of a higher offer and their policy is not to accept a cash offer instead of a higher financed offer. So that deepened the mystery – why was the bank not told of An’s offer?
While trying to understand these transactions, I discovered someone else with Exit Strategy Realty who has done quite a few more of these deals.
His name is Mike Cuevas, and he calls himself the “top short sale agent in the U.S.” He’s a young guy – around 30 – who says he decided early on in the housing crisis to concentrate on short sales. Now he offers training workshops to Realtors all over the country on how to do short sales.
Cuevas presents himself as a white knight, helping people avoid foreclosure by doing short sales. Short sales are less damaging to people’s credit than foreclosures. He says in his online bio that he’s closed almost 1,000 short sales.
“You know how many people send us cookies, hugs, cupcakes? People call us crying,” Cuevas said in an interview. “People say you saved my financial future and my kids are now going to be able to go to college because I can now get the credit to give them a student loan.”
What Cuevas doesn’t talk much about in any of his webinars I watched is his own role as an investor buying and quickly reselling short sales.
According to records on the Cook County Recorder of Deeds web site, Cuevas has bought and quickly resold at least 13 short sales, for combined gross profits of more than $800,000. He didn’t hold them very long. In many cases, the short sale and the subsequent sale were recorded on the same day on the Recorder of Deeds web site.
For example, he purchased a condo at 10 E. Ontario St. in downtown Chicago for $118,500 and then resold it for $185,000. Both transactions were recorded on the same day – Nov. 8, 2010.
He bought a home in north suburban Park Ridge, Ill., for $466,000 and then resold it for $543,000. Both transactions were recorded on Aug. 17, 2010.
Maybe about now you’re saying, so what? So he profited from real estate – isn’t that what investors try to do? That’s what Cuevas says.
“That’s what capitalism is,” Cuevas said. “That’s what America is.”
But this is a story of winners and losers. In a short sale, someone has to eat the loss. At first glance, it looks like banks are losing out. Naturally, in these days of joblessness, foreclosure and Occupy Wall Street protests, there’s not a whole lot of sympathy for banks.
But really, the losers are the investors who hold the mortgages – and here’s where this pertains to all of us. In many cases, taxpayers are the ones losing out when a short sale sells for less than it could fetch on the open market.
Fannie Mae and Freddie Mac, which are financed by taxpayers, own or guarantee about half of all home mortgages in the U.S. So when they take an unnecessary loss on a short sale, taxpayers are the ones getting hurt.
Cuevas says he’s helping the market by getting these properties sold as short sales, preventing them from going all the way into foreclosure, which he says would further drag down home prices. He says that as an investor, he’s also lost money on short sale transactions.
And he vehemently defends the role of investors in buying and reselling short sales. He says cash investors provide a service to the end buyer that justifies a premium.
Short sales are notorious for taking a long time to close, because banks are loath to take a loss on a property and also because there are often second mortgages or homeowner lines of credit that need to be settled, and that requires negotiating with multiple banks.
Cuevas says cash investors can better handle these negotiations, in some cases by paying additional cash to a second lienholder as a way to get them to agree to the short sale. Investors also settle other liens, such as overdue water bills or homeowner association dues. Because of all these extra expenses, Cuevas says his net profit is often a lot less than his gross profit, but he declined to give any specifics.
He says settling all those liens simplifies the process for the end buyer, who can then quickly buy a home with a clear title, instead of having to deal with the short sale rigmarole.
But in An’s case, Schmidt’s gross profit totaled $125,000, and she specifically sold the property “as-is,” with no rehab or renovation. She only held the property for a few weeks. So are deals with such a huge spread legitimate?
If short sale flips are done the wrong way, they can get a real estate agent and an investor in legal hot water. In Connecticut, a real estate agent and an investor, who was also a real estate agent, were convicted of bank fraud last year for a short sale flip. They put in a low offer to the bank that held the mortgage, while at the same time concealing that there was a higher offer for the property.
The bank approved the short sale at the low amount, and then the investor turned around and resold it for the higher amount. He shared the profits with the real estate agent. Both pleaded guilty to one count of bank fraud.
Cuevas says what he does is completely different from what happened in Connecticut. The way he does these deals legally, he says, is that he uses an option contract that he signs with the homeowner. Then, he says he submits his offer to the bank to get the short sale process rolling.
He says the option contract gives him the right to list the property as if he already owns it, so he can line up a buyer for the subsequent sale. He says he has no obligation to give those subsequent offers to the bank as long as his offer was the first one in. Cuevas says what’s most important is that he tells everyone – the homeowner, the bank, the end buyer – that he’s an investor seeking to profit.
“One, it’s plain out in English disclosed on the contract. You must disclose, disclose, disclose to stay within legalities,” Cuevas said. “Two, you record your notice of option, so it’s public record. Okay, there’s nothing hiding here, no one’s trying to deceive anybody. It’s right there. Third, it should also be disclosed on the listing agreements.”
He declined to show me one of the option contracts.
Lawyers I spoke with said without seeing the documents, they couldn’t say for sure whether the way he’s done these short sales is legal. But they said as long as he discloses to everyone that he is an investor, and as long as he puts his offer in first, before any other offers are on the table, then he’s probably done it correctly.
Cuevas says he’s done everything by the book.
“Not only by the book, but beyond and above the book,” he said. “I’m not hiding anything. There’s nothing funny going on.”
But even if option contracts are a legal maneuver to flip short sales, that doesn’t mean banks and mortgage holders like the use of such contracts. Freddie Mac, for example, warns banks that an option contract in a short sale is a red flag.
Kathleen Cooke, one of Freddie Mac’s fraud investigators, says the problem with many investors who use option contracts is that they don’t disclose what the resale price is. She says it’s not enough disclosure to just say you’re an investor seeking to profit.
Cooke stresses that she isn't making a legal pronouncement, but she says the use of option contracts is something the company doesn’t like because it costs them money.
“Freddie Mac considers it to be a deceptive business practice that deliberately omits crucial data to the short sale lender,” Cooke said. “Omission of higher offers causes short sale lenders to approve transactions without all the facts and we take a higher loss than we should.”
So last year, Freddie Mac started requiring banks servicing its loans to include forms that everyone involved with short sales, including Realtors, has to sign. They must attest that there are no hidden deals and that the sale is an arm’s length transaction. Many banks have now followed suit. Some require that the buyer hold the property for 30 days or even 90 days before reselling it.
“The banks got wise, got more restrictive with their language and cut this off,” said Greg Braun, a real estate attorney in Chicago.
Because of that, Cuevas says he hasn’t done any deals lately. The last one I could find on the Cook County Recorder of Deeds site was from March.
“The spread deals are dead,” Cuevas said. “You can’t buy and sell property for short-term investors. Any Realtors today who want to work and stay out of trouble, if they’re going to work with an investor, they have to sell to an investor who’s going to buy it, close on it and be ready to hold it for 90 days.”
There's another potential loser when a short sale yields less than it could on the open market – and that's the original homeowner.
A homeowner doing a short sale doesn’t make any money off the deal because he or she owes more than the house is worth, so all the money goes to the bank. So the homeowner may think that it doesn’t matter what the home sells for.
But, in Illinois, banks have the right to go after the homeowner for the difference between what the house sells for and the mortgage amount. That’s called the deficiency.
And Thompson of the National Consumer Law Center says banks are increasingly pursuing homeowners for deficiencies after a short sale.
“It’s become a big problem for homeowners because they agree to enter into a short sale because they think it means they’ll be able to get out from under the debt and then they can get a debt collector banging on their door six months later,” Thompson said.
Cuevas says he never steps in as an investor unless the lenders waive all of the homeowner’s deficiencies.
“Any investor that we’ve ever worked with, our rules are you can buy the property as long as you don’t profit at the expense of the homeowner,” Cuevas said. “It’s that plain and simple.”
The homeowners I reached who sold their homes to Cuevas backed that up. They said their deficiencies were forgiven by the banks.
But Ralph Schumann, an attorney who heads the Illinois Real Estate Lawyers Association, says people have to be very careful about promises from Realtors and investors that their deficiencies will be waived.
“I have seen so much fraud in this area, and I guess this is the bottom line, show me the documentation that says the deficiency is waived,” Schumann said. “Let me vet it. Let me make sure it’s really enforceable and valid and won’t be an issue down the line, and then I might be willing to tell my client, ‘Oh yeah, go ahead and do it under the circumstances.’”
As for Susie An, she and her husband are settling into their house. They’ve repainted the walls and ripped out the old carpeting. They’re excited to see the magnolia tree in their backyard bloom next spring.
An says no one twisted her arm to make her put in the higher offer, but she says it still rankles her knowing they probably could have bought the place for less. Still, she says it’s not her own situation that bugs her the most.
“I think what frustrates me the most is the fact that we have this type of market now, where before the bubble burst, people were taking advantage of how the market was set up, and after the market crashed, people are still finding new ways to take advantage,” An said.
But at least for now, this particular profitable niche in real estate has been closed off.
Banks – and the investors who hold the mortgages – are no longer willing to leave money on the table.
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Comments
I just closed a short sale flip. I happen to agree with Joe Alfe. I think there are a LOT of things people are jumping to conclusion here on. People see the buy price and sell price and ASSume that the investor made a ton of profit. Let me outline a few things on the transaction I just closed. #1 - Everyone complaining of ETHICS needs to think about HOW do you address an ETHICAL ISSUE? It becomes an ETHICAL ISSUE when there are undisclosed facts and the INTENT is deviant. Look at dual agency. It's completely ETHICAL so long as you've disclosed all of the pertinent facts. So, to address all who say it's not ethical...well it becomes ETHICAL when EVERYONE knows what is going on.
So the property I helped sell had a 1.2 million dollar balance. The investor bought it for $475,000, and then sold it for $600,000. Looks like an AMAZING PROFIT RIGHT? Let's break down the numbers. First, the investor asked to negotiate (on behalf of himself) and the buyer agreed. It was my job to present the offer to the seller, and we had a long conversation about what was about to happen. The seller agreed and was given an amount of disclosures like I had never seen. The investor encouraged the seller to talk to a lawyer AND accountant. The investor had an appraisal done, and then inspection reports. They then sent the offer in to BOA. Next the BPO was ordered. I attended two BPO's on behalf of my seller and one BPO came in around $500,000 or so the negotiator told me and one BPO came in around $470,000. The appraisal the investor ordered was at $467,000. The house was marked under contract with a note that additional offers or BACK UPS could be presented. The list price on the house was $550,000. The house needed a TON of work. As the investor negotiated with the lender they assured the buyer that if the approval came back with BOA retaining deficiency rights, the investor would re-negotiate. In the interim, I got an offer from ANOTHER investor who wanted to demo the house and develop the land. The first lender notified the second lender that they were flipping and that they would be making a profit on their contract.
NOW, the first approval came in at $475,000 and RETAINED DEFICIENCY RIGHTS, so the investor went back in and offered $28,000 more. The bank agreed and and the house was sold. The investor held the property 30 days and paid out a hard money lender over $40,000 to hold it for the 30 days. NOW, the investor had to pay me also out of the profit. Now, when all was said and done the PROFIT was $30,000 and that was for 98 days of work. MY COMMISSION was higher than what the investor made.
Now, I know everyone HATES investors, but FLIPPING can be done LEGALLY and ETHICALLY and it boils down to disclosure. I ran all of this by my local board of Realtors including contracts, disclosures etc., and was told it was ALL OK TO DO by their legal dept.
As much as everyone doesn't LIKE it, this investor just cleaned out one property from the GLUT that is on the market. They didn't fix it up, they resold AS IS.
William Gassett, Jr.
@Jimhale and others...
What you are not understanding, is that, at least with Mike, that be BUYS OUT the sellers deficiency with cash. The "Obscene profit" that has been mentioned, yeah, in many cases some or all of it was paid as a "buyer contribution" to erase a deficiency for the seller. In other words, the seller was able to walk away with absolutely no liability. Hows that for a so called "predator?"
If it is possible to get a seller out of a deficiency at any given price, then it would certainly have been possible to get them out of it at a higher offered price.
So the argument that the bank taking a beating on price is out weighed by the "service" being rendered to the seller is just hogwash.
@Ann, thank you for the message. I am disheartened by a couple of the comments making general statements, about bankers, about Realtors, etc. Obviously not all Bankers and Realtors are dishonest and out to make a quick buck. That being said, it is absolutely that any consumer looking to make a "Big" decision do their homework and take the time to find out who they are dealing with. I would have seen this coming a mile away and would have prepared my client to accept such an outcome.
"It's rather amazing to see this type of criticism" of the outrage expressed by the majority of readers at a legal scam. If he had robbed the buyer and seller at gunpoint but didn't kill them them then would you say that he has "done so much to help homeowners move forward with their lives"? After all he could have shot them. Or, its like telling a rape victim to enjoy the sex.
I suggest the Mr. Cuevas take a regular real estate commission on the sale and split the obscene profit he made between the seller and buyer. Then I might agree that something was done to help the "homeowners". Otherwise I am inclined to think that he cheated them.
The poster who thinks that the "defrauded" parties lacked negotiating skills and were lame is in my view wrong . They did not have the information to negotiate with. I have heard of other legitimate buyers trying to buy distressed property and being aced out by insiders. This poster is inclined to blame the victims. Perhaps he identifies with the fraudsters. Not everyone can be expert at everything. We rely on professionals not to cheat us. We go to the doctor with some confidence that he is acting in our interest. If this was legal then real estate professionals need to be held to a higher standard than they have been.
It sounds like so many reports we hear right now....."it's totally legal"...........that often just means that immoral behavior hasn't been legislated yet. Interesting to hear that once his actions were uncovered, Mr. Cuevas has stopped or suspended the process.
It's rather amazing to see this type of criticism about someone who has done so much to help homeowners move forward with their lives. The bankers and the securities folks caused today's situation and now they have restricted the number of people they give mortgages to even tighter than before -- despite the fact that the Government has given them incentives to help buyers. There are more properties on the market today than there are buyers. People like Mike Cuevas know how to either price the house right to get multiple offers and help the homeowner be relived of his distressed property, or he is able to purchase the property and make it ready for a resale. He does not know in advance if he will have one or many offers for the property until it is available through the multiple listing service and it is advertised to the public. Isn't it time we got angry with the bankers, the finance industry, such as the AIG's and other security regulators who did not do their jobs? And what about our Congress today, refusing to address the real issues that are still in existance even after today's reality? The Truth is not sexy, so you don't write about it. What's that about?
Unbelievable how slanted this article is. The broker fully disclosed everything that was going on and got the buyer a great house at a good price. Cuevas did exactly what he should for his seller as well by getting them out without any further liability. What people don't get is that the listing agent has a legal responsibility to the seller NOT TO THE BANK! We love to pillory banks in the public throughfare but now suddenly we're defending their interest when a trained professional is acting legally in favor of the homeowner? This makes zero sense.
We cannot figure out how to publically warn potential buyers and sellers of agents like these and our clients are often pleasantly surprised when they learn of our opinions of many real estate agents out there. All I can say is this; if you refer your friends and family to us, they will be protected from situations like this. I am sick to my stomach after reading this article. Have a great weekend! Check us out if you want honest, hardworking people on your side. The testimonials on our site are unaltered.
There are two stories here. Perhaps WBEZ should send its employees to a basic negotiation course so they can get out of their dope bubble.
Why would anyone with a brain offer 10K more than a 240 house in Chicago where there is no market? Really, you can't paint a house yourself and throw in some cabinets? You have to fall in love with it and then offer $285??? When the cashier at Jewel tells you its 150 for your groceries, do you say well maybe we could put them in our car for 180?
I am with Michael and Robert below. I heard this story when it was broadcast a few days ago and I haven't been able to forget about it. What happened to the Ans goes beyond someone getting "outsmarted". They were cheated by people who had inside knowledge that they should not have been allowed to trade on and, furthermore, it certainly sounds as if the An's offer was never presented. People should be charged with criminal intent - because that's exactly what it is.
I don't care if what this Cuevas guy does is technically legal. He can try to justify his actions, but he's a parasite and a thief. I hope he chokes on his profits.
This type transaction sounds extremely unethical. Why do some business people strain at the edges of legality and ignore the effect on others involved? Coal in the stocking to investors who are so slimy!
The ill gotten gains of the speculators belong to the banks and the foreclosed homeowners. We need protection from these thieves. Our taxes are paying for this in the form of mortgage guarantees. I hope that the exposure you are giving this helps put a stop to these practices.
Possible grounds for legal action. If legal discovery doesn't uncover signed offers from other entities for this same property, then the RE Agent, based upon reading this article, perhaps coerced the current owners into paying more than they had to. In this particular case, the RE Agent, it would appear, deliberately used the buyers emotional "investment" to their advantage and coerced then into a higher offer. The option contract might not be questionable. HOWEVER, the RE Agent's conduct is reprehensible especially given their inside knowledge of the investor's business practice. My suggestion, FIND A LAWYER NOW BEFORE IT'S TOO LATE!!!
This is an old saw, resharpened.
Real estate and Agency rules say clearly that the Agent has to submit all deals to the seller until the seller (a) accepts one or (b) says no more. I suspect that's a universal requirement.
Clearly, the agent violated the rules by withholding An's offer to the seller, and should lose his/her license. As a non-attorney, my non-legal opinion is that the agent committed an unlawful act and defrauded the seller.
Kantian Ethics is a matter of doing (a) what is right (b) for the right reason. Anything less is unethical, unless you believe in Utlitarian Ethics, which logically leads to socialism and communism. I don't.
There is an ethical way to do the transaction. (1) The Investor (not the agent) offers the home to An, contingent on his being able to buy it from the original seller at a lower price, and telling An that he does not own it yet.. (2) The investor (not the agent) offers the lower price to the seller, telling the seller he has a higher buyer, which he is not willing to identify. (3) He buys. (4) He sells. Just like Walmart does with shoes. That is capitalism. Walmart doesn't reveal their wholesale price for shoes and there should be no reason to reveal the prices of the homes, but the prices get recorded and revealed anyhow. Some people see that and think the money should be theirs, when someone else worked for that money.
A variant is also ethical. (1) The investor offers to buy the house contingent on his being able to sell it. (2) The investor locates An who is willing to buy at a higher price. (3) Investor buys. (4) Investor sells. Walmart does that with shoes too.
There are other ethical variants. Bottom line, an agent canNOT withhold an offer hoping to make a profit by buying lower and selling to the ultimate buyer. That violates the concept of "Agency."
Also, an agent cannot buy the house and represent the seller. That is a clear conflict of interest. An agent CAN buy a house and represent only himself, but canNOT get the seller to pay him a commission.
Pretty clear, really. The difficulty comes in when people think they should have money that others worked to get.
The Seller can't locate An, so needs an investor or agent to do that, and the Seller pays the investor to do that. An doesn't want to negotiate with the seller, or does not have the expertise to do it, so the investor gets paid for that. Ultimately.
The seller is willing to sell for a price. That's simple. The buyer is willing to buy for a different price. That's simple too. So the investor performs an invaluable service to both, and appropriately gets paid. Really simple, moral, ethical and capital.
I have written a proposed piece of legislation that would require anyone doing a short sale to be licensed by the state, including real estate agents. As you can see from some of the comments, just because you have a agent license does not qualify you to do a short sale. The bottom line and the most important consideration is that the seller not be charged any money and that they are put in the best possible financial out come. This is also why SSN only negotiates deals that have a licensed real estate agent listing as well as a competent attorney to represent the seller.
@chicago's to agent, SSN does not sign anything on behalf of the seller. What you objected to is our fee agreement, which simply states that our negotiation fee is paid by the buyer, not the seller. Both buyer and seller must sign off on it. Contrary to your opinion of this being a "violation," both Fannie Mae and Freddie Mac purchase guidelines now specifically allow buyers to be charged short sale negotiation fees, and in some cases be reimbursed through a sales credit. When both Fannie and Freddie allow something, it becomes a reasonable and customary practice. Everything is disclosed on RESPA at close, so your comment about how this arrangement was wrong or a "grey area" was unfounded. Lastly, I have no trouble stating my name and contact info, why are you hiding behind a made up alias?
Joe Alfe
joe@ssnegotiators.com
The An story is surrounded by the very unpleasant odor of rot. The data should be turned over to regulatory authorities for a full and complete investigation. The transaction defies all reaon.
This sounds like it should be illegal -- almost same situation as insider trading.
sounds like we have some more work to do in regulating this mortgage business.
This happened to me twice. I recently bought a home in Humboldt Park, but before that I put in cash overs on two other houses, and my offers were rejected in favor of lower offers from people using agents that worked inside the listing agency. I made a lot of phone calls to the bank and to the loan servicing agency that managed the loan and the sale of the property. They were disturbed by it, but didn't do anything. it turns out the way they did it was they sat on my offer for several weeks until their own offer was accepted, then they submitted mine when it was too late. The second time it happened I even saw it coming (cause it was the same agent) and did everything I could to alert the bank that there was fraud going on, and that they were likely going to accept a lower offer. What they did this time was take the house off the market an hour after my very high cash offer came in. They resisted several month later for peanuts, and sold it for lower than my offer.
I don't care it its legal, its fraudulent and unfair, and should be regulated. The one positive thing about this housing crash is that people who would not be able to afford homes in a regular market can all of a sudden by a home...but investors are favored over someone who needs a break.
@Chicago's Top Agent:
Short Sale Negotiators is wholly independent and not owned by Mike or George Cuevas. It is true that SSN shared office space last year with Cuevas, and had negotiated some short sales for them, but as an independent negotiator. If anyone has any questions regarding SSN, you can contact me direct at joe@ssnegotiators.com.
You're right, technically, the only parties are the ones that 'sign' the contract. However, every short sale contract says that the deal will only consummate if the bank approves the contract price. Yes, the bank never signed the initial contract, but does this statement not make them an important party in the whole process? If the bank was not involved in the sale to this degree, it would not be a short sale at all - it would be a regular sale!
Also, for those saying that the investor might have sunk in a lot of money - in this story, the Ans was a single family home, and there were probably no condo or home owners' association fees involved, and the property was not enhanced - the condition stayed as is (In full disclosure, there might have been a second lien, but if it is a junior lien, I cannot see it being priced as much as the mortgage!). Does that justify the markup in the end?
@Stubby - I practice ethical RE - and I am not a lawyer, but I do know when a bank needs to be involved. As I said above, the bank does not sign anything, but they are the ones that decide whether a short sale will be approved or not - does that not make them an involved party?
As I stated in my first post, that there are things that are legal and then there are things that are ethical. Just because something is legal doesn't make it ethical.
The same old story, "buy now, or be priced out forever.............forever, really"
I would have walked away from this deal on principle alone
@Swati Saxena, Correct me if I'm wrong, but I thought the only parties to the contract were those who actually sign the contract after coming to agreement? As far as I know the Lender is only a "debtor attempting to collect a debt" according to the many approval letters I have read. The lenders are merely agreeing to release their lien by settling the debt on the short sale.
Your confusion brings to light the confusion a lot of real estate agents seem to have. The lender does not own the property in a short sale, only the debt that has been secured by the property. Homeowners still have ALL rights to choose which buyer offer they want to accept, NOT the lender. Once the offer has been accepted and submitted to the lender it's then up to the lender to deem whether or not the amount is acceptable to them to release the lien and the homeowner from future debt. Most lenders don't like to see multiple offers given to them on a short sale because it confuses the process.
There are a couple of salient points here.
The first one is that the agent owes a fiduciary duty to the client. The client is the seller NOT the bank. The agent does have an obligation to present all offers TO THE SELLER. The seller is the one who needs to decide which ones to accept or not accept.
The second point is that a large majority of short sale contracts fall through because the buyer gets tired of waiting and walks.
Here is an analogy. If you could buy a $20,000 car for $15,000 you would probably want to do it. If you could MAYBE buy it at that price and had to wait around six months to find out you would probably just go ahead and buy a car that you could buy today.
If the seller decides to sell to an investor who is willing to pay cash and will DEFINITELY wait around until the deal is done it is probably a wise decision. Too many sellers end up going into foreclosure because the deals fall through when the buyer walks.
The bank makes a decision solely on the numbers. If the bank thought it would net more money by taking the property back and then searching for the elusive retail buyer it would surely do so.
When the investor sells a house to the end buyer it IS by definition worth more because the investor is able to sell a house that the buyer can buy TODAY.
The article ends with the statement that banks are no longer willing to leave money on the table. The irony is that without investors they will end up foreclosing on many more properties and leaving much more money on table then.
@Swati Saxena, lenders are NOT party to the contract! They are only saying whether they will accept the contract price for a release of lien/debt. Nothing else. If they were party to the contract, they would have to sign the contract. The seller owns the home. The only time the lender is party to a real estate contract is after foreclosure when they take the property back at auction (REO).
@Swati Saxena, the bank is NOT party to the contract, otherwise they would be signing it. They are only allowed to negotiate what they will and will not accept as a contract price and whether they will accept the contract for a full deficiency release or not. The short sale is contingent upon Lender (Third Party) Approval. Does not make them party to the contract...any more than having a retainer agreement with the attorney makes the attorney party to the contract.
"By: Swati Saxena: As a Realtor, the whole situation with Susie An's home makes me extremely uncomfortable. Where were the ethics of the professionals involved in the transactions? And as long as there are fishy transactions such as those, how is the public to trust that an Agent is watching out for their best interests? Yes, the new paperwork requirements (arm's length transactions) are helping, but just because an act was once legal didn't mean it was ethical! And just as you pointed out, as taxpayers, we're all bearing the cost!
Thanks for doing this piece, Ashley."
Do you really think that it's these homes that sell to an investor for $160k and flipped for $280k is costing the taxpayers? LOL What about the massive bail out money that REALLY used taxpayer funds?
I can almost guarantee that the properties that they used in the article isn't taking into account the costs of doing a full debt release for the seller. What is that? Paying cash outside of the actual contract/selling price to settle the 2nd lien, paying off HOA dues that the seller's lender will not pay, but that the HOA will not forgive.
When lenders approve short sales, they weigh the costs of a foreclosure and then sitting on a vacant property for an average of 15 monhts...not earning any money, still having tax liability, insurance liability, HOA liability, etc. So, if they decided to sell this property for $160k, that was their educated and financially sound choice after taking in legal fees, BPO/Appraisal costs and opinions, etc.
Swati, Are you a realtor? if you are I would never want you to represent me.
The BANK is not a party to the contract.
Only the BUYER and SELLER are..
The Bank can approve the shortsale or deny it.. But they are NOT a PARTY ...
The bank set the value.. so why are they upset at investors who buy at what they approve..
If the mortgage you received to purchase this home is FHA there are some things that definitely need to be researched on this transaction - property flipping restrictions, identity of interest, etc. Check out the HUD handbook 4155.1.
I think I have a unique perspective here, since I professionally and personally know all of the parties involved, except Ms. An. but first, my disclaimer:
I am an independent short sale negotiator. I do not buy properties, I do not place offers on properties. I work for and only represent the seller in a short sale situation.
I am very Familiar with Mike Cuevas, and he is as advertised: He flips property legally and ethically. He makes full disclosure to all parties as directed by law. There is no fraud. What Ms. An and the rest of they nay sayers do not realize is that just because Mike was able to purchase for 160K, does not mean someone else could. Also, a short sale, by definition, is a DISTRESSED PROPERTY, THEREFORE WORTH LESS. By negotiating the short sale, purchasing with his own cash funds, Mike was able to convert the property from a distressed property and convey clear title to Ms. An. Regardless of whether or not there was capital improvement, this act made the property WORTH MORE. It is established fact that distressed properties can be worth 20% or more LESS than non distressed property.
To answer the question of : Doesn't the lender/Freddie Mac lose money because of the flip? The answer is not necessarily, partially because of what I explained above, but mainly because the lender did their own valuation and chose to accept Mike's value. Since it is common practice for lenders to accept up to 20% less than the appraised value on a short sale, they do so with the knowledge that the property is being sold for less than market value, and therefore investor profit is implied. In other words, the lender knew Mike would make a profit. In fact, it was disclosed to them in writing on the very contract that the lender approved (and no, the lender is NOT A PARTY TO THE CONTRACT, JUST A CONTINGENCY. What Freddie is pissed at is they did not know the amount of the profit, but they certainly accepted the possibility of profit.
Also, most importantly, Mike, nor the seller, has any Fiduciary duty to the lender. None. In a short sale, as a negotiator, the sole Fiduciary duty is to the seller. The main goal is to put the seller in the best financial position. If I can do that with a high offer, wonderful. If I have the choice between a low cash offer where the buyer is willing to bring his own cash to the table to pay off seller liens or buy out their deficiency, then I will take that offer over a higher offer that leaves the seller responsible for the liability. We have NO OBLIGATION to disclose the higher offer to the bank. NONE.
What Ms. An's question should be is not "what price did the investor buy at" (They are under no obligation to reveal that to the end buyer) but rather "What position is my contract chronologically." In Mike's system, he executed a contract with the seller first, recorded it with the County, then listed for sale. Ms.An's contract was clearly second, therefore no obligation to disclose to the bank. In the example of the Connecticut fraud, the broker there engaged in "Front Running," this is a practice whereby a buyer makes an offer to the seller, but AFTER that offer is tendered, the broker slips his own, lower offer in and get's that approved, thereby netting the spread. That is clearly fraud.
I have also spoken to Ms. Cooke from Freddie Mac, and I completely agree with her assessment that there is short sale fraud in this market. Just not in this case. So long as everything is disclosed on the contract and on RESPA, there can be no fraud. At the end of the day, the lender (and Freddie) can make the choice to accept or not accept a deal.
I cannot say who, if anyone is a "Loser" in this deal, but I can say that there were three clear Winners:
Mike won because he did a lot of hard work and made a profit
Ms. An won because she got a property she wanted at fair market value with a clear title
The biggest winner was the seller, who was completely and totally released form all liability, and was not charged any money.
This is the way it should be
Joe Alfe
Short Sale Negotiators Inc
www.ssnegotiators.com
An is a fool on a number of counts:
-she didn't work with an experienced short sale realtor or attorney
-she fell in love with it prior to doing due diligence (someone should have held her wallet)
-she bought high in a vile economic slump
-and had little experience in negotiation: OVERBID without reason.
CAVEAT EMPTOR THERE'S BLOOD IN THE WATER
Let's face it people. There will always be a group of us who believe in following the rules and meeting what we perceive to be the ethical and moral standard that we were raised to believe in. There will also be a group who believe that just as those out there hold themselves to a higher standard that meeting the the standard or abiding by the law even if they can find a loophole is enough for them to sleep at night, legal is legal.
I'm in the former group so these activities bother my set of morals and ethics, but if in fact they are not breaking the law I say to each his own.
The problem with all of this is the fast changing landscape of the marketplace. Some of these schemes or activities may be legal one day and illegal the next.
For the record I crossed paths with Cuevas and I have heard several agents and attorneys, unsolicited by me, offer their opinion and it was bleak.
I chose to walk away from a deal of this nature, not involving Cuevas, when it presented itself. My client's attorney threatened to recuse himself if he wanted to proceed. The group Short-Sale Negotiators, I believe it is his brother George Cuevas, who was a part of this group. At one point they actually presented a contract to be signed by my buyer, the seller and the Short Sale Negotiators to compensate Short Sale Negotiators for there efforts. Interesting that Short Sale Negotiators was trying to sign off on an agreement for 2 of the 3 principals for the agreement. Even more interesting was there website saying that they only advise and don't offer legal or financial advice, yet they were signing documents for their client.
Visit the website for Short Sale Negotiators today and you won't discover that all the misinformation and violations, as they have been removed.
Ultimately, you have to ask yourself how close do you want to get to the flame given that there will always be people who follow the letter of the law and nothing more.
Sweati.. Your UN-informed
the BUYER AND THE SELLER are the parties.. I never bought a house that stated the bank was a buyer or seller...
Bank can approve or deny but they are NOT party to contract.. you must be a realtor that closes 4 deals a year and is mad at realtors and investors who take money off the table.. just a guess
@Really.. Really - Actually, the bank *is* party to the contract. Any SS contract will say that the contract is only valid upon third party approval, and the third party is the bank.
Dave's comments below about the house and what he/his clients felt do tell their own story.
"Lawyers I spoke with said without seeing the documents, they couldn’t say for sure whether the way he’s done these short sales is legal. But they said as long as he discloses to everyone that he is an investor, and as long as he puts his offer in first, before any other offers are on the table, then he’s probably done it correctly."
That was the most powerful part in your entire article. It's insulting when you say the banks lose money. Let's see, they were bailed out, and be real they created the problem and made a ton of money while they helped create the bubble.
OK.. last I checked. The bank was simply the note holder.. NOT A PARTY TO THE CONTRACT..
Why is it that when Banks make horrible (stated income) loans to people they know can't pay ... they blame the investors.. I just don't get it. The bank makes a bad loan... almost goes belly up.. begs the country to bail them out.. and now wants to target those who actually can turjn things around.
Think about this.. What is every real estate investors in the country said to the banks.. NO WAY.. WE WONT BUY ANY HOUSES FOR A MONTH.. I could promise that the market would take a huge hit. I would venture to guess that a majority of the houses being sold are to investors.
Mike Cuevas has found a way to get a house that nobody wanted off the market..
WHY DOES NOBODY SEEM TO ADMIT THAT WHEN A SHORTSALE TAKES PLACE THE BANK.. NO BODY ELSE.. THE BANK SETS THE PRICE.. Now reports who have never done a deal in their life thinks it;s the investor/realtor commiting fraud.. give me a break.
It angers me that in a time when houses are sitting on the market for sometimes years!!!! the banks are mad when they put a value on the house and someone buys it to re-sell
IN THIS ARGUEMENT.. WAL-MART IS GUILTY OF FRAUD AND ILLEGAL SHORTSALES..
When does Wal-Mart buy the product they sell??? at the same time they sell it..
in other words.. Wal-Mart buys the item for less then they are selling it.. but they dont pay for it until after they sell it.. they use the end buyers money to pay for the item... lol
I take my hat off to Cuevas for finding a model that works.. if the banks don't like it then ask them to stop giving loans to people that can't make payments..
REMEMBER: IN A SHORTSALE.. THE BANK SETS THE PRICE THEY WANT. WHY IS IT THAT THEY GET MAD WHEN THEY ARE WRONG AND THEN TRY TO BLAME THE REALTOR/INVESTORS
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Based on reading this article, it seems there are several holes in the assessment. First you have presumption of what should have been taken place, then assumption of whom is getting screwed (banks, sellers, and buyers), and lastly the clarify positions of full disclosure, due process of contracts, capitalism, and effectiveness of the actual process. So I guess anyone can sit here and judge, condemn, and even poke holes with all of this stuff flying around. Critical journalism is just that and then it opens up for the "arm chair judges" to determine what is right and who's responsibility is what...etc. Lastly, not one thing was mentioned about banks and the TARP funds were being unaccounted for with Fannie & Freddie. So I can't sit here and hit all the holes (there are so many) but really the views and opinions don't give the full story. I believe Mr. Cuevas has done a fair job of disclosing fact.
@Realtor with a brain: I couldn't have said it better myself! There is a MUCH bigger story to be told on this topic if real journalism was done; The bad guy is NOT Mike.
The journalist says "But really, the losers are the investors who hold the mortgages". Are you kidding me?! Do your homework... start by realizing that THE OCTOBER 2008 BAILOUT PAID OFF THE HOLDERS OF MORTGAGE BACKED SECURITES AND DERIVATIVE INSUREDS: http://www.marketoracle.co.uk/Article31789.html
I almost don't know where to begin. As agents we owe our duties and loyalties to the SELLER--NOT TO ANYONE ELSE. Not the buyer, and certainly not the idiot lenders that created this mess in the first place. As such, our primary objective is to free the Seller from crushing debt. That is it. WE HAVE NO FIDUCIARY RESPONSIBILITY TO BANKS! We do have a duty to disclose which all parties agree was done here. Retail buyers such as An are not the solution--most retail buyers--some 80% nationally--eventually walk away from a short sale transaction. Why? Because the process is tedious and time consuming. They simply can't and won't wait. Investors are a key part of the solution. They always hang in there to complete the transaction and they pay cash--which whatever some lender representative may say on the record we all know that in real estate--as everything else--money talks and bullshit walks. Investors help the homeowner de-leverage and present to the buying public a non-distressed asset free from any liens or clouds on title. They also assume the risk of being able to resale the property. And for this service investors deserve to be compensated. Lender's make decisions based on their own needs and their own independent evaluation. Are we seriously claiming that B of A is incapable of protecting it's own interests? And since An's purchase was a financed offer her lender performed an appraisal and deemed the purchase price acceptable. And on a personal note, I know Mike Cuevas and he does profit from short sales, but he does so ethically and within an environment of complete and full disclosure to all parties. Have we now decided that making money is bad in America?
Unless something is defined in law as illegal we can all complain that it is unethical or wrong by our feelings yet still 100% legal to do so. Law is not meant to state what we ARE able to do as a public but what we are clearly NOT able to do. There is no law anywhere that outlaws the arbitrage of this asset class as opposed to another, there are only lender policies and clauses you must abide by and the attorney cited in this article even said that given the facts presented to him te realtor did everything correctly.
Mike found a way to make more money by providing a service that was requested of him by the SELLER of this property. His fiduciary responsibilty was not to the lender nor the buyer, it was to the SELLER. Only about a quarter of all short sales in this country succeed and if he was able to waive their deficiency, negotiate all the liens on the property, deliver a property to the buyers that was clear of all liens and entitlements, all while disclosing his intent to do so, then this was a job well done and market dynamics at play. We don't hear the ANs speaking about the terrible feeling they would have felt had they lost the property to the next highest offer, we hear their greed speaking thinking they could have been in Mike's shoes as the buyer.
I have hundreds of articles this reporter can write daily about how i get fleeced when buying every product out where that i feel the seller is 'unethically taking advantage' of me...
My buyers made an offer on this home and we received all the addenda as if it were going to be accepted. It all stunk to high heaven. We moved on and found another house.
@ Rob - Like most agents, you probably don't have all the facts.
@Joe - You think that's good reporting? Maybe including the just over 1000 short sales that they have negotiated and gotten underwater home-owners clear of is a story. I suppose you like the Dodd Frank too.
If it was disclosed, if it was legal and if the homeowners had verbiage in the short sale agreement waiving deficiency NOT harming them, then what's your article about? Looks like a confused, frustrated journalist taking an uninformed homeowners side. Then, halfway into the piece they realize the story contradicts itself but run it anyway for the controversy. Anyone in the business knows how this story can be twisted to make an agent look sneaky and sly. The agent didn't say trust me the bank won't ever pursue the deficiency, he would have to show that the deficiency verbiage was waived in the approval letter.
Banks, Fannie and Freddie have screwed the US taxpayers over to the tune of Tens of BILLIONS and you are siting a guess that investors have cost taxpayers $300+ million a year... I think there is a better story if you had the guts to write it, how much have Fannie and freddie cost tax payers? How much is the shadow inventory costing tax payers?
Fun article, I read it!
Short Sale agents are deceptive? Investors are deceptive? Flipping is fraud? The comments on this are astounding and based on lack of education! Investors have money and are willing to invest in the real estate market. They are frightened by banks screaming fraud and agents arent deceptive... they are just freaking ignorant and stupid! As long as their is good disclosure to the the PRINCIPALS nothing else matters... If we keep investors out of short sales then we are just going to have as lack debt settlement.... Investors, agents, attorneys and homeowners lack real education on the law and how real estate really works... do the research on actual case law for flipping before commenting!
This guy is worse than a used car salesman. I have seen his ads and infomercials. Terrible that he has to take advantage of people in such a bad time in their lives.
It's obvious that this reporter hasn't researched the subject matter. Mr. Cuevas hasn't done anything improper here. The reporter should look more closely at the lack of integrity these lenders and service companies demonstrate during the short sale process, most folks would be shocked.
I find this articile to be incredibly one sided and lacking in pertinent facts.
For starters, in a short sale, the listing agent does not have ANY obligation to the seller's lender...NONE. In fact, it's a conflict of interest for the listing agent to be looking out for the lender's interest when the lender is foreclosing on the agent's client. The listing agent has a fiduciary duty to his/her client, not the bank. PERIOD. I'm not sure when the public and agents themselves began thinking that a listing agent on a short sale has a fidicuiary responsiblity to the seller's lender. The lender isn't even party to the contract.
Hopefully we can agree that the listing agent's responsibility is to secure the best possible offer for his/her seller, regardless of what is best for the bank.
So what does best mean?
It doesn't necessarily mean the highest price. If you understand anything about the tax consequences of a short sale, insolvency, etc. then you know that often times it is in the seller's best interest to accept a lower offer on a short sale. If you don't understand this, go and talk to your CPA or real estate attorney and have them explain how insolvency is calculated.
Best could mean, as discussed in the article, a buyer that is able to pay off items that won't be covered by a short sale lender such as delinquent HOA dues, additional amounts to a second lien holder, relocation costs to the seller, etc.
Best could also mean a cash buyer that doesn't have issues with appraisals and potential lender required repairs that the seller doesn't have the money to make.
Best ALWAYS means a buyer that is willing to wait for as long as it takes to get the short sale approved. Thousands of home owners have ended up in foreclosure because a buyer didn't keep his/her committment to wait for the short sale process to be completed.
If you're an agent doing short sales and you are protecting your client, you are making a poor decision if you recommend your client accept for example, a first time buyer with FHA financing over a cash investor. Your job is to find the offer that will go the distance, get accepted by the bank and close. The issue here is that we have so many ignorant agents that don't bother to educate themselves on how to actually negotiate a short sale and protect their clients. At the same time, sellers have a responsibility to really check out an agent and his/her practices before hiring that agent. If an agent has closed one or two short sales, I'd find someone else with a solid, documented history of closing short sales with several different lenders.
As for the buyer in this story, I don't have enough details to be confident in saying whether her situation was handled legally. I can comment that once a contract is signed by all parties and has been submitted to the lender, the seller is in a legally binding contract with the buyer and unless it states in the contract that other offers are going to be submitted to the seller's lender for approval, the seller could be violating the terms of the contract by doing so...even if the 2nd, 3rd, 4th offer is higher. Whenever I represent a buyer on a short sale I make certain that the contract contains language stating that all other offers are to be held as back up and not presented to the bank. That's how I protect my buyer.
In this article, I find it interesting that they used one scenario that did sound a little "shady" but then instead of discussing that particular agent, they basically did a bait and switch by discussing another agent that it appears no one had an issue with. That to me is not solid journalism, it's borderline libel.
If you really want to vilify someone you should be going after the banks and their lack of effective systems for processing short sales and load modification. This does MUCH more damage to homeowners and taxpayers than all the investors (legit or crooked) combined. It's a very slippery slope when you start dictating who can buy what and at what price. I believe that's called price fixing and it's not part of a capitalist society.
It is NOT the bank's right to know about a higher offer. The contract is between the buyer and the seller, period...not the banks.
In addition, imagine going to buy a home and after you sign a contract the seller comes back to you and says "hey, we got a higher offer than yours after we legally contracted with you so we aren't going to honor the contract"....how would that work...legally.