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It doesn’t pass my sniff test, not by a long shot!

January 22, 2010

SmellyIt doesn’t pass my sniff test, not by a long shot!

I know most of us were happy when HUD suspended the 90 day flip rule to help speed up the resale of foreclosed properties for one year beginning February 1, 2010. But there is always someone quick to understand how they can use it to their advantage when it is not a foreclosed property. Three of the key components say that:

  • There can be no identity of interest between buyer and seller or other parties participating in the sales transaction. It must be “arms length”.
  • If the sales price of the property in the “flip” is 20% or more above the original sales price, certain criteria apply.
  • It must be fully disclosed to all parties.

You can read the full text of the temporary policy on the HUD website.

I know I wrote about something similar in a short sale situation where a buyer was marketing a property for sale to another buyer. It is legal, but the 90 flip rule was in place back then and would have made it very difficult to pull off.

ConfusedYesterday I heard about something that really didn’t pass my sniff test. A home that has been on the market for probably at least a year as an “approved short sale” went under deposit. The price has been reduced over time. An offer to purchase was made to the current home owners, the offer to purchase was signed by “someone else”. “Someone else” happens to be the short sale negotiator who worked with the sellers to get the short sale approved. Then it came to light that “someone else” is now purchasing the home, will own it for one day and will be the one to sell it to the people who just made the offer.

I can tell you that the people who put the offer in were not informed. I can also tell you that I am not privy to any other information, but it certainly didn’t pass my sniff test The key points that worry me are:

1. No disclosure to the prospective buyers.
2. The current owner did not sign the offer to purchase.
3. The “arms length” rule, in my opinion (and I am not an attorney) has been violated as the person who negotiated the short sale for the current owner is the one who is purchasing from the seller and selling to the buyer. Arms length, or no identity of interest is defined by FHA “as any relationship where the purchaser and seller are related and/or affiliated through a business relationship”.

None of us will know until all is said and done and deeds are recorded how much profit will be made for owning the house for one day. I imagine that it is being done as payment for the negotiating of the short sale. I am surprised at how fast people realize there is a way to make money when the rules change. Perhaps this is a bit naive on my part, but for me it just doesn’t pass my sniff test. (pass the clothespin please!)

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