More On Questionable Short Sale Flipping

In Nashville, Tennessee, The Tennessean reports:

• [S]ome short sale practices are controversial in an industry already battered by rising numbers of foreclosed or distressed properties, and a recent history of questionable mortgage practices. So, regulators and real estate brokers say homeowners must be alert to a slew of potential risks and consequences of a short sale.

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• For instance, some brokers or investors get distressed homeowners to give them a legal interest in the property with little or no compensation, via such documents as an option to purchase or power of attorney. The broker or investor then goes out and tries to find another buyer to flip the property to a new owner. In other words, the investor or broker buys it and then resells it quickly to someone else for a higher price, sometimes on the same day, pocketing the spread. That's all well and good if another buyer is found. If not, the flipper can just walk away and the home is foreclosed.

• [Tennessee] State regulators and real estate brokers said that's all perfectly legal, as long as the practice is being properly disclosed to buyers and sellers. One of those doing it is Heather Benjamin, a broker for Reliant Realty in Hendersonville, who worked with Coldwell Banker Barnes a few years ago. Benjamin, a former model, said she got into the short sale business a few years ago as real estate sales lagged, her income fell, and her own home was foreclosed upon.

• She said she discloses everything to homeowners, including the fact that she is planning to sell the home for a profit, and said the homeowners already are in a desperate situation and need someone with experience dealing with lenders. She said she offers them $10 to $100 for an option to purchase the property. [...] Benjamin said she wasn't getting rich off homeowners but did manage to buy a series of townhomes in Davidson County from an investor in December 2008 for $376,000 and sold them for $508,000 a few days later to another investor.(1)

For more, see Desperate homeowners turn to short sales to unload houses (Sales avoid foreclosure but can come with risk).

(1) Attorneys representing homeowners who, either knowingly or not, have had their properties flipped for profit by a real estate broker, agent or anyone else after receiving nominal or no consideration for the option to buy (or power of attorney or any other device) should take a close look at their state's real estate license law for a way to void the deal and recover, for the homeowner, the profit pocketed by the flipper.

For example, in Florida, the state real estate license law provides for a way to potentially undo such an arrangement for the homeowner and possibly recover, from the flipper, the derived profits (and without regard to any amount of disclosure given to the homeowner - interestingly, there are some people who think they can get away with anything and everything when dealing with people who are experiencing financial distress or desperation, as long as they "disclose" it). Chapter 475.43, Florida Statutes, provides:

• In all criminal cases, contempt cases, and other cases filed pursuant to this chapter [ie. Chapter 475, Florida Statutes], if a party has sold, leased, or let real estate, the title to which was not in the party when it was offered for sale, lease, or letting, or such party has maintained an office bearing signs that real estate is for sale, lease, or rental thereat, or has advertised real estate for sale, lease, or rental, generally, or describing property, the title to which was not in such party at the time, it shall be a presumption that such party was acting or attempting to act as a real estate broker, and the burden of proof shall be upon him or her to show that he or she was not acting or attempting to act as a broker or sales associate.

• All contracts, options, or other devices not based upon a substantial consideration, or that are otherwise employed to permit an unlicensed person to sell, lease, or let real estate, the beneficial title to which has not, in good faith, passed to such party for a substantial consideration, are hereby declared void and ineffective in all cases, suits, or proceedings had or taken under this chapter; however, this section shall not apply to irrevocable gifts, to unconditional contracts to purchase, or to options based upon a substantial consideration actually paid and not subject to any agreements to return or right of return reserved.

In the case involving a flipper who is not a Florida licensed real estate broker, and to whom is applicable the above referenced rebuttable "presumption that such party was acting or attempting to act as a real estate broker" in this type of arrangement, such flipper may be exposed to criminal liability for his/her actions, as set forth in Chapter 475.42(1)(a), Florida Statutes:

• A person may not operate as a broker or sales associate without being the holder of a valid and current active license therefor. Any person who violates this paragraph commits a felony of the third degree, punishable as provided in s. 775.082 or s. 775.083, or, if a corporation, as provided in s. 775.083.

As I read Ch. 475.43 and Ch. 474.42(1)(a), taken together, such a flipper in this case who lacks a Florida real estate broker's license may find him/herself in a position of being presumed guilty unless proven innocent of a third degree felony.

For those flippers who do hold a valid Florida real estate broker's license, Chapter 475.43, Florida Statutes presumes that the flipper was merely acting as a real estate agent, in which case the agent would only be entitled to a commission on the sale, and not the entire profit on the flip. The opton contract, power of attorney, or other device would be treated simply as a listing agreement. The statute places the burden of rebutting the presumption in this case on the flipper/Florida real estate license holder.

For those of you outside Florida, a careful review of your state's real estate license law should reveal whether you have a similar statute. (While I recognize that Florida, as a nationally recogonized "scam capital" may have a need for such a law, I find it hard to believe that it is the only state with such a statute. In addition, it wouldn't surprise me that this statute isn't the original work product of the Florida legislature, but rather, it may be an adaptation that's been patterned after the law of another state - possibly California or another state that provides fertile ground for abuses in real estate transactions).