Thursday Minute  Here is an Interesting Problem, Too Big a Profit!

Thursday Minute
November 13, 2008

You heard it right - Now we seem to have to worry about making too large a profit! It seems the lenders doing short sales want a double closing to not have a profit larger than about 10%. How would they know and why is it their problem? They know because the closing agent is quaking in his/her boots because his underwriter holds the power to take away his authority to issue title insurance and the lender always has the option of saying "no" to the financing. His underwriter's package will simply request a letter from the lender and the buyer, with the disclaimer AND approval from each one, that they understand that the investor is making $700,000,000,000 (oops - that's what the lenders got, sorry), I meant $30,000+ as a profit on the short sale without having any investment in the deal.

For many investor sellers, the point of the double closing was so the investor's profit was "invisible". It's pretty simple, no buyer wants to believe he is paying "THAT MUCH MONEY" to buy a home to an investor who didn't' even own it. It's OK if the buyer believes the realtor's commission is being paid by the seller because it isn't out of his pocket. Ask yourself, as an informed investor, do you believe the seller is really paying the commission, even if it comes off the seller's side of the closing statement?

In California the lenders are prosecuting investors who they have done short sales with where the investor had a signed contract with a buyer for a higher amount, before the lender gives the approval letter. They seem to believe that they discounted the loan because of issues with the property and the general condition of the market. Their justification of prosecution is - "If we were told the truth about the value of the property, we wouldn't have sold it so cheap!" I'm not talking about the short sale specialists who destroy the property or paint the outline of a body on the carpet to motivate the lender, no, I'm talking about any legitimate short sales where the homeowner/lender want out of the property/mortgage and the investor is his only option.

Many lenders send out at least one appraiser and probably 2 BPO's (Broker's Price Opinion) just to be sure about what the value of the property is worth and the expected DOM's (Days on the Market). The irony here is that even the lenders can't seem to determine fair market value using professionally licensed realtors and appraisers, so why are we as investors suddenly liars?

Numerous closing agents are balking at doing double closings where the profit margin is the greater or $50,000+ or 50% of the purchase price. And I'll say it again - "Why is it any of their business?" Just because an investor makes a substantial profit on a transaction, does not mean he has defrauded the homeowner or seller. The seller was motivated or he would not have sold at all. However, the homeowner could always try and sell to the friendly appraiser who say the property is worth $350,000, or his lender who loaned $300,000, or the well-intentioned family member or neighbor who thinks it's worth $400,000, or perhaps the realtor who wants to list it at $420,000.

INSTANTLY, a whole lot changes when you ask ANY of these well-meaning people to "please buy my house". Suddenly, the well-meaning rhetoric turns to common sense and the "value" of the property drops so much they won't make an offer at all. Who then will buy the property that has to be sold? It isn't the State of Florida, not the legislators that pass laws to regulate investors; no it is the "lowly" investor that must come forward and save us from a housing depression. We have been called "bottom feeders" but if it was not for us buying properties, there would be no bottom.

If you don't believe this, think the last time you bought common stocks and "believed" they had some value. Did you get an idea of how fragile the market is when there are a few more sellers? Even the gurus of Wall Street know that if everyone doesn't hold hands that stocks have no value. I don't want to fight with readers buy I learned this from 23 years as a stockbroker and CFP.

What happened to the American Dream of free enterprise? As a small business owner don't we have the right to make as much of a profit as possible on a deal and not be considered as defrauding the buyer/seller? Someone must have forgotten to tell the oil companies but - I guess they have better lobbying groups.

We had a closing where we were to make $40,000 as an assignment fee on two duplexes. The buyer's lender declined saying we were making too much on the transaction. The solution was that a partner in the firm was a realtor at the time so we called the $40,000 a commission (and paid it to our realtor partner) and the lender happily closed on the deal. This $40,000 was a 20% realtor commission, but that didn't even bother the lender. So if a realtor charges the same as an investor makes on a deal, the investor's "profit" is too high but there seems to be no limit on the realtor's commission.

Anyway, I'll stop ranting and get to the point. The State replaced the old Statute 501.2078 with the new Statute 501.1377 because the former was too vague about what "victimization" of a homeowner actually was. It makes it hard to prosecute, but also hard to defend yourself if you are being prosecuted.   So the question is - "How much profit is too much?"

Lenders, through the FBI, have approached title companies and "pressured" them into reviewing files with substantial profits for possible "victimization" of the sellers. Instead of risking exposure of losing their ability to issue title insurance, many closing agents have opted to tell investors to go elsewhere to close - at least the sell side of the transaction.

SOLUTION - PRESENT YOUR ENTIRE DEAL TO YOUR CLOSING AGENT BEFORE HE OPENS THE FILE so he is not "blind-sided" later and has the legal liability to not do your closing.

I have always had a great deal of interest in Land Trusts. Some time ago, an investor called me about purchasing an REO in a Land Trust to avoid the seasoning issue. I told him the lender wouldn't sell them the property (REO) into a trust. He asked a great question - "Why?" and I said "They just don't understand trusts and they always want to be in control". He explained he did what I had said about asking his closing agent first and the agent said it was "OK". I told him I was surprised, but I had been wrong before.

The investor called back the next day and said he had closed but NOT in the land trust because the lender wouldn't approve the sale into the trust! I'm not sure what in the world the lender was thinking but they should have spent more time on the amount they decided to take for the REO, because the investor had a buyer for 200% MORE than the sale price.   This means that the REO went for $80,000 and his buyer was paying $240,000! This was not a short sale, it was an REO so the lender had to have done HUGE due-diligence on the property to determine FMV.

Was the lender "victimized" because the investor made so much money? The answer is in the eyes of the beholder - the lender probably thinks "yes", the investor obviously thinks the lender is stupid and he has only done his best, and the buyer is happy as can be because he got a great deal on the property.

The next issue was the fact that he had to close with the buyer who needed conventional financing and the "new" lender's closing agent would see on the chain of title that it was purchased for $80,000 and sold in a in a few days for $240,000. Forget the seasoning issue, the new lender is going to run from the deal because he will be SURE it is fraud. There is at least one legal solution to this issue and I suggested it to the investor who did as I said this time, and the REO lender/seller, the buyer and the investor, lived happily ever after - and it was a legal solution. Don't write or call me and ask.

To your limitless success,
Dave Dinkel
Exec. VP BREIA