You may have noticed a proliferation of “strategies” initiated by buyers/investors to try to capitalize on short sale opportunities. They are obvious to spot, as they each use some type of unique vehicle, such as the use/creation of a trust, land trust, limited liability company, or option arrangement, and essentially involve two (2) transactions (referred to as “Transaction A,” wherein the seller sells/conveys the property or the beneficial/ownership interest in some type of trust/entity to the buyer/investor, and “Transaction B”, wherein the buyer/investor subsequently conveys the same property/interest to the eventual third party Buyer for a profit).
While many of these strategies may be quite legitimate if properly and thoroughly disclosed, they all share in common one potentially large pitfall. They each have the potential (and in many cases are purposely designed) to conceal (a) from the seller and/or the seller’s lender the details of the final or “true” sales price associated with Transaction B, and/or (b) from the ultimate buyer and that buyer’s lender, the details of Transaction A. None of the strategies that we have seen require full and complete disclosure of the final contract price and terms to the seller or the seller’s lender (associated with Transaction B), or the initial contract price and terms to the final buyer and/or the final buyer’s lender (associated with Transaction A). In our opinion, this poses a significant problem for real estate agents.
If you represent a seller, the seller’s obvious goal is to sell its property for the greatest amount possible thereby reducing the potential deficiency. Each of these strategies, however creatively structured, are each designed to minimize the initial sales price in an effort to ultimately sell (or flip) the property to a buyer who is willing to pay more for the property. If you cannot justify to your seller why you are encouraging the seller to sell the property for any amount less than what you think (or worse yet, know) what the property can actually be sold for (or worse yet, why you are encouraging the seller to allow the buyer or the buyer’s attorney to negotiate the short sale on their behalf, knowing that their objective is to negotiate the lowest price possible), you are running the risk of significant legal liability to the seller or seller’s lender.
We believe that at some point in the near future, sellers and/or their lenders, and maybe even buyers and their lenders, will attempt to seek legal action against parties who failed to thoroughly disclose the fact that certain property sold for more money just days or weeks after it sold for less (particularly if one or more agents is earning a commission on both transactions).
We will be blogging these strategies on our website when and as they come to our attention so that you can remain properly informed. We strongly encourage you to contact a lawyer if you are presented with one of these opportunities to assess the risks and potential liability issues.
Written By Attorney Evan Berlin, Esq – Partner