The Truth Behind Those "I'll Buy Your House!" Signs

Every time real estate is the topic of conversation, everyone is talking about short sales.  So what is a short sale?

A short sale is when the bank is owed more than what a home is worth in the current market and the Seller doesn’t have the cash to bring the difference to closing.

Most people forget about the second part. 

A seller must have hardship for the bank to accept less than what they are owed.  If a Seller has cash reserves that aren’t tied up in retirement funds or penalty investments, most likely the bank will want the seller to use those funds to make them whole.

This is when most Sellers turn to a real estate professional to receive guidance through this complicated type of transaction. Legal and tax advice could also be required.

But it's a daunting process that most don't want to undertake. And one that often leads to victimization.

Enter The $10 Option Contract.

You’ve seen the signs around town,“We Buy Houses Cash” and “Avoid Foreclosure, I’ll buy your House!”

The back story to these companies is there's an individual or company (often a Realtor) who asks for the seller to sell them the option to purchase the home for $10. For $10 they ask the seller to sign and notarize the option contract, which they then record in the public records.  This option contract effectively becomes a lien on the property and their interest in the seller’s house. 

The financial and emotional stress may be affecting their ability to think straight about the options. These smooth talkers propose something that seems like a viable solution.  So what exactly do they do after they record the assignment?  They work with the Seller to compile  hardship documents and submit them to the bank. They put the home on the market with a Realtor at or just below market value.

For our example let’s use $150,000 as our sale price and $125,000 as the investor approved short sale price.  Prior to submitting any contract to the bank(s), they work to agree an the short sale approved price of $125,000 with the bank(s).  The goal is to find a buyer who will pay the sales price of $150,000.  Since there is a profit of $25,000 in the above scenario, investor chooses to exercise their option to buy the seller’s house the same day they sell it to the buyer for $150,000.  The investor nets $25,000.  They argue they have sold the home and agreed a short sale for the seller. Many also argue that disclosure to all parties is all that is needed in this scenario.

So why would it be unethical?

A couple reasons include, the bank had the first lien on the property and is entitled to recoup the most they can out of their loan which is secured by the home. In this scenario they have recouped $25,000 less than what they would have been able to achieve in a normal short sale.  Second, remember a seller is often liable for any deficiency between the loan and the net sale price.  Thirdly, there will likely be larger tax consequences for the seller in this scenario.

So an unrelated third party inserts themselves in a short sale for $10 in the interests of greed.  In the meantime, they are swindling banks of the money to which they are rightly owed pursuant to the note and creating a larger deficiency for the seller. The investor is essentially increasing the amount of the deficiency attributed to the seller and putting that money in his pocket.

This clearly puts the investor and/or realtor’s interest in front of the seller which, in my mind, is not acceptable.  This type of unethical and immoral activity doesn't benefit anyone, except the greedy investor or realtor.

So, if you are approached for this type of scenario, do yourself a favor and get a second opinion from an experienced and well-established real estate professional or a real estate attorney before proceeding.