Thursday, October 9, 2008
The Flim-Flam Short Sale
One of the better morality movies from the 1960's was George C. Scott's The Flim-Flam Man. He played Mordecai Jones - a penny-ante con man that rode the rails and took the money of Southerners. "You can’t cheat an honest man" was his motto. But he had no trouble cheating would-be cheaters.
I have seen several properties that have been offered as "Short Sales" in the Key West Association of Realtors MLS that are Flim-Flam. Flim-Flam can be defined as "a trick or deception, especially a swindle or confidence game involving skillful persuasion or clever manipulation of the victim".
The concept of a Short Sale is pretty simple. A home owner needs to sell his house quickly because of some impending situation such as a potential foreclosure, illness, marital conflict, etc. So Seller lists the property at a price he hopes will attract a potential buyer. In turn, the Seller hopes his lender will agree to accept a discounted payoff of his mortgage (an amount less than what is owed). If this occurs, the seller theoretically walks away from his problems and resumes a somewhat normal life without the burden of whatever precipitated the need to sell.
The above scenario is playing out with more regularity now across America. It pre-supposes the seller, the buyer, and the lender are each acting in good faith with respect to their competing interests in the sale of the specific property and the potential forgiveness of some portion of the debt. The parties negotiate their best deal based on their competing interests and submit an offer to lender to approve the deal. At that point the lender usually gets Broker Price Opinion (maybe a drive by appraisal by a local Realtor who estimates the fair market value of the property in the given market). Assuming the broker's opinion supports the contract price, the lender would then order a full appraisal and start the process to obtain final approval under the lender's credit authority to accept the discounted payoff.
I have seen a few sellers that have properties listed as Short Sales that are pulling a flim-flam on their lenders. This is how it is done. Seller lists his property for sale at a ridiculous price for a given market. In Key West the asking price might be somewhere around $1000 to $1300 or more per square foot for a nice house in Old Town, The Meadows, or The Casa Marina Area. There are very few houses that would sell for those prices in the current Key West real estate market. Yet the seller dictates the high listing prices.
Let's imagine that the seller owns several such properties in Key West. Let's further imagine that seller has each property rented. Let's assume that the tenants pay their utilities and that they send their monthly rent checks directly to the would-be seller. For grins sake we'll assume the seller gets $2000 per month net on each house. Let's make the scenario more interesting. Let's assume that the seller has not made a mortgage payment to his lender(s) since July 2006. If my math is correct the seller would have collected 26 months rent of $2000 per month for a total of $52,000 (for each house) without making any payment to the lender.
Let's add a different dimension. Let's assume the seller lets the "tenant" control when the house can be shown. A lot of tenants "work nights" so that means showings can only occur during certain hours and usually require at least 24 hour advance notice to tenants. The more impediments the seller or his tenant establish to limit the showing the short sale property the more likely there will be no offer on it. Likewise, the higher the asking price, the less likely the property will be shown because buyers are looking for deals not ordeals.
Here's another wrinkle some would-be sellers have devised. They require the listing Realtor to exclude certain parts of the real property from the sale. Examples could include that shiny new Viking stainless steel stove and refrigerator, or that ornate crystal chandelier, or whatever. Those are usually items that were in the property when the seller bought it or added to the property through renovations paid for by a loan on the property. Even though the mortgage covers these new fixtures as becoming part of the real estate, I've seen many sellers treat them as their own private property which they can keep as a souvenir of the once treasured house. And nobody is going to stop them.
The sellers who are achieving short sales in Key West are the ones who have listed their property for sale at a price that is targeted for this current market. The price is not related back to a time when the house may have sold for a higher price nor even to an old appraisal. An appraisal that is more than a year old is worthless in my opinion.
Almost every mortgage I have seen has an assignment of rents provision in it wherein the borrower agrees to give the lender any rents he collects in the event of default on the mortgage. Lenders typically don't enforce this and the borrowers (sellers) keep the rent. So it is not in the interest of a flim-flam short seller to get a short sale accomplished.
If you think I am exaggerating or making something up, you are wrong. There are a bunch of people in Key West who own several properties that are collecting rent but who are not paying their mortgages or taxes. There is no reason to do because they know they will lose the property at some point in time. In the meantime, they get to pocket the loot. We may cheer that the banks are getting hosed by these flim-flam would-be short sellers. But when you consider the "Bailout" or what the President now calls "Rescue Package", we are collectively letting the flim-flam short sellers take money out of our pockets.
And this tidbit may get you a little miffed at the tenants. They often claim to be abused by the awful landlords. Many eventually stop paying rent when they figure something is up. That can occur when the property is listed for sale or when the sheriff posts a public notice on the door advising the property is subject to foreclosure. If the tenant holds over and does not vacate the new bank owner must file an eviction. That costs more money and takes more time. So some banks give up to $1500 in relocation money to tenants to get them to leave without being evicted. Again, it looks like the taxpayers are going to help subsidize this into the future as well.
There are many good and decent people that are facing real adversity right now. My point is not to make lite of their predicament. Their pain must be awful. It just riles me that there are some really devious people that continue to use the system to their own advantage even as they sink into mire.
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Gary Thomas in a Nutshell
- Gary Thomas
- Key West, Florida, United States
- I first read about Key West in a magazine called "After Dark" sometime in the mid 1970's. But it wasn't until March 1984 that I made my first visit to the island that would become my home. I had two weeks for a vacation and reserved a room at Colours Guesthouse (now Marrero's Guest House) for one week. I thought that if I didn't like Key West, I could always go back to Miami or Ft. Lauderdale for the rest of my trip. But after a couple of days in Key West, that was no longer a consideration. But when I wanted to extend my stay for the extra week I found there was no room at the inn. The guesthouse owner did find me a room at LaTeDa, the infamous guesthouse/restaurant. That's a story I'll write another day. But those two weeks in Key West gave me the realization that I had found Paradise. Key West has been my home since 1993 and my only regret is that it took me so long to get here. I am a full time Realtor at Preferred Properties CRI. Let me help you find your new home or business in Paradise. Living in Paradise is not a slogan, it's a way of life.