Flippers rip off lenders through short sales
Flippers find most of their below-market deals from short sales.
Ordinarily, the IRS considers forgiven debt a form of income, which it is. In 2007 Congress passed the Mortgage Foreclosure Debt Forgiveness Act which allowed borrowers who short sell their houses to avoid taxation on forgiven debt. Many borrowers availed themselves of this tax break and extricated themselves from a bad housing situation.
The Act originally was scheduled to end in 2013, but the huge number of underwater borrowers (and lobbying by reporters and left-wing advocates) got the Act extended through the end of 2014. The usual suspects are back decrying the end of the tax break and lobbying for its extension through 2015.
What makes this round of lobbying unique is the new group of interested parties to the transaction: flippers.
Flippers succeed through buying low
I spent three years actively flipping homes in Las Vegas before the inventory dried up, so I have some working knowledge of how the business works. While most people focus on the renovation, this isn’t really where the value resides. In real estate, investors make money when they buy property, not when they renovate or sell it.
If a property is purchased at a good price, the subsequent improvements and sale merely convert that good purchase savings to cash. If a buyer overpays for a property, no amount of renovation is going to add enough value to dig them out of a hole. Of course, most novices don’t realize this, which is why most novices don’t get past their first flip.
Since the foreclosure market dried up, the only stable source of properties flippers can acquire at undermarket prices has been through short sales. A flipper I know in Riverside county even started a charity to help families obtain loan modifications purely as a source of leads for short sales when the loan modifications failed. Short sales make up 70% or more of the business of successful flippers.
Nobody looks out for the lender
Obtaining a property for an under-market price, by definition, hurts the seller who didn’t get fair-market value for the property. Since the owners on title really don’t care because they have no equity, the only really concerned party is the lender who must approve the short sale, and neither the agent for the seller or the agent for the buyer has a fiduciary responsibility to the lender. The seller’s agent has responsibility to the seller, so they are only concerned with getting the bank to sign off on the debt.
Nobody represents the lender, so in a short sale, everyone wants the screw the lender. The seller is losing their house because the lender wouldn’t forgive the debt (something loanowners think they deserve), so the seller is happy to screw the lender. The buyer wants to get the property at the lowest possible price, so they are happy to screw the lender.
In fact, the only leverage the lender has to get a better price is to threaten to reject the sale, but this only serves to delay the deal, which in turn makes most buyers shun short sales. The only buyers with the patience to wait out these deals are the all-cash flippers, a group likely to bid very little for the property.
An example of a flipper rip off
The property below was recently purchased by a flipper who put it on the market the day after closing for $110,000 more than he paid.
Did this flipper add $110,000 in value the morning after the closing?
If this property really is worth $110,000 more than the flipper paid, how did he acquire it? The rapidity of the offer and closing suggests it was a pre-arranged all-cash deal, the typical pattern of a short-sale rip off.
It should come as no surprise that flippers are the biggest advocates for extending the tax break for short sales.
Short sale extension would also help communities and investors
The U.S. Senate has introduced two bipartisan pieces of legislation that, if approved, will offer much needed relief to underwater homeowners, rejuvenate the Home Affordable Modification Program (HAMP), create and preserve jobs, and spur economic growth. …
Pleasant sounding bullshit, nothing more.
The Inspector General of the Troubled Asset Relief Program issued a sobering report on the performance of HAMP, stating that since its inception in 2009, nearly one-third of all homeowners who received a loan modification through the program have redefaulted. The redefault rate for homeowners who received loan modifications in 2009 surged to 53% in 2014, up from 46% in 2013 according to the report, raising concerns that more redefaults could follow.
While fair and legitimate debate is currently underway about HAMP’s performance, there is no question that there is a necessity to boost its utilization, and furthermore it is in no one’s interest if HAMP continues to underperform.
For the nearly one-third of program participants, passage of the Senate legislation could mean immediate relief in the form of short sale transactions. Short sales allow the borrower and the lender to walk away from a transaction that has failed for both parties with far less damage than foreclosure or defaulted loan modifications.
How exactly is a short sale superior to a foreclosure or a redefault?
Realistically, with foreclosures in such short supply, lenders now recover more on a foreclosure than they do on a short sale. If this weren’t true, flippers would focus on obtaining their supply there, which is where most flips were bought in the past.
Unfortunately, short sale transactions declined dramatically in 2014 because Congress did not pass this crucial tax extension until December. Without the tax break extension in place, underwater homeowners and potential short sale buyers are reticent to execute the transaction because of the potential negative tax consequences. …
The contractors needed to provide the repairs for these homes means job creation and job preservation in communities desperate for economic stimulus.
In addition to safer communities, short sales will generate more real estate tax revenue, bolster local businesses by empowering formerly distressed homeowners with more disposable income and introduce qualified owners with disposable income to communities, and dramatically reduce the threat of the formation of foreclosure clusters that have decimated so many communities around the country. Short sales are a proven commodity for assisting underwater borrowers, and the Senate Finance Committee legislation will ensure those borrowers have access to this crucial transaction. …
More pleasant sounding bullshit.
Hopefully, members of the House and Senate from both sides of the aisle will join with the Senate Finance Committee and extend the Mortgage Forgiveness Debt Relief Act through 2016 as soon as possible. Time is of the essence for this issue because homeowners and buyers cannot exercise the short sale option until the tax extension is in place, and the underutilized HAMP must improve its performance for the sake of underwater borrowers.
No, time is of the essence because flippers can’t find enough short-sale inventory to support their business model.
This legislation is a tangible and philosophical win for both parties that will stimulate the economy, provide much needed help to distressed homeowners, boost job creation and preservation, and breathe new life into a struggling federal housing program.
The tax break on short sale forgiveness is not something I want to see my tax dollars subsidize. I am doubly against it when I see the real beneficiaries of this tax subsidy are professional flippers. I fully support flipping as a value-added function of a free market, but I certainly see no need to help it along with government subsidies.