This is a topic that is near and dear to my heart because quite frequently I see peculiar short sales that really make me scratch my head. Ashley Gross of Chicago's WBEZ radio station just aired an awesome story on how a few Chicago realtors, mostly with one particular real estate brokerage, have managed to walk a very fine ethical and legal line to make obscene profits flipping short sales. Yes, even in this market.
The story starts with the perplexing experience of another WBEZ reporter, Susie An, who put an offer in on an Avondale home back in March but was outbid by an investor who offered a lot less. Yeah, that's not a typo. And even if the investor offered all cash it wouldn't explain why a bank would take $160,000 vs. $250,000, except that maybe it had something to do with the fact that the bank never knew there was a $250,000 offer on the place. And the investor was another realtor named Marcie Schmidt who worked with the listing agent at Exit Strategy Realty. Hmmm. The plot thickens.
So Susie An eventually ends up buying the home from Marcie for $285,000 and Marcie makes a quick $125,000 less any transaction fees. Meanwhile the bank loses that $125,000 and maybe that loss gets passed along to PMI, that recently went bankrupt, or Fannie Mae and Freddie Mac and the American taxpayer. Geez. I thought we were done with people gaming the real estate market. Note: we don't know for a fact that Marcie did anything wrong because she wouldn't talk to Ashley.
The Really Big Chicago Fish In Flipping Short Sales
Well, Ashley is a pretty good reporter so she got curious about what else was going on at Exit Strategy and found out that a realtor named Mike Cuevas, who is a team lead there, has been doing a ton of these transactions. In fact, by her estimation he has grossed $800,000 over the course of just 13 short sales where he stepped in as an investor. Fortunately, Mike agreed to talk to her so we have a pretty good idea of how the process works - and the sequence of events is important:
- He gets the homeowner to give him an option contract to buy the home at a pre-determined price.
- He records that option so that it is public record
- He then initiates a short sale with the bank at that pre-determined price
- He then lists the home as if he owns it since the option contract gives him the right to own it
- During this entire process he fully discloses to everyone involved what his role is and that he is likely to make a profit
- Once the bank accepts his "offer" and he has another buyer lined up at a higher price he can almost simultaneously buy the property from the bank at one price and sell it to his own buyer at a higher price
So how does Mike Cuevas justify his profit? Well, frankly, he doesn't need to. If he can buy something at one price and resell it at a higher price without breaking any laws or ethical standards then all is good. Nevertheless, he can justify some of the profit by virtue of the fact that he has speeded up the process for the ultimate buyer and also simplified it by settling any outstanding liens - except it's not clear to me how he can give more money to second mortgage lienholders than the first lienholder would normally allow.
From my point of view, if all these shenanigans were really being disclosed and the banks still accepted them then the banks have no one to blame but themselves. Let's face it, the banks routinely demonstrate how dumb they are. However, as Ashley discovered, the banks and Fannie and Freddie finally figured out that they were leaving money on the table and they basically shut down this business by imposing a lot more restrictions. Consequently, Mike Cuevas hasn't done any more deals like these since March. But he had a good run while it lasted.