A double, double escrow on the same street by the same broker!
The big benefit to him is to make the both sides of the commission paid by the bank on the short sale. He probably made $70,000-$80,000 total – more than the investor made flipping the re-sales. This type of listing agent fraud is happening every day. I know, if the bank approves the deal it’s their fault, but this broker is doing double escrows which are illegal if not disclosed – and do you think he told the bank he had a second buyer in escrow paying substantially more for the same house, closing on the same day?
The first shown here is just as bad though:
Makes me want to barf into my keyboard.
Why doesn’t the banks bring the fraudsters to court?
Or just hire a 3rd party law firm to watch for fraud on behalf of the banks. Anything they get from the fraudsters they keep.
It just doesnt make sense. Either the banks are totally inept. Or they’re involved in the shady deals.
This cr@p is ridiculous jim.Is there any enforcement in real estate?why doesnt anyone arrest these white collar criminals?
What street are these houses on?
732773317335
Paseo Capuchina
The board of realtors knows this is happening, and does nothing to stop it, or penalize the agents – they could at least kick them out of the membership.
What are they doing besides the annual chili cookoff?
Both NAR and CAR sent urgent emails yesterday warning of the impending assault on the MID.
http://www.facebook.com/realtoractioncenter
An agent sent this around (with spelling errors):
“Elimitating or even limiting the mortgage intrerst deduction would be the death of our business.”.
I think Congress, SHOULD limit the mortgage interest deduction AND reduce spending!
I guess the guy considers this his “finder’s fee”. It’s like there’s a bounty out on every short sale that says “make big bucks if we priced it wrong”.
Well as Jim pointed out, this is either illegal by the agent or dumb by the bank.
Why should the banks care? Their losses are being underwritten by the US taxpayer.
shadash, I think “the banks are totally inept” is a safe bet at this point in time. Evidence to the contrary is pretty thin.
The purchase contract with investor as buyer disclosed that ‘the investor intends to promptly resell for profit’.
I’d ask that you please stop with your inflamatory fraud accusations, although the only thing you will stop is this post from being published.
You are saying that the banks saw that verbiage, and signed off anyway? They knew about the double escrow?
If so, then I will stop with the inflamatory fraud accusations. Henry the agent didn’t return my call on the first one.
The purchase contract is presented to the bank as part of the short sale package. This is sufficient disclosure and more than sufficient to defeat any claims of fraud or impropriety.
Fair enough, then it’s on the banks.
I’ll either delete this post, or run a retraction. I’d rather run a video retraction this weekend because there is a large audience who watches the youtubes only, and don’t read here.
I guess if it’s legal then it’s ok? This is what’s wrong with this country! 🙂
So the job of a Realtor in a short sale is:
1. Figure out the lowest price the bank will accept.
2. Sell it for market price (through “Short Sale Investor”?)
3. Pocket the difference (with “Short Sale Investor” getting a cut?)
I’m no attorney but “the investor intends to promptly resell for profit” reads a bit different than “the investor has already initiated an escrow contract with a buyer willing to pay more than the investor will be paying”.
Legal, sure. Ethical, that seems questionable.
Some of the banks are smarter than others in that some require all parties to execute affidavits at closing which prohibit flips for thirty or more days and additionally bar them in the estoppel letter. An investor or agent who participates in flipping a home under these circumstances is guilty of fraud.
But more likely than not, when you see a home flipped (even on the same day), it’s because the loss mitigation rep at the bank either did not take the time to read the contract, or simply did not care.
“simply did not care” is shorthand for “we’ve got our losses shunted off onto somebody else, so we don’t give f***.”
More dirty realtor tricks at the Ucar murder-suicide house in San Clemente. Trying to cover up a cracked foundation and not disclose it because the sellers (heirs?) don’t live there and are overseas.
#14 is correct. There is a difference between disclosing that the transaction is an investment/flip and a technical double escrow.
There is also a difference between the investor’s obligations (few to none) and the agent’s ‘agency relationship’ with the bank relating to specific statutes regarding a ‘double escrow’.
thus, the investor can be clear and do no wrong (and bravo for them!!!) while the agent fails to disclose the double escrow and perhaps violate their fiduciary/agency relationship to the bank.
2 distinct issues at play here.
Perhaps the gray area here is that in a short sale, is there actually a true agency relationship between the bank and the agent? Since the bank is NOT the owner but simply internally approves taking a smaller payoff than they are owed perhaps the agency relationship is with the underwater seller and the agent owes no fiduciary duty to the bank???????
While licensed, I am not a practicing agent so others may be more intimately versed on this agency relationship than myself.
I agree.
The investor should be clear of any repercussions with the one sentence included – if the bank signs off, then too bad for them if the investor is rewarded later for superior knowldge and expertise brought to the table.
The agent? Technically doesn’t owe the bank any fidiuciary duty, but that’s the bank’s fault too. They don’t have to hire their own listing agents, all they have to do is make this one sign an agency form, declaring their fiduciary duty to the bank too. Simple enough, but a new idea that doesn’t fit the mold – hence nothing is done.
Do agents have an ethics duty to bank or community? Probably an individual choice, not imposed or implied, in spite of the hokey “Code of Ethics that all realtors adhere to”.
Pure incompetence that the bank allows a seller to have ANY control over the SS process. Seems simple enough to fill out the Agency form and have the seller sign away whatever it takes to move all sale authority to the bank and away from the seller. All this should be achievable while still shielding the bank from technical liability during the process (which is why they like SS’s vs taking title to the property via foreclosure…think slip/fall, bomb factories, insurance issues, etc).
ps: if there are defined disclosure rules for a double-escrow then those need to be followed. I would think you could unwind a transaction if it later turns out that these laws were not followed.
I think what you all are missing here is that the banks are doing everything they can for homeowners and at every opportunity. They’ve implemented HARP, HAMP, HAFA and every other initiative in record numbers with tremendous success. They’ve acted in the best interest of each and every homeowner by offering affordable loan mods and in an across the board waiver of deficiency balances on all short sales.
Given all of the above, I think the least these homeowners can do is to ask their real estate agent to pledge their fiduciary to the bank. I think this is particularly true in jurisdictions of judicial foreclosure where the bank is suing the homeowner/client.
(/snark)
I do some of these “slimy” short sales….yes, they’re not kosher…but, as noted, they are legal.
I don’t hold any ill will towards the investors, the problem is with the agents, on a few fronts.
Short Sale Investor, I appreciate you coming back and adding texture – one more question.
Did the agent, who has a fiduciary duty to do what’s best for the seller, make sure that the bank gave the seller a release of liability?
In both of these cases, the sellers had refinanced, so the new lenders had recourse. If the agent didn’t get a release, then he breached his fiduciary duty unless he told the sellers and they didn’t care that they’d be on the hook for paying the difference.
But even if the sellers were OK paying the loss/difference owed the bank, the agent still had the duty to sell it for top dollar, which we know was $750,000 and $735,000, respectively – and we know because they sold the same day for that in spite of very limited exposure to the open market (a couple of hours).
Could the agent claim he only represented the investor buyer? Not if he inputs the properties onto the MLS as listing agent which he did in both cases.
BTW, he used the same MLS remarks for both, are you ready? Here they are:
“Beautiful house – Must see!”
The seller probably got a cut. Would that have to be disclosed?
Hmmm . . . Could these double-escrow sales be used as a technique for a short seller of a foreclosed property working in conjugation with a confederate (to use magician’s parlance) in order to extract money out of a process that ordinarily prohibits this? What’s to keep first “buyer” from splitting the proceeds with the seller upon same day escrow to second (real) buyer? Too many loopholes in the whole foreclosure business with little regulation or oversight, IMO.
“Beautiful house – Must see!”
Four words for MLS remarks, Jim? I’m curious about one thing. Is the vast majority of MLS remarks which are similar to the above nearly always short sales or REO’s?
Fascinating,
Instead of investing, these groups are engaging in arbitrage. I’m not on my high horse if it’s legal…BUT I would just like to say this.
There’s a sucker born every minute and both the short sellers (the banks) and the new buyers are being happily fleeced by the middlemen (i.e. short sale investor).
Short Sale investor is not willing to gamble even for a couple of days on the open market. Instead they market in house and take the offer that will close as near as possible to the date and time of day that they actually have to “own” the house. It’s far more important for Short Sale investor to clear the 8 percent profit immediately than to gamble on getting 10 or 11 percent if they had to hold that nasty property for a week or two.
That’s arbitrage pure and simple. Do the deadbeat’s….er sellers know they are being arbitraged? They probably wouldn’t even get it. And do these pocket buyers know they have given 60 k for free to and arbitrager? They wouldn’t have been able to find out about the deal if it weren’t for these “savvy” arbitragers. Suckers! One and all.
These transactions are an affront to transparency but in the grand scheme of things, if the banks don’t care and the suckers…er buyers don’t care then let the arbitrage roll!
The ‘C’ buyer on the B-to-C leg of the transaction is informed in the B-to-C purchase contract that ‘seller does not presently own the property and intends to take title to the property immediately prior to closing’.
And what kind of ridiculous-cave-man-comments are these asking if the ‘C’ buyer is ok with a ‘middleman’? Of course any sane person would love to purchase a home cheaper if they could, but fortunately, contract law exists in our civilization.
Nothing to see here. Move along.
Thanks for commenting SSI.
Most sane people find it irritating that you can set up a no – lose “investment” just because you captured the short sellers real estate agent. Your capturing of the Agent is the only reason that you can execute this arbitrage. Even a caveman can make a profit on this deal. Seriously, you are too cowardly to hold that nasty property even one day!
But hey more power to you!
No, I also do rehabs.
BTW, the really irritating part is that same-day closings can be accomplished with borrowed funds (i.e. no money down).
That’s taunting now.
Let’s be clear – if you were the investor on these, you didn’t borrow traditional mortgage money to purchase, then then flip. There is no record of mortgages recorded on the first purchase. Borrowing private money that goes unrecorded isn’t the same.
Google ‘transactional funding short sale’.
That’s fair SSI.
I admit I had an emotional reaction to this whole story. The emotional reaction comes from 2 things. One, it looks like a no – lose “investment” and I wish I could have such opportunities. Two, it looks like Jim’s buyers never had a chance at these two places and most commenters here like Jim and some are potential buyers. I think every property should be marketed to all the buyers but life’s not perfect.
You are right though, SSI. The double escrow transaction is perfectly legal when both sides of the transaction know of the middle man. The locking out of potential buyers is not a legal issue. This fine blog post ( I don’t know if the author is a lawyer though many contract laws are stated int he article ) cites the relevant legal clauses involved http://firsttuesdayjournal.com/flipping-the-assignment-of-purchase-transaction/ . I also learned from that article that FHA buyers can participate in double escrows until Feb. 2011.
Anyway thanks for a great article and great comments.
Peace and farewell to all.
SSI
I don’t believe agents anymore at all. Most of the time we’re being told there are multiple offers…
I think those are flat-out lies.
JTR – I too know many people willing to fund ‘double escrows’ with the type of funding mentioned by SSI. they too see their funds as a very risk free transaction in which to make a few points in a few days. Its a nice deal if you are have a very sophisticated advisor who knows the nuances of the contracts and laws so you know what you are dealing with. its not really property risk, but rather transaction risk.
As an additional example of non-traditional financing we ‘borrow’ money all the time for our purchases but just not from banks or the traditional private lenders. Thus our commercial properties ‘appear’ to be all cash purchases.
We simply ‘borrow’ in the form of preferred units/shares in our LLC/REIT, which earn a fixed yield and preferred payments of this yield and preferred return of capital. However, they don’t participate in the upside. end result is the preferred shares function mechanically just like a 3rd party loan (we target a 50% LTV in the form of preferred shares vs. common shares).
We do this for 2 reasons: 1) so we can close fast with one big check and no reliance on bank funding to close; and 2) to be ‘foreclosure proof’ if the property hits a snag. Even if we cannot pay the preferred dividend the property won’t get foreclosed.
This is all to point out that there are many ways to achieve your end real estate goals which vary from the one dimensional ‘textbook/traditional’ approach.
Clearfund,
Since REITS by law have to pass-thru 90% of their profits, how do the common share holders under your stucture get paid dividends? They are in a much higher risk position in terms of liquidity and/or exit stradegy, not to mention they cannot recapture “lost equity’ by having no rights to foreclose.
Under your structure the common share holder seems to be ” mezzanine private equity” investors with no collateral rights or claims.
This type of “structured finance” is more common in the commercial world of MBS/commercial private equity deals, but for your basic “ford and chevy” SFR type of lending, most private investors will want some type of security or collateral as opposed to shareholder rights unless you are a public traded REIT.
It looks like one.
It quacks.
It waddles.
Water flows off his back.
It is a duck.
Welcome to real estate.
Econman – Perhaps it was a weekend of being mr. mom, but your post is a bit unclear to me.
Couple quick points where we may be missing: 1) the scenario presented uses ZERO 3rd party bank debt (thus our preferreds are effectively in the 1st postion with a claim on cash flow and principal); 2) perhaps we are envisioning preferred/common in different ways from each other.
Our common units/shares have full equity ownership rights, subordinated to the preferred (again no different being subordinated to a 1st trust deed from a bank).
In a deal our common unit/shares receive all the cash flow after paying the preferred shares their yield.
This is exactly what would happen if we had 100% common units/share and a 50% bank loan. Bank is 100% preferred and gets it yield first with the balance of cash flow coming to the common ownership.
Thus I am unsure why you feel the common are in an unusually disadvantaged position relative to a traditional equity real estate deal financed with bank debt.
There is no ‘mezz’ position as there are only 2 traunches in the entire capital stack: preferred and common.
Your view of preference and equity rights would be very accurate if a first party bank loan was added superior to the preferred shares. That’s not the case here.
Econman – ps: to clarify, we are purely talking “commercial private equity” deals on our side and not simple “ford and chevy” sfr investing or sfr trust deed lending.
Thus, its a different animal from the common SFR world. No better, no worse, just different.
Point of the post was to share that you can create a deal’s financial structure in a thousand different ways depending on the needs/abilities of the parties involved.
In our case we have clients who wanted a good, stable yield well above current CD rates backed by good current income, and a 50% equity cushion, but are not concerned about upside. Thus we reverse engineered the ‘preferred shares’ so we could keep them in the family.
The equity guys are looking for mid-teen IRR’s and prefer paying the interest to the preferred guys first instead of paying interest to the corrupt banks…
Clearfund,
Thank you for the more detailed break down of your ” commercial private equity deal”.
I hope JTR is ok with a couple of commercial guys on his SFR/RE forum…… LOL
Let me try to clarify my very muddled comment.
Lets take a look at your capital structure assuming a $10 million dollar investment with 2 tranches.
Capital stack
50%Preferred shares/ 5 million
50% common shares / 5 million
Total Captilization 10 million.
Lets assume this is an “A type” of building with an 8% cap rate, and cash flow after mgmt fee,vacancy, TI’s, taxes, insurance,maint, reserve, etc, leaving aprox 500k net. The preferred guys will get a fixed yield 0f 9% or 450k, leaving the common guys with a “pass thru”bone of 50k, and hope of “upside equity” down the line.
In the above scenario what happens if the property declines in value by 20%?
What happens if cash flow erodes and the preferreds dont receive promised yield?
I am interested because you mention that you are “foreclosure proof” because you have no debt to service, but I assure you when the preferred shares stop getting the expected yield, they will pressure Mgmt to explore adding leverage to boost yields or worse file for chap 11, wipe out the common shares, and offer some type of equity/debt swap at best, all while the Mgmt collects it’s fee’s not to mention legal and accounting costs when everything starts going to the basket…………….LOL
I underwrite these deal’s from a loss mitigation point of view, and I find in “all equity” deals they can be just as risky as having the crooked banks involved.
I really appreciate your well thought out comments, and thank you for your time.
PS Clearfund,
above are some of the reasons why I beleive common shares are at risk. I would interested to know how your MGMT team can mitigate not only some of the market risks, but greedy shareholders,MGMT risk, etc
The point here, I think, is that the bank should get the profit that the instaflipper is getting. SSI is contributing nothing to society, not even sharing the risk. What should happen is that the bank should sell it to SSI’s buyer.
Econman – By your numbers it is clear you understand ‘how’ deals work. However, it is clear that you are not actually managing/creating deals because the numbers you choose are out of line with today’s reality.
No one would ever be foolish enough to pay a 9% yield on a preferred share at an effective 50% LTV. We’d go to a bank and get bank financing before paying that high yield. We can get 5%-6% bank loans at that LTV. Thus, your financial proforma analysis breaks down at that point.
Second, in today’s market you can acquire a $10mm deal with an 8% YIELD (before debt service). Thus we have an cash flow of $800k.
$800k cash flow
($100k) mgt fee
($300k) 6% preferred shares
———–
$400k to common
8% yield to common plus upside upon liquidation
Your questions about eroding of value by 20%: not good, however, we can ride it out if the shareholders wish to hold on.
Cash flow decreases so that the preferred don’t get paid: If you cannot achieve enough cash flow to pay a 50% ltv preferred at 6% then you would have been in foreclosure already with a bank and lose 100% of your equity. Our structure handles these events internally with predefined structures/remedies which allow for workout restructuring, but not losing to foreclosure.
Real estate is a risk investment (what investment isn’t). From your comments, you are obviously a hyper risk adverse person, which is great. Thus, my question to you is if an ‘all equity’ deal is so risky, how would you ever invest in any piece of real estate? Perhaps a CD is your risk limit….
If you have a safer structure in mind I am totally interested in learning. Removing risk for my clients is of utmost importance!
Mr Clearfund,
Your above pro-forma accounts for only a MGMT fee and debt service to the preferred’s no other expenses such as property T&I,Improvements (unless it is industrial warehouse)maint, etc, so not sure how you can find those yields unless it is an inferior location and is not backed by an S@P tenant.
Our Investors can get 10-15% yields in the public markets, with REITS such as CIM and NLY.
6% for a non-liquid private equity deal(Iknow it is at 50% LTV)is subject to a “liquidty trap”, not to mention is not diversified by nature.
Our group has not found any singular structured commercial deals in the last 5 or so years since we entered the bubble phase of 3-5% caps.
We have owned properties in Inland Socal, Ohio, AZ ( dont want to know about that one),Texas,Wash. We have never found a solid deal in San Diego area, but have seen some investors we know have success with purchase leasebacks with good equity positions.
We like Health care campus, university extensions campus,warehouse/logistics ( with solar credits on roofs), and deals which can be “credit enhanced”
I must admit you have “peaked my interest” as to where you can find investors who are willing to accept 6% yields, with a “huge hangover” of disasters looming, especially in SD commercial.
I don’t mind you Bentley guys in my Chevy/Ford world…..
PS clearfund,
by the way I am a huge risk taker when you consider that I invest in highly leveraged mortgage REITS with up to 8 to 1 leverage, but practice very disciplined risk management practices.
JTR – I own a Jeep!!!
Econman – no real interest in defending our model or dissecting your model’s pros v cons. Some like a decent rate, some like upside, and some don’t like to play. Our model works for our groups. 8-1 leveraged deal may work for your guys (very familiar with nly etc) we just play on a simpler sandbox for simple returns. Nothing fancy.
If you have a safer structure in mind I am totally interested in learning. Removing risk for my clients is of utmost importance!
No one would ever be foolish enough to pay a 9% yield on a preferred share at an effective 50% LTV
Sorry I did not realize we were in a debate, I was just attempting to respond to your above statements.
There is no one solution for commercial real estate investing, as we come in all shapes and sizes.
I wish you the best of luck.