Submitted by Maryann Little
In the current real estate climate, many investors and rehabbers are taking advantage of the deals that can be found. In the process, they are adding to the quality of many neighborhoods by taking an abandoned home that is bringing down values and turning it into a gem. For the investor who is considering purchase of a property out of a short sale transaction with the intention of selling it months later, there are a couple potential issues to keep in mind and prepare for.
1. Insurable Title versus Marketable Title: After weeks, maybe even months, of carrying a property and putting work into it, the investor will get it under contract with a potential buyer. The title is then pulled by the buyer or buyer’s counsel. Because of the short time between acquisition and sale, there may still be mortgages on the title that were paid off upon the purchase, but have not been discharged from record yet. This situation is called insurable title- the investor likely can produce proof of payoff and title insurance, which covers or indemnifies the new owner and their underwriter. The new owner or their attorney, however, may reject this approach and require the title be marketable, or completely clear of liens. In this situation, the investor gets stuck carrying a property for longer then they had planned while they wait for the paid off shorted lenders to get a discharge to record. The investor that is aware of this issue up front can alert their buyer and the buyers attorney of the situation so the investor knows before an offer is accepted whether the buyer will take insurable title and close on time.
2. The Anti Flip Provision: Sometimes an investor will make an offer on a property that is in the process of short sale negotiation, therefore, no final payoff has yet been obtained. The investor has to understand going into this situation, that they may wait for months for the payoff to come. The smart investor would therefore be wise to put very little money down, include provisions in the contract alerting the shorted lender that they intend to resell, and avoid putting any money or time into the property until the final payoff is in hand.
Generally, the more an investor discloses to everyone involved about what his or her plan is with the property, the better off he or she will be. The more attorneys, agents, and buyers deal with short sales and learn from prior mistakes, the smoother the process will be all around. Short sales will perhaps lose their bad reputation as scary transactions, and be treated for what they are, a process that allows a property to be used for its best potential while allowing a seller in a bad situation to see light at the end of the tunnel.
Maryann Little is the VP of Mitigation and Negotiation at Short Sale Mitigation, LLC where she serves as a liaison between lenders and homeowners in New Hampshire and Massachusetts.
photo courtesy of woodleywonderwork