Short Sales Raise Suspicion

Short sales are now a common part of housing market landscape, especially in areas of the country where foreclosures have hit hard, like California and Arizona. Suspicions have been raised that some of these short sales involve banks selling homes to “investors” who then immediately resell the homes to buyers for a large markup. The problem is that often the profits for the investor (who may be funded by the bank doing the selling) exceed 100%, and often these sales are made on the same day. For more on this continue reading the following article from Tim Iacono.

Given the recent trajectory of home prices and the number of mortgages that are already delinquent, the term “short sale” is one that is likely to stick around for at least another few years and it was in the news again today.

First, the Orange County Register reports on a Corelogic study showing an exceptionally high level of “suspicious” short sales in California and a disproportionate share where investment companies are involved.

In the “suspicious” transactions, a short sale is quickly followed by a resale for a substantially higher price, sometimes on the same day.

This study reveals that short sales that show another sale transaction closing on the same day account for 16 percent of all suspicious short sales in the industry,” said Tim Grace, senior vice president of Product Management and Analytics at CoreLogic. “These same-day resales are on average $50,000 greater than the lender agreed upon short sale price.”

Investment companies are involved in a “largely disproportionate amount” of suspicious short sale transactions, the report states. Investors in limited liability companies are the buyers in 2% of all short sale transactions, but in 28% of the suspicious cases.

Trying to avoid this sort of thing is just one more reason why it takes so long for short sales to get done. I recall that we had to sign a document pledging that we would live in the short sale house we bought last fall for at least six months. It’s not clear whether the “suspicious” short sale buyers are violating this agreement or if they’re not bound to it. My impression was that these were standard short-sale terms (along with the right of the bank to pull out of the deal at any time, for any reason, right up to the day of closing).

For a look back at our short sale odyssey, see this item from last October.

And it seems that Sarah Palin was involved in what might be viewed as a “suspicious” short-sale, recently purchasing this 4.4 acre Scottsdale, Arizona property for $1.7 million after it had been sold for less than half that amount as a short sale some time ago. Details are provided in this Zero Hedge story:

Let’s recall the math on Ms. Palin’s purchase: Whitmore buys the short sale from JPMorgan in March 2010 for $805,000. He then flips it just about one year later to Ms. Palin for… $1,750,000. A profit of 118%. Surely, this transaction should set off dozens of “suspicious” red flags at JP Morgan.

Ironically, Palin, who in this case is completely innocent of any wrongdoing, may have tripped the alarm switch on a trick that is being used by mortgage “investors” across the country (with who knows what sources of capital – arguably money from the likes of… JPM?), which are buying up wholesale REOs only to flip them to end buyers at up to 100% profits shortly thereafter.

Then again, it would not surprise us if it was none other than JP Morgan who provided the financing to “real estate investor” Platinum First Realty to purchase the property in the first place and to keep it off the market with a substantially above market price. At this point, it is clear that if any aspect of the housing market can be manipulated, it will be.

One look at the before-and-after images of the distressed property and the one that was recently sold would indicate that the investors did a huge amount of work on the place, not the least of which was to put a nice big pool in the backyard. Moreover, Zillow puts the home’s value at $1.2 million, meaning that Ms. Palin might have paid a bit too much, so, this deal is not nearly as “suspicious” as you might first think.

Whatever the case, we’ll likely be hearing short sale stories like these for years to come.

This blog post was republished with permission from Tim Iacono.