Disclose or Not to Disclose – Make the Right Choice and Sleep Soundly

I’ve been asked at least a dozen times over the past two weeks about disclosures in double closings, especially in the context of a short sale. The question usually goes like this: “I’m doing a short sale double close. What do I need to disclose, and to whom?”

Hopefully I can shed some light on this common question, even while standing on my soap box for a bit. Here goes:

Disclosure in your purchase contract that you intend to resell.

Even though short sale transactions are more and more frequent and banks have grown accustom to investors as purchasers, many short sale investors conceal their intentions to the short sale bank as well as to the ultimate purchaser. For example, the investor prepares a contract for purchase with the investor as an individual buyer, even though the investor will want to switch the buyer to the investor’s entity just prior to close. Or, the investor might submit an offer where the buyer is John Doe, Trustee, but the trust is not identified. Sometimes the investor may go so far as to establish a corporate name that sounds like an individual, such as John Doe, Inc. Why would the investors do this? Well, the explanation I get is either “I was trained to do it that way” or “I don’t want the bank to know that I’m an investor that will resell the property.” In other words, the investor wants to mislead the short sale lender for fear that the short sale won’t be approved absent the deception. Yikes! Let me persuade you not to engage in this practice and suggest some language to use in contracts to make sure you are disclosing what you need to be disclosing.

Let’s talk about the fear of the bank killing the deal if it knows you’re an investor. I think the fear is completely unfounded. It’s just not a big deal that you’re buying as an investor. While loss mitigators may have been reluctant to sell to investors a few years ago, the market has changed drastically. In today’s market short sales to investors is a daily occurrence. At Vista Title we see all kinds of investors that close short sales. The investors that close the highest volume of transactions always contract as investors without hide-the-ball tactics. Their feedback to me is that the loss mitagators simply don’t care if they are investors. The loss mitigator cares about the seller’s inability to pay, the BPO value, and the bank’s net proceeds in relation to the BPO. In other words, the bank cares about the payoff it is getting, not the party buying the property.

Thus, you’re really not losing a thing by being upfront from the start of the transaction. By misleading, however, you could be losing a bunch. While changing the buyer on the contract at the 11^th hour may innocent enough, it can actually equate to fraud. Anytime you intentionally deceive someone in order to induce him or her to act, you’re probably committing fraud. Yes, fraud is a bad word and committing it is a bad thing. Don’t do it. If a short sale loss mitigator tells you that you can’t buy as an investor, move on to another property. Switching names at the last minute might also kill a deal that would have gone through if the correct buyer were listed in the first place. When the short sale lender issues its authorization letter to allow the short sale to proceed, the letter almost always identifies the buyer. If that buyer is different than the real buyer, the title company will make the short sale lender revise the letter to show the correct buyer. Thus, the short sale bank is going to find out anyway. Now the bank’s loss mitigator may feel truly duped and kill the transaction. I have seen at least 4 transactions where the bank refused to allow a change in buyer. Two of these deals died because the investors had intended to flip the properties and the ultimate buyers’lenders pulled the approval when they learned that the seller was going to have to be changed on the 2nd transaction.

So, now that I’ve preached about disclosure, what should you disclose? Notice that I’m advocating disclosure to the seller, and ultimately the seller’s lender, that you’re an investor. I’m NOT saying that you have to tell the bank the terms of your second transaction. If the bank knows you’re an investor that intends to resell the property the bank would have a hard time complaining about the fact that you were savvy enough to sell for a profit. I suggest that the contract that you sign with the seller – which will be disclosed to the bank as part of the short sale package – contain a paragraph with something like the following:

“SELLER understands that Buyer intends to resell the property for a profit as soon as reasonably practical, which could be as early as the day BUYER purchases from SELLER. SELLER is giving up any equity that may exist in the property and any proceeds that may ensue from the sale of the property.”

If you’re going to market the property prior to the purchase you may also want to add the following:

“Seller hereby grants the Buyer and/or their representatives all of the necessary rights to list for sale, market, negotiate and enter into a contract to lease or sell the property to a third party.”

Will the bank read any of your contract except the section about the purchase price? Who knows? The point is that your contract has properly disclosed your intentions. Whether the bank chooses to read it or not is the bank’s problem.

Disclosure in the resell contract.

We also run across investors that don’t want to disclose to an end buyer that they are buying and selling to the buyer on the same day. Again, the reluctance is out of fear that the buyer will not move forward with the deal. While you may not be required, legally, to tell a buyer that you’re buying a property the same day your selling it to the buyer, failure to do so may actually kill the deal.

First of all, the buyer is going to find out anyway. The title commitment issued to the buyer will reveal the fact that the seller will be buying and then reselling to the ultimate buyer. When the buyer discovers that your flipping the property from a source other than you, the buyer stops trusting you and grows suspicious about the transaction. If you’re simply up front in the first place there are no surprises that will upset the buyer.

When you’re closing a back-to-back or a simultaneous double transaction, it’s also advisable that your contract contains some provision that the closing is contingent upon the first transaction going through. Otherwise, you might be in quite a pickle when your buyer is forcing you to close and you don’t have short sale approval on the first transaction. Not only will contingency language give you an out, it will document the nature of the transaction to the buyer so that the buyer and the buyer’s lender know it is a double closing transaction.

As with the above-suggested language, you should consult with our attorney about the specifics of your transaction to come up with the contract language that best meets your particular needs. Suggested language to add to the contract might be something like the following:

“Closing is contingent upon Seller obtaining clear title to the property and upon short sale approval of the lender(s) on the existing deed(s) of trust.”

Again, there are an infinite number of ways you can draft this language. In addition to coming up with your specific contract term, most investors find it helpful to also speak to the selling agent and the mortgage broker for the buyer to explain the nature of the transaction. If the buyer cannot get qualified due to a title seasoning requirement of his lender, you need to know that quickly so that you entertain contracts with other buyers.