Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. Jack of All Trades and Master of None: Attorneys Wearing Multiple Hats in a Transaction
3. Short Sales & No-Flip Clauses in the Approval Letter – Removing a Roadblock

Small sale transactions are essential to go properties in furtherance of rebuilding our economy. They directly benefit several parties including:

• the distressed homeowner: unburdened by debt he cannot afford without the same level of credit score hurt a foreclosure would cause as well as possible deficiency judgments;
• the real estate agent: earns commissions (provides jobs etc);
• the small sale bank: removes nonperforming assets from its books,  usually at far less of a loss than if the property became an REO; and
• real estate investors: acquiring properties at a discount provides incentive to negotiate as well as to seek out qualified purchasers

Part of the fallout from the real estate market crash is a rash of negativity aimed directly at real estate investors.  They, along with mortgage brokers and other members of the real estate community, are being made the scapegoats for the Housing Bubble.  I’m going to clue you in on a small secret – it really wasn’t them.  Not that there weren’t unscrupulous investors, loan officers etc. – far from it.  Point the finger directly at the Banks and the Government. The Banks needed those deals to package up and sells as mortgage backed securities on Wall Street.  When there was not enough product, they lowered their standards to bring in more loans. They blatantly ignored fraud reports and lended on questionable properties. The banks made exotic loan products and recklessly offered them without regard to ability to pay.  The Government wanted to increase homeownership among minorities – hence ACORN. It made several programs and incentives to push the percentage of homeownership way above the standard amount.  I am also going to point the finger at the American Homeowner who chose to use their home as an ATM, or who lied on their loan applications because they needed to compete with the Joneses.  Lets also add real estate agents to the mix who fought for higher and higher appraised values and selected comparables for their Broker Price Opinions (BPO) to influence the appraiser to come in higher. (RANT finished)

These very parties, who irresponsibly handed money to unqualified buyers on overvalued properties, as part of their attempt to pass the blame to real estate investors, are throwing around the “fraud” mark with regard to flipping small sale transactions (for more discussion on Small Sale Fraud please read my prior blog post). In an attempt to curtail the investor’s ability to flip these properties, some banks are including “no-flip” clauses in their small sale approval letters. I have seen this language in Bank of America, GMAC, EMC,Countrywide to name a few.  There are varying forms of this language from purporting to restrict the transfer of the subject property for 30 days post closing to voiding the transfer and reinstating the note and security agreements, post-closing, if the bank determines that there was fraud.

The simplest language to address in the 30 day post-closing restriction on transfer.  Lets review basic contract law and the doctrine of privity.  Basically a contract does not confer rights or impose obligations upon anyone except for the parties to it. The contractual relationship is between the homeowner and the bank. The small sale approval is a settlement of the debt obligation between these parties.  The bank has no contractual relationship with the investor and/or buyer and therefore this language, purporting to impose a restriction on the investor/buyer, is unenforceable against the investor/buyer. With respect to the other no-flip clauses, Bob Massey does an brilliant job of explaining how to handle those banks in his video:

I have located an underwriting bulletin from Stewart title which addresses these problematic clauses in small sale approval letters.  It indicates that such language makes the transaction “uninsurable”.  As Massey suggests, request that the clause be removed from the small sale approval letter as title will not insure the transaction and provide a copy of the title bulletin to support your argument. You might have to bypass the negotiator and contact a supervisor but this should be sufficient to persuade them to delete the offending language.

What have you encountered and what has worked for you? Please comment!

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. PropertyShark University – Short Sales Class – Tues June 17, 2008 – Don’t Miss It!!!
3. Buyer $5,000 Short – How to Close the Gap…from a NY Point of View

CNN recently posted a video on their website detailing the “shocking” tale of a woman who paid her mortgage but whose home is being foreclosed upon, jumping on the fraud bandwagon and telling the tales of homeowners preyed upon by the real estate & banking industry. The video leaves out more than it tells, in an obvious attempt to manipulate the truth for their tale.

Maria Espinosa, a Nevada realtor, apparently bought her home, without counsel and without purchasing an Owner’s policy of title insurance.  It appears that a previous owner in the chain of title had a VA mortgage that was never satisfied and as such, brought an action to foreclose.  She sought redress from Chicago Title who advised her to retain a lawyer and visit the ALTA website, wherein the message was to potential home buyers to buy title insurance so that if there is a title claim, the title company will not only insure the property but pay to defend such title.  Ms. Espinosa finally retained an attorney who admits he has only 18 months of experience in real estate and foreclosure defense who just states “he has never seen anything like this before”.

I learned of this video through the New York State Bar Association Real Property List Serv’s forum wherein my esteemed colleagues brought up a valid point yet again – why would anyone, who is about to make one of the largest buys of their life, choose to do so without retaining a real estate attorney?  This topic is discussed, ad nauseam, on the listserv but is often not publicized…until today and here on my blawg.

I am amazed at the mentality of the realtors and abstract companies of other states who are so resistant to attorney involvement, nevermind the

Federal Trade Commission, which for years has lobbied heavily against having attorneys involved in residential
real estate transactions. But, it has become clear, in light of the collapse of the Housing Market, that the rationale was to keep the people blind to the greed of those certain mortgage brokers and bankers, realtors, appraisers and title companies who made fortunes selling homes riddled with toxic mortgages and funded with fraud, kickbacks and the like. They told those people, “We are saving you money”, “It is like buying a car” or “The attorneys are just trying to control everything and get rich in the process”.  What they didn’t tell them was “We want you at the closing table with NO ONE to look after your interests” or “We want you to take out a loan you can’t afford or know”.

Numerous times I have engaged in discourse, in various internet forums, with members of the real estate industry who had been vocal and derisive of attorney involvement in real estate transactions. I heard their closing horror tales of deals falling apart because of the lawyer’s failure to prepare contracts in a timely manner or instructing their client to not go forward etc. While I agreed with them that retaining any attorney for a closing was not conducive, I argued that the retention of a real estate attorney was a necessity and would eliminate their apprehension. A real estate attorney has a far different focus than the average litigation attorney and the expertise to close a transaction without issue. Most importantly, the real estate attorney is the only party who only represents the interest of the buyer or seller and probably one of the least of the expenses paid at closing, especially compared to the thousands of dollars paid over to the realtors.

In New York State (particularly downstate), it is customary to retain attorneys for real estate transactions.  And it shows: New York had a 23% decrease in foreclosures in 1st Quarter 2009 as compared to 1st Quarter 2008 and compared to a 24% increase nationally!

So, while I am sympathetic to the plight of Ms. Espinosa and others out there in the same position, I can’t help but shrug my shoulders and say it all could have been avoided or at the very least, addressed with no out of pocket expenses, had she had a lawyer at her side when she bought that home.

Related posts:

1. Mortgage Assignments are Not the Real Estate Investor’s Dream!
2. Jack of All Trades and Master of None: Attorneys Wearing Multiple Hats in a Transaction
3. DON’T SAY I DIDN’T WARN YOU! NY Attorney General’s Crackdown on the Loan Modification Industry