Fear of short sale fraud will cost you money

For sale sign with sky in background

Unless yours is the only house on the block, you probably have neighbors who in the last few years have unloaded their home via short sale -- selling it for less than they owed on the mortgage.

Their discounted price lowered your home’s value because it’s a "comparable sale" -- the closest, most recent sale of a home like yours -- used to value your house. You can recoup some of that loss if the home is resold quickly, although quick resales have become unnecessarily controversial.

About a third of home sales involve distressed sellers nationally, and those homes sell on average for 20% less than homes sold by owners who aren’t in financial trouble.

They sell for less not only because the homeowners have financial problems and the house is worth less than what’s owed on the mortgage but also because banks are such a pain in the neck to deal with in a real estate transaction.

If you find a short-sale home you like and make an offer, it might take the bank months to accept or reject your offer.

If the bank takes the offer and your home inspection turns up a problem, say mold in the basement, you’ll wait another month to hear whether the bank will cover the cost of getting rid of the mold.

You know who has the patience to buy short-sale homes? Real estate investors.

In recent years, investors figured out that when they buy through a short sale, the house can be worth 20% more the day after the sale closes simply because it’s now a house owned by person who can respond to a purchase offer in two days rather than two months.

This is good news for you.

If the investor sells the neighbor's house for 20% more than he paid, your home's value might just go back up to what it was before the short sale.

Here’s the bad news for you: One of the largest data consultants in the mortgage banking market, CoreLogic, is trying to sell lenders on the idea that the investor's 20% profit is fraud.

In a recent study, CoreLogic called resales where the investor makes 10% or more within 30 days "suspicious," along with sales generating a 20% profit in less than three months, or a 40% profit in less than six months -- unless the investor makes improvements to the property.

They’re suspicious all right. They make me suspicious that banks don’t know what they’re doing.

In CoreLogic’s mind, if I buy your neighbor’s house in the morning and sell it for more in the afternoon, I’m not a smart investor with patient money in a market where it’s easier to get a reality TV show than a mortgage, I’m a scammer.

To me, a scammer is someone who works with a crooked appraiser to cook up a fake, low value for a home and then has a friend come in and buy the house at the artificially low value.

Why should you give a fig about what CoreLogic says?

Because banks pay attention to what CoreLogic thinks.

Bank of America announced a few weeks ago that all its short sale buyers have to promise they won’t be reselling the house for more money within 30 days.

Bank of America ought to be able to correctly value short sale homes, bring in purchase offers and get the best possible price for homes.

They’re the ones with vast amounts of data and corporate real estate experts. And if it can’t do those things, it should be working to fix its own company instead trying to push investors out of the short-sale market.

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