By Robert Freedman, Senior Editor, REALTOR® Magazine
Bank of America has started requiring buyers and sellers to sign an addendum to its short-sale agreement. The addendum has raised some questions among real estate sales associates and brokers, so to learn more about what the bank is trying to accomplish with the form, REALTOR® Magazine spoke with David Sunlin, senior vice president and operations executive for short sales, deed in lieu, and real estate management for Bank of America.
REALTOR® Magazine: What’s the reason you’re asking for this additional document as part of your short-sale approval process?
David Sunlin: It’s entirely about fraud prevention. We want to ensure that the transaction is at arm’s length and that the property isn’t immediately flipped for a higher price without there being any repairs or upgrades. It’s not punitive in any way and has nothing to do with deterring any part of the transaction, and certainly not the compensation that goes to the agent. We think they’ve earned every penny of that commission and we’re not trying to interfere with that.
RM: Can you go into detail about the kinds of fraud the addendum is intended to curb?
Sunlin: There are two main categories. First, there’s flipping, and then there are schemes in which parties collude or otherwise try to keep the home owner in the home or else pass along some kind of benefit to the home owner from the sale of the property. For example, the parties find a buyer at current market value [which is considerably lower than what the owner originally paid] and that buyer flips the property back to the home owner, or they allow the owner to stay in the home, or they feed the owner some cash out of the deal so that the owner can stay in the home. When you have losses that are on average in the hundreds of thousands of dollars, and in the vast majority of these cases those deficiencies [losses] are being waived [by the investor] to allow the sale to happen, it’s reasonable for us to want to know if there is a hardship, and if the owners were to receive cash payments on the side, arguably that money should go to the investor as the debt that’s being forgiven. In every case, that amount [to the investor] would be much less than the total amount of debt owed, so the investor isn’t made whole by any means. But if someone is saying, “Hey, do this and we’ll throw you five grand,” [that’s not appropriate]. We’ve certainly got programs that will help home owners as they exit. In fact, we’re getting ready to roll out a really nice information packet that we’re going to mail to delinquent customers that advises them of their options to avoid foreclosure and can connect them to some of our social services network partners. We certainly recognize people are in default and experiencing hardship. They need help. We want to be able to connect them to that help, and provide it directly to them as much as we can, but we certainly don’t expect them to use a short sale as a means to walk away with more cash or to purchase the property back at current pricing.
RM: Can you elaborate on the flipping schemes? How much time must elapse before a transaction can be flipped without being considered inappropriate?
Sunlin: I know we prohibit it for at least 30 days. [The contract language says, “Buyer agrees that property cannot be sold or otherwise transferred within 30 days of closing.”] We don’t want to cause any problems. There are legitimate investors who buy properties and either want to rent them or they want to rehab them and resell them. There’s nothing wrong with that. What we’re looking at are the immediate flips, where somebody has already lined something up and shortly thereafter flips it for a much higher sales price after they’ve first purchased it for a lower price. This is an issue all the large servicers are interested in. And, in fact, the original idea for the addendum came from Freddie Mac, which requires it. They came to us and said, “We, as an investor, require you to do this.” And then we looked at it and thought it was a good practice, so we extended it to our entire portfolio that we service. It’s a small number of cases where we see this type of fraud, but any is too many and we want to put the spotlight on the bad guys and get everyone else moving forward as quickly as possible.
RM: Can you walk us through the bank’s valuation process?
Sunlin: We’re attempting to maximize the recovery against the current market value. We’re not intentionally going to leave any dollars on the table for the investor. And, as everyone knows, valuation can be something of an inexact science. Professionals are going to disagree, within some range, as to what properties are worth. Fannie Mae and Freddie Mac both use their own BPO [broker price opinion] networks. Outside of that, we use full walk-in interior appraisals, so we get a pretty good indication of value. We’re going to use a model that looks at that and then determines if we’re mitigating the investor’s loss relative to the REO process. So, really, the only way someone could turn around and [immediately and legitimately] sell the property for more [than what we approve in the short-sale agreement] is if we didn’t necessarily get the most accurate value when we made that determination or if the next buyer that came along happened to have a more inflated opinion of what that property is worth. We might have thought it’s worth $150,000, but if someone else thinks it’s worth $200,000, then they might be willing to pay that amount. I would say that falls within the range of just variation in terms of value. But we don’t consciously allow things to discount very deeply from current market value. That in and of itself would be a red flag [that someone’s trying to flip the property]. We might be mitigating loss down to a certain level of discounting, but we would say that, if someone is willing to pay that within a short amount of time, then that is the market value. We all know market value is determined by what a buyer is willing to pay. We’re just trying to get as close to that value as possible, and obviously if anyone, whether they’re an institution or a private party, that sold a house found out the buyer flipped it for considerably more in a short amount of time, I’m sure they would regret that.
RM: Where do real estate practitioners fit into the flipping and arm’s length cases?
Sunlin: Agents can certainly get caught in fraud inadvertently. If there’s a third party, with no collusion at all from the agent, that third party can still perpetrate these kinds of schemes. It certainly helps if they get someone who’s more connected to the transaction, because part of the idea of flipping, or flopping as it’s sometimes called, is that you have to at some degree purchase the property at less than market value, otherwise you have to find a buyer who’s willing to pay more than market value later on. We’ve set up the rules pretty clearly, so that should help agents. It’s all in the addendum. So, if their potential buyer in the transaction understands and is willing to sign that addendum, then I think the agent is going to be in a good position. They’ve done the due diligence. If the [buyer] signs that and then turns around and flips the property anyway, then they’re defrauding themselves. The agent has upheld their responsibility in that case. The one thing agents can probably be more aware of is the need to ask a couple of more questions if it’s an institutional buyer. There are a lot of institutions out there buying properties for completely legitimate reasons. As I said, they either want to rent them or attempt to rehab them and flip them later. For someone whose going to do that, that’s perfectly legitimate. What we object to is the very quick flip at a higher price with no improvements to the property. So, if the agent sees that an LLC or some other type of institutional investor is buying the property, they probably want to spend a few minutes asking questions about their intentions. If they’re willing to sign that addendum, the agent should have no problems.