The Dangers of Wholesaling Short Sales

Short sales have become one of the most attractive sources of deals for those flipping houses, but done wrong, can lead to some serious trouble.

There are many reasons why wholesaling short sales stands out as a great option for real estate investors, but you had better make sure you are armed with knowledge of the latest changes and trends before attempting to flip these homes.

The Benefits of Investing in Short Sales

The obvious draw to short sales is the big discounts they offer, but this is really just the tip of the iceberg and actually far less important than some other reasons. After all, there are plenty of ways to find distressed properties today.

These homes are normally much easier to find and easier to land deals on than at REO auctions, or hounding homeowners directly, making higher transaction volume simpler and more affordable to maintain.

Perhaps more importantly, sellers aren’t gutting these properties like other foreclosures, and with many still being occupied, they haven’t been left to deteriorate or get vandalized. This makes it a lot less expensive and clearly faster for investors to turn these properties around. The title to these homes isn’t as prone to issues as those which have already gone to the courthouse steps or haven been through the REO loop.

So What Is the Downside of Wholesaling Short Sales?

If this breed of foreclosures is so great, then why are investors bothering with anything else?

Of course the negotiation process can be a pain, though it has been streamlined and lenders have been much more willing to grant them recently than in the past.

Unfortunately, due to lender greed and the abuse of the opportunity by some homeowners and real estate investors, there can be serious penalties for flipping these properties in the wrong way.

Investors and lawyers can argue that ‘short sale fraud’ is a made up ploy by mortgage lenders to get their hands on cash they think should be theirs and to spite others making money on their losses, but the penalties for it are very real. Just as with any other type of mortgage or real estate fraud, this can lead to many years in federal prison. We are talking about far more than a life sentence, when multiple charges are put together.

Typical forms of short sale fraud today involve real estate agents purposely fooling banks into selling for less to benefit themselves and their investor buddies as well as ‘flopping’ where properties are purposely devalued in order to get banks to grant larger discounts.

Profiting from Wholesaling Short Sales without Landing in the Big House

Attempting to fool the bank for a fast buck is a losing strategy. Lenders and government agencies aren’t just stumbling on fraud or finding it when defaults occur anymore, they are actively looking for it. They are automating alerts to fraud, have task forces hunting it down and are soliciting tips from whistleblowers.

You can make great money flipping these homes and there are enough to come to keep profiting from them for years to come. However, you need to do it the right way; not trying to trick the bank and making sure you disclose what you know when asked to sign.