Of course I need to start by admitting that I am not an attorney even though I did almost go to school to become one. Because I am not an attorney I am not giving legal advice and urge you to get your advice from someone qualified. This article is only based on my understanding after reviewing the Colorado Foreclosure Protection Act and the advice I’ve received from my legal advisors.
There is an amendment to the Colorado Foreclosure Protection Act (CFPA) that specifically addresses the short sale flip. A short sale flip is when a buyer of a property, through a short sale, re-sells the house to another purchaser for a profit. This is normally done with no work being done to the property and is actually not a bad strategy at all. If you can add enough value by discounting a payoff then you should be compensated. Many times the end buyer is another investor but more often it will be a homeowner. The problem with this strategy is that the bank that is taking the loss hates it.
It used to be that a short sale flipper would utilize a double close where they buy the house and sell the house the same day or within a few days. This is still allowed under the CFPA but it becomes very difficult. Among other things, if you want to close the transaction with your Subsequent Purchaser you need to disclose your purchase price and the resale price to all parties involved. (You are essentially disclosing your profit) This includes the homeowner’s lender which will most likely kill the deal. If you are required to disclose that you will be reselling the house for a profit to the owner’s lender, they will most likely reject the short sale offer. Why wouldn’t they? They would rather sell the property to your Subsequent Purchaser or someone else at a higher price and now they know it is worth more than your offer.
These disclosure rules go into effect if you identify your Subsequent Purchaser before you close on your short sale AND they close with you within 14 days of you buying the property.
So what do you do?
Because the definition of a Subsequent Purchaser in the law defines it as any person who enters into a contract with an equity purchaser, there are two ways to handle this.
- Enter into your contract with the Subsequent Purchaser after you close on the short sale transaction. A contract does not always need to be in writing so entering into a verbal contract and then putting it in writing the day after you close may not be good enough.
- Wait 15 days before you close on the sale with your Subsequent Purchaser.
Again, I am not an attorney but by doing either one of these two things you should avoid the disclosure requirement that will ultimately kill your deal. In either case you will need to actually close on the deal and you will need funding to do that. I know that many investors are playing this safe and are just waiting 15 days to close with their Subsequent Purchaser. Pine Financial Group is very aware of these regulations and the need for a longer term bridge loan. For that reason we created a very affordable loan that will give you plenty of time to flip your short sales. Our new loan has a 45 day term for only 1.5 points. Please give us a call for more information on how this new loan will help your business.
I know people are still wholesaling short sales trying to be creative with the use of Land Trusts or LLCs but let me tell you that the law is clear. An equity purchaser is not only buying the property but is buying an entity that is buying the property. You cannot shield the transaction with an entity and close this legally. If you do chose to do that please understand that you are violating the CFPA and please proceed with caution.