Are you selling a home or a contract?

In a recent home showing, the listing agent remarked that the seller is the “contract seller.” As it turned out, the seller of the home was not on title, but rather had a contract on the home and wanted to sell the contract. The listing agent, trying to explain the situation as best as he could, stated that the seller’s contract gave hime equity in title which allows him to sell the home.

I had to wonder where this agent received his real estate license because, as a title attorney confirmed, equity in title does not permit one to sell a home they do not yet own. Never mind the fact that our local MLS (Metropolitan Regional Information Systems, Inc.; requires listed properties to be listed by the legal owner of the property. So what are these guys trying to do?

The number of home flipping transactions are increasing as the market recovers. Home flipping received a lot of bad press in the 1990’s when fraud was prevalent in such transactions. Flipping a home per se is not illegal, it is fraud and other irregularities that raise eye brows and get the attention of local (and sometimes national) authorities.

Not all property flips involve fraud and deception. During the heyday of the sellers’ market earlier this decade, real estate investors capitalized on the frenzy of home buyers eager to own a home in the seemingly never ending appreciating market by quickly flipping properties. Of course, many real estate speculators lost a lot of money as the market receded.

A flipping technique that has been thought to be dubious by some and now making a comeback is the simultaneous closing (or double closing); a similar term/technique is selling the contract. Rather than take ownership of a property and obtain the title to a home, investors most likely resort to the double close or contract sale to save on transfer, property, and other taxes.

A local attorney (requesting not to be named) trying to close such a deal was contacted by the buyer’s lender Fraud Investigation Department. Although he felt there was nothing wrong with the deal and he was not withholding any information, the deal was denied by the buyer’s lender. Although the buyer qualified for the loan, the lender’s Fraud Investigation Department nixed the deal. Growing concerns of stolen homes where homes are sold without the knowledge of the legal owner are raising additional red flags.

To avoid such deals, FHA (among many conventional lenders) require that the title to be “seasoned” (the owner must be on title for a required period of time) before they will lend on the property. Finding a lender to finance a simultaneous closing or contract sale is often difficult.

Although the “contract seller” of the home I showed was most likely legitimate, it reminded me that even seasoned agents need to be on their toes. Buying a home is an investment of time and money, so don’t be afraid to exercise due diligence; asking who the seller is and why they are selling the home is often a good place to start.

By Dan Krell
Copyright © 2010

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