156 Hamilton St., Leominster, MA

Title insurance underwriters, concerned about the risk in insuring short sale flips have taken a position of not insuring them.  Old Republic Title Insurance announced to it’s agents last month that it would no t authorize the issuance of lender or owner title insurance policies on short sale flip transactions.

So what is a short sale flip?

A short sale flip is when a property is purchased by a real estate “investor” from a seller who has negotiated with the current mortgage holder(s) to release the mortgage(s) for less than what is owed, the purchaser of the property then flips, or resells, the property for a profit.

Often the flip is done without the new buyer doing any repairs or upgrades to the property before selling it to a subsequent buyer.  Real estate flips are rather common, what is concerning about the short sale flip is that the lender who has accepted a short payoff does not know that the property is valued for more than what was settled for on the flip.

For example a real estate investor finds a homeowner in distress, upside down on their mortgage.  The investor negotiates with the homeowners mortgage holder to accept a short payoff.  Let’s say the homeowner owes $170,000.00 on the mortgage and the investor negotiates a payoff of $120,000.00, a $50,000.00 shortage (or “haircut,” so to say).  The sale takes place the mortgage is paid off and released for $120,000.00 two weeks later the new owner, the investor, sells the property for $145,000.00, pocketing $25,000.00.  Sweet deal right?  Maybe too sweet, if the lender who took the haircut discovers the facts they may be able to make a very strong argument that they were defrauded.

If lender wins the argument they may be able to pursue the seller, investor and subsequent buyers on a claim of loan fraud.  If successful the parties to the transaction have a lot to lose.  Loan fraud is a federal offense and an unwitting homebuyer may be out their new home, or at the least a substantial amount of money in the legal cost of defending against the lender.

Seeing the risk of having a lender that has taken a significant loss on a short pay off file a claim of loan fraud, title insurers are not willing to insure short sale flips.

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