Short sale, what would you do?

Friend calls me to let me know he won't be moving into a mansion in an upscale neighborhood that was being built for him. We'll say this friend's name is Mike. His friend "Frank" is a builder/mortgage broker/real estate broker and sold him an "interim" home while the new construction home was being built.

Frank can't make the payments on the 3 mansions he was building (and is facing foreclosure), so now the friend has no place to go. To make matters worse, the payments jumped up on the interim home to a point where he can't afford the payments. Turns out Frank sold him a 30 year conventional ARM at 9.1%. Mike had a middle FICO of 770 at the time of that loan. Mike said that Frank worked out an arrangement where Frank would make the payments on the interim home while Mike was waiting on the new construction to complete. Since Frank is facing foreclosure, he can't make the payments on the homes he's building, much less continue honoring his verbal agreement that he'd make payments on the interim home (Frank made 19 payments of $3,500). I did a CMA on this interim home previously owned by Frank, who bought it for $200K, gutted it out, and sold it to Mike for $500K. Nothing else on that street has sold for more than $180K - ever.

Mike called me last night asking if I'd list the interim home as a short sale, and then he put his short sale specialist friend on 3 way call. This short sale specialist was telling me that he was extremely confident that he could get the bank to take $160K if I would list it and bring a buyer. The short sale specialist can't list it because he's a couple hundred miles away and is not a member of my MLS.

I refuse to believe that Mike is that dumb. He has an engineering degree and works as an engineer at a nearby nuclear power plant. After sleeping on it, this smells like a deal where Mike *may* have not been too worried about the questionable appraisal (which no one seems to have right now) ordered by Frank's mortgage company, assuring Mike that he'd up the value so high as to make the payments himself while the new home was being built (pulling out the equity). What neither of them banked on was hard times 19 months later. I'm guessing Frank's plan was to turn around and list it, with the previous sold of $500k to his benefit, along with another commission check.

I checked Frank's assets in the tax records, and from what I could see, he is about 7 million dollars in the hole.

Mike is a friend, and I'd hate to see his good credit get ruined (he's now 3 months behind on his payments since Frank stopped paying.) I have ZERO experience with short sales. Could I get Mike out of this mess by trusting that the short sale specialist can negotiate a sale ridiculously lower than the payoff? Or should I just stay away from this one? This morning I told Mike to call this real estate attorney I know who offers short sale classes to brokers (I attended one a few days ago) and to do what he advises. What do you think about all of this?

I think you did right by advising him to speak with an attorney. From my experience, short sales have little to do with the amount owed, and more to do with where the property gets appraised after you bring an offer. That's just my experience, though...

You were correct in staying away from this.Whatever arrangement they had they are looking for someone to blame.The short sale specialist states away won't take the blame and neither will your friend and his friend Frank.They will say you botched the deal because you couldn't clean up there mess and were not well versed in short sales.

I don't like a process I can't control and it seems your friends want to use you a an agent/broker to run the scheme.

Some business you do not want to take on and this is it.

I specialize in short sales so I am going to give you my advice. If you are not familiar with short sales, then refer it to someone who is. Refer it to someone that will list the home in your area and negotiate the deal with the bank. I guess you could leave it up to the other guy to do the negotiating, but I think that the more people that are involved in a file, the worse. I am more "hands-on" with all of my files. I don't refer my negotiating out to a 3rd party company or anything. I consider myself an aggressive negotiator too though.

Super Realtor, I was posting my post before I saw your post on this thread. In all fairness, the homeowner has a rising interest rate and cannot afford the property any longer. So the other alternative to the short sale is to foreclose. Why shouldn't this agent help this person move forward with the short sale? He can at least refer it to someone that is well versed in short sales. It truly does sound like the homeowner does have a hardship though.

Well...thing is...when Mike talks to the real estate attorney, I doubt Mike gives the attorney the entire picture like I listed here (maybe he feels concerned about that "cash-out make my payment" arrangement.) The attorney may say, "sure do the short sale, chances are you may take less of a hit on your credit record." Then Mike would call me on Monday and ask to list it. But I'm starting to think that this is looking a bit like mortgage fraud (although I have not seen the questionable appraisal).

Since other agents here have more experience in short sales and have no personal gain in this, I figured you'd shoot it to me straight. Even the attorney would have something to gain since he knows I use him for closings.

Yeah, I think I may want to stay out of this possible "scheme" regardless of what the attorney says. Hate to let a friend down but, can't let it run me into the ground in the process.

Thanks for confirming what I feel in my gut.

Len, I was hoping you'd jump in this. I posted my reply before I read yours. There are a few issues here:

1. Mike needs help.
2. this *may* be fraud
3. I'm friends with Mike, and Frank is an acquaintance of mine. If something were to come of it, it would appear as though I'm "wrapped up" in it somehow.

So #2 carries the most weight and #3 complicates things. I think I should at least take your advice and refer Mike to a short sale specialist. Funny thing is, I saw a "short sale" sign topper on a listing I drove by (listed by my former broker). So I called him. They seem to be all up in Frank's business because Frank is a former pro athlete and he's been in the paper here because of his foreclosures. My former broker said the only reason why he took that short sale was because that family listed with him before and he's doing it out of friendship. He said "No way" that he'd take Mike's short sale as a referral. So I guess I should find someone else who's willing to work with him. What a mess.

I am sure your friend Mike will understand why you cannot assist him when you explain the Mortgage Fraud aspect.

Refer it to someone else who does short sales,if something happens you will make a fee.Tell your friend you don't feel comfortable handling it as you don't have the experience.It's a nice beleivable way of saying "I don't want to touch it" while preserving your friendship.

To me it just seems from what you have posted to not be on the up and up and I just wouldn't want to be connected with it or take that chance.

If something doesn't feel right about any deal, then it probably isn't. Your gut will keep you off the front page of your local paper more times than not. BigC