Would this be allowed (short selling)

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ddierck_IHB

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Hi everyone,



I have a buddy who is contemplating a particular move in regards to real estate, and I wanted to bounce it off the heads of the most informed real estate forum I know of.



My buddy ignored my strong protestations, and bought a condo at the peak. He paid about 240,000 and it is now probably worth 140,000 (if that.) He wants to get out of that place and buy another place for a lower price. His current plan is to start renting out the place that he originally bought, and buy another (bigger) place to live in. After a few months, he plans on hitting up the mortgage company to allow him to short sell the original place, allowing him to be left with only the newer, more reasonable mortgage.



I understand that my friend made a stupid move buying at the peak, and that what he is doing is unethical. You guys can save that talk, because I am in agreement. However, as a friend to a friend, I do want to provide him some info about this potential transaction.



So, my question is, would the above plan work? Would the original bank refuse the short sale? Is it illegal? Any info like that would be appreciated.
 
[quote author="SoCal78" date=1238142177]How exactly does he plan to qualify for a loan on the new place? Or did he do MEW and is going to pay cash?</blockquote>


I was thinking the same thing. Unless the friend has a huge income. The Debt to Income ratio is going to prevent him from getting a loan for the new place.

My mom's neighbors pulled something similar to this. They bought in 2006. Sold the house to their mom in 2008 at a way inflated price. Used the cash from the sale to buy a new place. The mother let it go back to the bank. I think they are facing some legal repercussions from doing this. I suspect this because one day my mom got a knock on her door from the police who were asking questions about the neighbors and said they were there to serve them legal papers.
 
[quote author="ddierck" date=1238139498]Hi everyone,



I have a buddy who is contemplating a particular move in regards to real estate, and I wanted to bounce it off the heads of the most informed real estate forum I know of.



My buddy ignored my strong protestations, and bought a condo at the peak. He paid about 240,000 and it is now probably worth 140,000 (if that.) He wants to get out of that place and buy another place for a lower price. His current plan is to start renting out the place that he originally bought, and buy another (bigger) place to live in. After a few months, he plans on hitting up the mortgage company to allow him to short sell the original place, allowing him to be left with only the newer, more reasonable mortgage.



I understand that my friend made a stupid move buying at the peak, and that what he is doing is unethical. You guys can save that talk, because I am in agreement. However, as a friend to a friend, I do want to provide him some info about this potential transaction.



So, my question is, would the above plan work? Would the original bank refuse the short sale? Is it illegal? Any info like that would be appreciated.</blockquote>


Like the others said, this isn't 2006. They may verify his income :)
 
[quote author="Mcdonna1980" date=1238145520][quote author="SoCal78" date=1238142177]How exactly does he plan to qualify for a loan on the new place? Or did he do MEW and is going to pay cash?</blockquote>


I was thinking the same thing. Unless the friend has a huge income. The Debt to Income ratio is going to prevent him from getting a loan for the new place.

My mom's neighbors pulled something similar to this. They bought in 2006. Sold the house to their mom in 2008 at a way inflated price. Used the cash from the sale to buy a new place. The mother let it go back to the bank. I think they are facing some legal repercussions from doing this. I suspect this because one day my mom got a knock on her door from the police who were asking questions about the neighbors and said they were there to serve them legal papers.</blockquote>


Me three... your friend intends to buy and essentially bail and the greedy people before him have caused the lenders to be smart to this one. If your friend doesn't have 25% equity (as he does not) then he will need to qualify for a loan for the entire amount of his other place on top of the mortgage for the new place. Is it his DITI that is preventing him from getting a new loan on the place or the LTV? I'm sure the LTV doesn't qualify for a refi, but if it's his DITI then he is totally SOL, as he should be.
 
[quote author="24inIrvine" date=1238149665][quote author="ddierck" date=1238139498]Hi everyone,



I have a buddy who is contemplating a particular move in regards to real estate, and I wanted to bounce it off the heads of the most informed real estate forum I know of.



My buddy ignored my strong protestations, and bought a condo at the peak. He paid about 240,000 and it is now probably worth 140,000 (if that.) He wants to get out of that place and buy another place for a lower price. His current plan is to start renting out the place that he originally bought, and buy another (bigger) place to live in. After a few months, he plans on hitting up the mortgage company to allow him to short sell the original place, allowing him to be left with only the newer, more reasonable mortgage.



I understand that my friend made a stupid move buying at the peak, and that what he is doing is unethical. You guys can save that talk, because I am in agreement. However, as a friend to a friend, I do want to provide him some info about this potential transaction.



So, my question is, would the above plan work? Would the original bank refuse the short sale? Is it illegal? Any info like that would be appreciated.</blockquote>


Like the others said, this isn't 2006. They may verify his income :)</blockquote>
Verify his income for what? the new loan?
 
A year ago this would have probably worked. Now I doubt it because banks have gotten back to underwriting basics as the above posters described. LTV, debt/income ratios, etc.
 
Yes, if he/she (I can't remember the specifics) has the income to afford to carry both loans comfortably they'd be able to get the second loan. I don't know much about single family housing underwriting but you wouldn't be able to bank on 100% of your theoretical rental income on the first property when calculating your income. Also its very likely the first property wouldn't rent cash-flow positive (so the monthly cash going towards the difference would impact your debt to income calcs).



Still the person's income could be high enough to carry both mortgages even assuming no rental income... But then it would be that much harder to prove hardship and get the bank to short sell the first house. Unless they manage to deceive on either end (the 2nd buy or getting out of the 1st loan) which would open them to fraud and who knows what other crime. I'm guessing its a moot point because few people in the OC making well into the six figures were buying 250k condos to begin with.



The OP scenario IS possible just pretty unlikely to be successful for the time being.
 
[quote author="NewToOC" date=1238554416]Yes, if he/she (I can't remember the specifics) has the income to afford to carry both loans comfortably they'd be able to get the second loan. I don't know much about single family housing underwriting but you wouldn't be able to bank on 100% of your theoretical rental income on the first property when calculating your income. Also its very likely the first property wouldn't rent cash-flow positive (so the monthly cash going towards the difference would impact your debt to income calcs).



Still the person's income could be high enough to carry both mortgages even assuming no rental income... But then it would be that much harder <strong>to prove hardship and get the bank to short sell the first house</strong>. Unless they manage to deceive on either end (the 2nd buy or getting out of the 1st loan) which would open them to fraud and who knows what other crime. I'm guessing its a moot point because few people in the OC making well into the six figures were buying 250k condos to begin with.



The OP scenario IS possible just pretty unlikely to be successful for the time being.</blockquote>




It's pretty obvious (Gary Watts as the prime example) that banks really aren't requiring anyone to prove hardship in order to get a short sale approved. My impression is that the banks are just too swamped to get into the reasons why someone wants a short sale. Fraud? Yes. But no one seems to be paying attention. Like I try to tell the parents of my junior high students, "a rule without a consequence will not be followed, it's against human nature itself."
 
[quote author="halfnote19" date=1238555834]Say he does end up buying house #2 and can't get the short sale approved... what is to keep him from walking?</blockquote>


Not much. Either the bank approves a short sale and loses or it forecloses and loses even more.
 
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