Short Sale Flips and Seasoning

Recently many of the financial institutions are expressing concern about flips short salesby investors in general and specifically short sale flips.

A flip is when an investor gets control of a piece of property as the buyer and they find a third party who purchases the real estate shortly after closing. Let’s take a look at how this relates to the real estate investor who is doing a short sale flip. The investor takes control of a property from a distressed property owner. The investor negotiates a sales price which is submitted to the lending institution. The lending institution agrees on a fair market price for the property. Once the fair market price is established, the investor finds a buyer to purchase the property at a fair market value. The distressed property owner has reduced his liability by the investor taking control of the property. The lender has reduced their liability by removing the distressed property from their inventory and the ultimate buyer has received a property which is the fair market value as they see it. This seems like a very workable and smart business decision on all participants.

The banking institutions find something sinister about these transactions so they have decided to add a clause in their documentation requiring “seasoning”. This seasoning can result in the investor being required to hold the property in inventory for between 30 to 90 days before you can sell the property to the third party. In addition, they are requesting that the investor notify the lender, seller and buyer how much the investor initially paid for the property as well as how much they sold the property to the end buyer. This spread is the investor’s profit in the transaction.

Many of the business books I have studied indicate the free market system is “Where buyers and sellers can make the deals they wish to make without any interference, except by the forces of demand and supply. A stock market comes closest to this ideal.” (

Now let me try to understand what the “Law of Supply and Demand” looks like.’s definition for “Law of Supply and Demand” is as follows: “Common sense principle which defines the generally observed relationship between demand, supply, and prices: as demand increases the price goes up which attracts new suppliers who increase the supply bringing the price back to normal. However, in the marketing, of high price (prestige) goods, such as perfumes, jewelry, watches, cars, liquor, a low price may be associated with low quality, and may reduce demand.”

Now let’s ask several questions – Why would a firm (banking institution) who sold their distressed product want to retain liability on the product for 30 – 90 days? Why would an individual, who has been distressed while owning a product, want to know what happened to the product after they no longer have responsibility for that product.

Let’s close with this: The free market system is where buyers and sellers make deals they wish to make without any interference except by the common sense principle defined as the generally observed relationship between demand, supply and prices.

Are these recent moves prolonging the recession in general and the housing crisis in particular. Please let us know where you feel we are correct and where you feel we need to reevaluate our position.

Tom Fitzgerald is a real estate investor who has been in the insurance and financial field for a number of years. In his recent years he has become more interested in his health and well being. Tom will be submitting information about these three fields: real estate, financial and health.

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