Disclosure on Short Sale Flips – New!

by Attorney William Bronchick

Short sale flips – the process of shorting a property then reselling it for a cash profit in a simultaneous closing – has been taking heat lately from title companies and real estate brokers. Realtor blogs are filled with drivel about how these transactions are illegal or unethical. What’s the real truth?

The Basic Process

The process of the short sale flip works as follows.

Step 1: Investor signs a contract to buy a house from a seller who is behind in payments.

Step 2: Investor contacts seller’s lender to negotiate short sale

Step 3: Investor gets lender to approve short sale

Step 4: Investor lines up backend buyer

Step 5: Investor closes with seller, paying off lender, then resells to backend buyer in simultaneous closing for a profit.

In essence, this is no different than a regular wholesale flip except instead of paying off seller’s lender in full, investor pays off seller’s lender at a discount.

The Hoopla

Some Realtors and title companies think there should be full disclosure to the lender and seller about the resale of the property, otherwise the bank and seller are being “defrauded”. In order to be defrauded, someone must be owed a legal duty of disclosure.

As far as disclosure to the seller, I see no issue because the seller is not getting any money out of the deal either way. His lender will not agree to a short sale while the seller walks away with money. So any profit made by the investor is fair game. As far as disclosing to the lender that you plan on reselling the property for a profit, of course you are going to do that. That’s what investors do – they make a profit. If you planned on keeping the property as a killer rental instead of flipping it, there would be no issue. If you fixed the property up and sold it 3 months later, there would be no issue. For some reason everyone gets upset because you are flipping it an hour later for a profit. In order words, what exactly triggers a duty to disclose to the lender that you intend to make a profit? Well, in at least one state (Colorado), the law now requires you to disclose if the resale is intended within 14 days.  This requires an all-cash closing on the front end with no back-end contract signed until day 14, risking the loss of your back-end buyer.  Geniuses at the Colorado Legislature passed this law under “Consumer Protection”.  Exactly which bank is the consumer??


Chances are this will end up in court someday and a jury will have to be convinced that failing to tell people you are reselling your property for a profit is somehow a fraud upon the lender or the seller. Nobody wants to be the test case, so I think that to be on the safe side, your contract with the seller should clearly disclose that you intend to resell the property for a profit. “Buyer may resell the property in a simultaneous closing for a higher price and make a profit.” This covers the seller, but what about the lender? Well, the lender gets a copy of the contract in the short sale package the investor submits to the lender. This puts the bank on notice (We all know that the package is 100 pages long and the bank’s loss mitigator is probably not going to read the contract in detail, but who’s fault is that?).

Should you further disclose in your cover letter to the lender that you have a buyer lined up to resell the property to at a higher price? Hmmm…

About William Bronchick

William Bronchick
Attorney William ("Bill") Bronchick, host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 25+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the Executive Director and founder of the College of American Real Estate Investors. Click on the "About" link above for more information on William Bronchick.


  1. William… I have done 100’s of these short sale flips if not more since 2008. You are spot on counselor. Disclose and disclose some more. We disclose in our sales contract. We also have an addendum separate from the state addendum that has another set of full disclosures. And then our third disclosure is filing a Notice of Contract on public record with another full disclosure on the very front page of the NOC. I did run into a couple of counties that would not allow me to file the NOC anymore but when my attorney sent it to the county clerk… somehow it magically got filed. Your disclosre is probably far better and more to the point than mine. But for kicks… here is what mine says. { Seller hereby grants the Buyer and/or their representatives all of the necessary rights to list for sale on the MLS, market, negotiate and enter into a contract to immediately lease or sell the property to a third party prior to Buyer’s ownership of subject property. It is the intention of the Buyer to procure a third party purchaser at a price greater than the negotiated short sale purchase price as a condition precedent to exercising this option since Buyer intends to promptly resell the property for an obscene profit. If the buyer purchases and closes with this short sale transaction, buyer is fully disclosing now that there must exist a contract for buyer to re-sell this property to a third party at a price greater than the negotiated short sale price.} Mind you that many of the MLS’s put a stop to allowing us to list as not being the owner of record. I really lost my passion for short sales and for me the energy sink in dealing with them and all the muffinheads along the short sale journey. I have backed off of doing short sales altogether and am back rehabbing but have a little twist on vacant pre-foreclosures that I love doing. Only one high end short sale left in my pipeline and my short sale chapter will close. Becasue I still have marketing out there… I do get vacant pre-foreclosures dropped in my lap. With these my biz not partner but biz JV coach who is a foreclosure attorney and I have come up with a legal way to control these vacant properties and rent them out. I use a full set of disclosures with my sellers. I use a full set of disclosures on my rental/lease contracts to my tenants. I contact the banks to see if they will reinstate, do a forebearance and recast but only if the PITI is less than my rent to have a positive cash flow. If it doesnt cash flow… I still rent it out until it goes to foreclosure auction and will check back with the bank every 4-6 months with a call to see if something has changed on their end. Yes… I sometimes will pay a local attorney to do foreclosure defense to stay off the execution for as long as possible so I can collect rent as a pure cash cow. I love the Tenant Foreclosure Protection Act. One time and only one time so far… after I put a tenant in the property a few months later… I tried to reinstate the loan…. the bank came back and released their lien against the property and I got it free and clear. YUP… blew my mind! I would love to do that again. I have had another property since July of 2007 which was the last time a mortgage payment was made… I have hired an attorney a couple of times to stall out the auction date. I get $1400 per month rent and pay no taxes, no insurance. Just a pure cash cow and as of this writing… no auction date set but I know it is coming in the next few months. I did put this info last year in a little video course with my attorney and sharing what we do. I call it Short Sale Rental Riches because Short Sales Suck! I got tired of short sales going south because title companies or realtors that are uneducated or just plain stupid screw up the deal. So with this last short sale pending… I really don’t care if I flip it or not. If it happens… awesmome. If it doesn’t… I will have no more short sale stress in my life. Last year I lost a short sale deal when my title company accidentally cc’d the banks attorneys on a email that explained to my seller and my buyers attorneys how the simul/double close would take place with full disclosures of the $300K profit. The bank did not buyer restrict me with a 30 day hold. We were clear to flip same day or next day. Everyone was cool with it. Sellers attorneys were cool. Buyers attorneys were cool. Real estate broker was cool. Everything was fully disclosed to all parties and super transparent. The banks attorneys already knew I was flipping it but when the profit was documented and given to them in this email writing with the documented profit spread… the banks attorneys told me that they had to act in the best interest of their client and could no longer sell me the property. That sucked! Too much stress and too much heartburn on that deal. It was heartbreaking. I chose to adapt and find another way. Bill… always love your stuff brudah! Keep it coming! Investors need your voice and imput to expose the lies, traps and better ways to do business! Blessings, Coach Pat

  2. On the simultaneous or back to back short sale deals, I personally quite doing them because the seller and their 3rd party “partner” the Bank, were not receiving the higher price from a true end buyer, even if the property was in imminent foreclosure and I was the only person who could in essence save that home, it would make the deficiency higher to the Seller for one, and on the government guaranteed loans, the seller, buyer, title company, and agents, were having to sign and notarized affidavit that there is no other contract or party buying or in essence doing a simultaneous flip or back to back closing.
    Sure you could disclose that fact and they might overlook it, but in today’s world where they have all the money in the world to go back and check these transactions I think I’ll pass, I sleep better at night.

Leave a Reply