A new title status called "Equitable Interest" has been appearing in our MLS.  My understanding of this term is that someone other than the owner has negotiated a price with the lien holder and is now selling the home (or hopes to) at a higher price and will keep the difference between the negotiated price and the actual selling price.  This sound similar to an option agreement only between the person with the equitable interest and the lien holder.  I will be showing a property to one of my buyers with this title status.  Here is what appeared in the private remarks section of the listing:

 

"A prior closing must take place before title can be delivered.Original seller is in a short sale/pre-foreclosure situation"

Is my understanding of this arrangement accurate and has anyone had any experience with these?  Is this legal?  Are there any risks for the buyer?  Will this work with an FHA loan?

 

Any comments are welcome.

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  • LIZA DIGALIZIA said:
    Hi Smitty, can you expand a little more on this new item that is happening in our industry. I am unsure of what is going on. Please tell me step by step what is happening. Thank you Smitty... lizadig@aol.com

    Smitty said:Hi Liza,
    In my area, there are certain investors that specialize in short sale negotiation. The last buyer I brought to one of these situations bought the distressed asset from the investor, not the original homeowner. I have been speaking with some of the investors in my area that do it. What they do is purchase the distressed home from the homeowner and negotiate the short sale. They get approval and resell the same property for a profit. I've seen both sides of the coin. I've worked with an investor on the selling and then also brought investors to buy from a homeowner on another house.

    The investor gets the distressed asset under contract via equitable interest which gives them the right to resell the property WHILE they are negotiating the short sale. They market to find another buyer so when they get approval they can get the house under contract and sold. To be honest, in the few transactions I've done, it took the major headache out of things. I have two investor contacts in the area and when I get a short sale, I call them first. Usually one of them will want to purchase it. They negotiate with the bank and buy the property, and I've assisted them in reselling it. That's when I've worked with them on the purchase side. I also have brought home buyers to properties they've had listed, and again, they take title after they negotiate the short sale and resell the property.

    I know I'm not explaining the whole thing right, but what I can say is the headaches of being on the phone with the lender and negotiating the short sale is GONE for me (on the ones the investor purchases - although they don't purchase every property). It's AWESOME. I always get some kind of authorization so if I need to at any time I can call the lender and check on the process, but so far I haven't needed to.

    I don't think it's hugely common yet, but I know it's becoming more and more common to see short sales like this. A LOT of agents in my area have never heard of it, but I feel like I have a little niche or something. It's great. I'm sure everyone will catch on eventually, but for now, it's great.

    The only thing I caution is if you decide to work with an investor purhasing a short sale of yours to make sure they have full disclosure. I guess that's the key. They need to be disclosing to the lender that they are making a profit and also to the homeowner. If you're on the buy side of things with a homeowner, it's not necessary because when you purchase it, you're purchasing from the investor and they've cleared the title. You also should be able to dual agent. I can be a dual agent, but sometimes I act as "facilitator" too. I think those are the biggest things to be aware of.

    I've actually been able to take on more listings because of it, so I'm thankful. I am not sure I'm explaining it all correctly but that's the overview of how it works. Good luck.
  • Hi Smitty, can you expand a little more on this new item that is happening in our industry. I am unsure of what is going on. Please tell me step by step what is happening. Thank you Smitty... lizadig@aol.com

    Smitty said:
    Yes it's legal. It's likely an investor negotiating a short sale. It's disclosed in our MLS too, but usually looks like "Sale contingent upon seller taking title" - I actually like seeing that because the few buyers I brought in to buy, didn't go through the normal headaches of the traditional short sale. The investor that bought the property did all the work, and my buyer's reaped the benefits.

    It'll work on an FHA loan. If the investor is doing a double closing FHA lifted their seasoning requirements. The only problem I ran into was the appraiser for the FHA loan was METICULOUS. ....ug..the sale was an "AS IS" property but the appraiser wanted SCREENS put on the windows before closing. Thankfully the seller caved and got the screens added. I don't think a lot of agents are familiar with the process and at first I was very hesitant, but I've had a couple great experiences so I'm pretty satisfied.

    I don't think there is serious risk other than the sale falling through, but that can happen on any sale. Your buyer would get you deposit back, so I don't see a major risk.

    I don't think equitable interest is new. We just may be seeing a lot more of these types of listings because of the nature of the economy and short sales in general. My understanding is it IS like the option agreement only the investor actually buys the property and takes the title to clear it. It's better than an option contract.

    Good luck! Go for it!
  • Thanks for the reply Smitty. I did speak to the listing agent about this and it is as I suspected. After showing the property the buyer was not interested so I won't get the opportunity to work through one of these but knowing that you have had success with these in the past is comforting. If I come upon another listing with "equitable interest" I won't hesitate.

    Thanks again!
  • Yes it's legal. It's likely an investor negotiating a short sale. It's disclosed in our MLS too, but usually looks like "Sale contingent upon seller taking title" - I actually like seeing that because the few buyers I brought in to buy, didn't go through the normal headaches of the traditional short sale. The investor that bought the property did all the work, and my buyer's reaped the benefits.

    It'll work on an FHA loan. If the investor is doing a double closing FHA lifted their seasoning requirements. The only problem I ran into was the appraiser for the FHA loan was METICULOUS. ....ug..the sale was an "AS IS" property but the appraiser wanted SCREENS put on the windows before closing. Thankfully the seller caved and got the screens added. I don't think a lot of agents are familiar with the process and at first I was very hesitant, but I've had a couple great experiences so I'm pretty satisfied.

    I don't think there is serious risk other than the sale falling through, but that can happen on any sale. Your buyer would get you deposit back, so I don't see a major risk.

    I don't think equitable interest is new. We just may be seeing a lot more of these types of listings because of the nature of the economy and short sales in general. My understanding is it IS like the option agreement only the investor actually buys the property and takes the title to clear it. It's better than an option contract.

    Good luck! Go for it!
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