The Colorado Division of Real Estate has formed a task force to examine short-sale real estate transactions involving investor trusts.
The division believes that individuals, some of whom may be mortgage brokers, appraisers and real estate brokers, are forming trusts to avoid complying with laws regarding fiduciary duties and disclosure requirements, said Erin Toll, director of the division.
Such trusts are not illegal, but the division is drafting a rule prohibiting sham trusts. It also is drafting a rule that says one must be a licensed real estate broker to handle short sales.
“We think trusts are being set up as a subterfuge to avoid regulation,” Toll said.
A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property.
The trusts, Toll said, are negotiating short sales with banks, which are anxious to get the real estate off their books. The trusts already have buyers lined up for the real estate but do not disclose it to the bank.
“The problem is that the buyer doesn’t know that the trust bought it concurrently for $50,000 less, and the bank doesn’t know that the trust already had another buyer lined up,” she said. “If everybody knows what’s going on, we don’t have a problem with it. If you do it in a way that is not transparent, that is not fine.”
Toll said the division is not trying to shut down short sales. Rather, it is creating standards for short sales. The huge losses many banks are taking as a result of short sales is bad for the economy, Toll said.
“Also, the original seller and the buyer may be liable for the difference between what the lender is owed and what the lender received from the short sale,” Toll said. “The original buyer is still on the note in some cases and the bank has the property as collateral and can go after the buyer. That’s why disclosure is critical.”
Will Berry of Foreclosure Brokers LLC said short sales are a way for homeowners to avoid the stigma of foreclosure and worries that the Division of Real Estate may make it harder to get those deals done.
Berry has used trusts in solving foreclosure problems. Having the property in a trust enables a property to change hands without ever changing title. That is important to people who are buying a property to renovate and resell because lenders often require buyers to own a property for 90 days before selling it, Berry said.
Berry’s team helps homeowners and real estate agents in closing pre-foreclosure and short-sale transactions.
“Investors and trusts are a very valuable part of the industry,” he said. “Is it wrong for someone to buy a property and then turn around and sell it for a profit?”
Margaret Jackson: 303-954-1473 or mjackson@denverpost.com
