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Massachusetts Agencies

Tips on Flips

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Winter 2009, Volume 8, Number 2

Tips on Flips
by Jane Greenhood, Underwriting Counsel 

How do I know the proposed closing involves a flip?

Typically, the current owner has recorded an Option to Purchase or Notice of Option to Purchase wherein the owner agrees to sell to an "intermediary." A generic example of the Notice of Option is included as Exhibit A at the end of this article on page 3.

What’s the point of the option?

The seller’s loan amount is typically greater than the current value of the property; the seller has been unsuccessful at selling his or her house for sufficient consideration to pay off the current loan, and due to the inversion of values coupled usually by the fact that the mortgage interest rate has adjusted leaving the seller unable to meet debt service, the seller has only a few options:

  • The seller may consult with an attorney in order to renegotiate the terms of the mortgage, negotiate a short sale with the lender, or, alternatively, orchestrate a deed in lieu of foreclosure.
  • Many distressed owners in this situation succumb to being foreclosed upon or resort to self-help solutions with an illusory appeal of rescue.

What does the intermediary do?

Typically, the intermediary requires the seller to cease marketing the house and contract with the intermediary as exclusive broker or promoter while simultaneously negotiating a short sale payoff “on behalf of” the seller. The incentive for the intermediary is to "flip" the property to a third party buyer for a profit.

That just sounds like a good business model, right?

If the flip is:

  • Knowingly negotiated,
  • Seller understands that the intermediary is not their advocate,
  • Short sale lender has explicitly approved the flip,
  • Seller is not left in financial straights due to short fall liability under its note,
  • Third party buyer and its lender acknowledge their transactions are predicated on a flip, along with other possible considerations…

…then these types of transactions are feasible and may be underwritten by Stewart Title. In many flip situations there are less than scrupulous operators preying on desperate home owners who, in the wake of the flip transaction, realize they have been "had" and may pursue litigation as a remedy possibly resulting in setting aside the sale to the third party buyer. Alternatively, the seller or its creditors may file bankruptcy seeking to void the flip thus undoing the third party sale.

So, how do I know if the flip is equitable and insurable?

We require a case-by case review of each transaction in which we review:

  • Short Sale Letter: Does the lender acknowledge that it is not receiving all net sale proceeds?
  • Has the short sale lender approved the HUD settlement statement between seller and intermediary?
  • Is the seller bringing cash to the closing in contravention of the short sale agreement?
  • Are the third party buyer’s purchase funds being used by the intermediary to pay seller’s expenses in contravention of the short sale agreement?
  • Is the short sale lender forgiving the seller’s debt or is the lender reserving rights to sue the seller for the short fall?
  • Does the difference between the sale price from seller to intermediary and intermediary to third party buyer shock the conscience or is it commercially reasonable given the effort and expense expended by the intermediary?
  • Will the intermediary actually hold title, and for what length of time?
  • Is there an indemnity from the intermediary stating that they have no knowledge of the seller’s pending bankruptcy, nor do they have any knowledge of the seller's intentions to file bankruptcy?
  • Has there been full disclosure to the third party buyer that their purchase is derived from a flip deal?
  • Has the buyer signed an affidavit stating that there is no relationship between themselves and the seller and/or intermediary?
  • Has full disclosure been made to the third party buyer’s lender relative to the fact that the purchase is derived from a flip deal and that such lender’s appraised value is within the range of the sale price to third party?

There is no exhaustive list of considerations as each deal presents its unique facts. When your pending transaction appears to be a flip or there is a flip in your recent back title, please be advised that such closings may only be insured with the benefit of a Stewart underwriter's review.

We appreciate the fact that this information gathering and review process is cumbersome, but in light of the high risks associated with flips, we will all benefit from our efforts to avoid a fraudulent conveyance. Thank you for your cooperation and understanding, and perhaps once we have met our stride in this type of transaction, the market will have moved on to more "conventional" tactics!

Exhibit A

Notice of Option of Contract

This Notice of Option of Contract for the purchase and sale of the property located at _______________ (the “Property”) between __________ ("Seller") and _______________ ("Buyer")

In consideration of $150.00 the Seller hereby grants to the Buyer the option to purchase the Property pursuant to the following terms:

Typically the only term disclosed on record is the date by which the Option must be exercised.

Executed as an instrument under seal this                  day of                                , 2009.


By: _____________________________ Date: ______________


By: _____________________________ Date: ______________

                                Commonwealth of Massachusetts

Acknowledgement before

                                                Notary Public:
                                                My Commission Expires: