Title insurance group's move could stymie short sale flips

It may now be a bit tougher for investors to flip short sales for big profits.

Attorneys' Title Insurance Fund notified its 6,000 member attorneys this week that it will not insure deals made with a popular - but controversial - method for closing flips of short sales. A short sale occurs when a lender agrees to allow a home to sell for less than the mortgage owed so that foreclosure can be avoided.

The Orlando-based fund is a major underwriter for attorneys who write title insurance in Florida. In a letter to attorneys, the fund said it has become aware of short sale programs advertised on the Internet that promise to make investors lots of money with little or no work.

The programs, the letter says, involve investors entering into option contracts with homeowners for "the exclusive right to purchase their property for a period of time."

The investor negotiates a short sale with the lender by convincing the lender that the price it is offering is the market value of the property. The investor then finds a buyer for a much higher price. The sales happen simultaneously, and the investor pockets the difference.

The problem is that "the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property," the letter states.

The fund's decision could have a major impact on short sale flips because many investors use attorneys to close deals when traditional title companies won't.

The option contract method has been gaining steam as a way to work off inventory in a bad real estate market.

Critics say lenders are misled and don't realize they could be selling the home for more money. Some real estate agents and buyers complain that the option contracts lock some buyers out of the market. That's because some types of loans forbid flips.

Some attorneys have raised concerns that sellers could have to pay the difference later.

But proponents say investors can make money and homeowners can avoid foreclosure. They say lenders would lose even more money if they foreclosed on the home.