Seller beware. New Colorado law adds oversight to short sale flips

Governor Bill Ritter just signed HB 10-1133 into law, a bill that makes marked changes to the Colorado Foreclosure Protection Act. This applies to you if you are a real estate investor who buys and flips short sale properties

The bill’s target is the “short sale flipper.” So, for the investor who plans to sell a  short sale property within 14 days of  purchase, the new law will require you to inform all parties involved in the transaction (including all lenders) about both transactions (including the profit you will make).

Here’s how the law works:

Once you identify the subsequent purchaser, the new law requires that you make two forms of disclosure:
1. Disclosure to Seller & Short Sale Lender. The buyer must disclose to the seller in foreclosure,as well as the seller’s lender or lenders (or loss mitigators), the terms of the agreement with the subsequent purchaser — including the purchase price. The disclosures must be made within one business day (and in no event later than the closing date of the short sale)  “identifying” the subsequent purchaser.
2. Disclosure to Subsequent Purchaser & his/her Lender. The buyer must also disclose to the subsequent purchaser and his/her lender the terms of  contract with the first seller, including the price to be paid. This disclosure must be made at the time of contract and must be part of the contract.  That's why we love "additional provisions."

The bill is fairly clear up to this point, until it defines “subsequent purchase,” where i believe it muddies the waters:

"(2) AS USED IN THIS SECTION, A “SUBSEQUENT PURCHASER” MEANS ANY PERSON WHO ENTERS INTO A CONTRACT WITH AN EQUITY PURCHASER PRIOR TO THE DISBURSEMENT OF THE SHORT SALE TRANSACTION TO ACQUIRE THE RESIDENCE IN FORECLOSURE AND WHO ACQUIRES THE RESIDENCE IN FORECLOSURE WITHIN FOURTEEN DAYS AFTER THE DISBURSEMENT OF THE SHORT SALE TRANSACTION."

If we apply a strict definition of “subsequent purchaser” to determine whether the disclosures are necessary, we get the following:

The first disclosure to the home owner and the lender is required when the “subsequent purchaser” is “identified.” This would require that (1) you have “entered into a contract with an equity purchaser prior to the short sale transaction;” AND (2) that you acquire the home “within 14 days after the disbursement of the short sale transaction.” The legislature’s use of the word AND requires that both elements be met to qualify as a “subsequent purchaser.” So, to meet the definition, you must enter into a contract before the short sale is complete, and you MUST acquire the property within 14 days of the short sale. So, strictly speaking, if you don’t contract with anyone until AFTER the short sale is closed, or if your contract does not require acquisition by the subsequent purchaser within 14 days of the short sale, no “subsequent purchaser” is involved and no disclosure is necessary.

Looks to me that real estate investors have just been given another hurdle to overcome. Stay tuned.
-30-