What is Short Sale Fraud & Why Should You Care?

Short sale transactions are hugely susceptible to cons. A standard short sale is difficult, hard, and will drag on for lots of months. Yet, short sale sellers are often too monetarily strained to hire experts to advise them on the complicated monetary, legal, tax, credit, and other issues brought up by their situation. Sellers can also be likely anxious to finalize their short sale rapidly to prevent the opportunity of losing their homes in foreclosure. Along with the worry and stigma of a looming foreclosure, short sale sellers might be addressing other financial and psychological hardships, such as career loss, loss of a loved one, divorce, or ailment. Given these conditions, the sellers can certainly succumb to some scam artist’s lure of a certain quick fix.
Short sale fraud schemes come in different forms, but some are more common than others. Short sale buyers and sellers need to be on the lookout for these three scams as outlined by nolo.com.

Short Sale Scam # 1: Undisclosed Payments

Victims: sellers, buyers and lenders.

Perpetrators: Sellers, junior lien holders, real estate agents, short sale negotiators.

Red Flags: Payments made “out of escrow” or “Off settlement”

How it works: Lenders accept short selling to avoid foreclosure and minimize their losses. Before their approval, lenders often do one or more of the following:

  • Reduce commissions to realtors.
  • Require that sellers receive no financial benefit from the sale.
  • Reduce or even disapprove payments to other parties involved in the short sale (eg., Short sale negotiators, lawyers, etc.).

Primary lenders may cap payments to junior lenders. If there’s multiple loan on the property, the short sale won’t go through without the discharge of the junior liens. With a purpose to get this done, the primary lender will permit some payment to the junior lenders however will set a cap on these payments.

Obviously, those obtaining reduced or capped payments are often unhappy with this situation. Taking advantage of motivated buyers or sellers, they request payments “out of escrow” or “off of the settlement statement.” As a seller or buyer involved with a short sale, you might be enticed to make an undisclosed repayment to just get the offer done. In so doing, however, you’ll most likely be considered a party to loan scam.

All payments made within a short sale deal should be disclosed to lenders and other functions approving the short sale. According to Freddie Mac, short sale scam occurs when someone intentionally misrepresents an undeniable fact or omits a fact to be able to stimulate a lender, buyer, or insurance company to consent to a short sale that it could not have approved otherwise. To be on the safe side, always disclose.

Short Sale scam #2: “Flopping”

Victims: Sellers, lenders.

Perpetrators: real estate agents, buyers.

Red Flags: Double escrows; customer is an LLC or a fictitious entity or buying under the power of a legal professional; purchase contract offers the buyer the choice to resell property.

How it Works: “Flopping” occurs when a short sale is approved based on a misrepresentation of the value of the property. In a usual flopping fraud, the fraudster is the buyer purchasing the property from the short sale vendor. In some cases of flopping, the seller’s real estate agent is the buyer. The fraudster offers a low offer to buy the property to the lender along with an artificially low valuation of the property, with a view to convince the lender that the property is worth less than it really is. Meanwhile, any bigger offers from bona fide purchasers are withheld from the lender, since the lender would definitely reject the low offer if it knew that greater offers had been on the table. Once the lender approves the short sale at the artificially low fee, the fraudster contacts the veritable buyer or markets the property at its actual market price. Without the short sale lender’s knowledge, a second escrow between the fraudster (now the vendor) and a bona fide buyer is then opened to close concurrently with the primary purchase, or soon afterwards. The perpetrator of the fraud buys low, sells high, and keeps the change between the two sale prices.

Sellers could get hurt by flopping, simply because lenders may possibly hold sellers answerable for the deficiency, or the value of the difference between what the seller owed and the selling price. If a lender forgives a vendor the deficiency, the seller may well owe taxes on the amount of financial debt that is forgiven.

Short Sale Scam #3: Predatory Short Sale Negotiators

Victims: Sellers, potential buyers.

Perpetrators: Small sale negotiators, real estate agents.

Red Flags: Upfront fees; fees needed to be compensated out of escrow; negotiator will not be licensed.

How It Works: Sellers thinking about short sales are particularly vulnerable to con artists hoping to benefit from their demanding situations. These con artists, calling themselves short sale negotiators (or short sale processors, short sale coordinators, debt resolution professionals, loss mitigation experts, or foreclosure rescue negotiators) would guarantee results for a flat flee or possibly a share from the sale price. Often, the short sale negotiator normally takes the money and does very little in return.

Some states – including California, Washington and Oregon – require short sale negotiators authorized by the appropriate government agency (probably the body responsible for licensing and regulating real estate agents). If you are considering hiring a short sale negotiator, you should contact the agency within your state to find out if the short sale negotiator needs to be licensed and, if so, whether the short sale negotiator you are planning on hiring has a license. In California, it is illegal to collect short sale negotiator fees before providing services, unless they comply with certain strict conditions. You should also check whether this is the case in your state.

Prior to hiring a short sale negotiator, do your research. Study paperwork very carefully before signing. Ask questions. Request and get in touch with references. Seek the recommendation of an attorney or other neutral third party. Always remember, if it seems too good to be true, it probably is.