You may have received some of the promotional e-mails yourself in recent weeks, with promises of quick short sale riches. Investors promising quick cash offers to homeowners in trouble are now also going directly after real estate agents with promises of quick short sale riches.
The scheme promoted is nothing but a new variant of the old fraudulent flip. During the real estate boom, investors would use intermediaries or straw men to flip homes to at inflated values and then pocketing the difference of the new loan and the original purchase price. The lenders ended up holding the bag and authorities have begun prosecuting these fraudulent transactions with realtors, mortgage brokers and investors going to jail. One thing all these transactions had in common was cooperation between the parties (investor/realtor/mortgage brokers and closing agents).
Today we see a new variant emerging: the short sale flip. Here is how it works:
In default home owner is presented with a low ball short sale offer on their property. The investor often uses realtors as ‘bird dogs’ to help them find deals in exchange for promises of full double sided (since the realtor would be representing both buyer and seller) commissions and quick cash offers. The investor offers to manage and ‘negotiate’ the short sale with the lender and will try to influence the appraisal by meeting with the broker performing the ‘broker price opinion’ or BPO.
In the meantime, the investor will re-list the property with another real estate agent in an attempt to find an actual retail buyer for the property that will pay actual short sale market value. If the investor can get the short sale approved AND locate a (preferably cash) buyer for more than his purchase price then the property will be flipped in a simultaneous closing, and the investor walks away with a ‘cool $20K to $30K’ per transaction.
The problem: The lender is being defrauded and the realtor cooperating with the investor is in on the conspiracy. For the first time now the Department of Justice has brought charges in a case that maybe the first in many to prosecute this new type of loan fraud.
To download a copy of the actual court action, click here: US DOJ Short Sale Fraud Case
Participation in these cleverly structured schemes may be a criminal offense and real estate agents are cautioned to participate in them, regardless of how ‘amazing’ they seem.
Equally troubling though, these schemes are also extremely risky to the home seller. In order to bring these transactions to successful conclusion, all the ’stars have to be perfectly aligned’, namely, the lender must agree to the far below market value original offer (which is to a large degree contingent on the investor being able to ’sell’ the broker performing the BPO), a new buyer must be found in time at the actual market value, and that new buyer must be a cash buyer since no lender will finance a transaction where the actual seller (being the investor) to the new buyer is not the actual owner of records; lenders routinely require a 24 months chain of title. This can of course be circumvented if the original owner is willing to execute documents creating a new sales contract for the end retail buyer, which of course represents an entirely new level of fraud.
Bottom line is that only one in 30 deals will work (according to investor’s own promotional materials seeking to sell other’s their system of ‘how it works’).
As always, the best policy is to conduct your business with integrity and to stay away from dubious transactions.
To Your Success!
Thomas Heimann
“Mr. Shortsales”
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{ 9 comments… read them below or add one }
Hey very nice blog!! Man .. Beautiful .. Amazing .. I will bookmark your blog and take the feeds also… I am placing a link on my site to yours… what “anchor text” would you like me to use?
Hi there! Just use “The Short Sale Blog”. Thanks!!
TH
Hi Tom, In My Opinion you may be spreading misunderstood information. If I am reading the article properly .. what the Connecticut ‘Scammers’ were doing was ..
- 1st getting an ‘end-buyer’ contract at market-value SIGNED BY THE SELLERS (now bank has ‘interest’ in this contract).
- SWAPPING the buyers contract with a 2nd ’straw-buyer’ offer to submit to the bank instead of the ‘real’ contract.
- Getting the ’staw’ contract approved and then going to the ‘end-buyer’ and telling them they are all set to close, without anyone knowing their was even a middle-man contract in place. Then obviously pocketing the difference.
That is by all means clearly fraud bc the ’scammer’ literally SWAPPED a contract to the original owner (With bank interest) with their own ’straw contract’.
BUT that is not the same thing as ..
- 1st Putting in a Short Sale Offer SIGNED BY THE SELLERS.
- Getting the short sale approved.
- Before closing, securing an end-buyer to pay a little bit more money than yourself and having that ‘end-buyer’ purchase from the ‘middle-man’ Short Sale Seller DIRECTLY.
In the first example, the sequence of offers is out of sync and so is the sequence of sellers. The first example the ‘Investor’ BREAKS the flow of contracts between the Seller and End-Buyer by REPLACING the short sale offer with their own. The 2nd example is a clear transition from Seller to Investor to End-Buyer.
1st example (illegal):
A) The original offer SIGNED BY THE OWNER should be sent to the bank and not ‘hidden’, since it is THE Short Sale Offer sold/signed by the home owner.
B) The ‘Short Sellers’ clearly played a trick by SWAPPING a contract between the homeowner and the end-buyer, with their own discounted offer.
2nd example:
- If the investors Short Sale Offer was SIGNED BY THE SELLERS and presented to the bank as THE offer (which it is), then everything is ok thus far. THEN the Short Sale Investor with ‘Vested Interest’ has every right to resell their ‘interest’ (property) to a 3rd party for more money.
This is EXTREMELY two different scenarios. The first REPLACES AND/OR HIDES an offer made TO THE bank (FRAUD), while the 2nd has an end-buyer contract with no ties to the homeowner or the lender (between investor and retail buyer only).
If you look at the dates of the ‘End-Buyer’ Contracts and the dates the ‘Short Sale Investor’ Contracts, you can see that the Investor always executed their contracts AFTER the original contracts were received thus an illegal fraud contract.
A 3rd example that makes this more clear is if you remove the Bank from the situation. In the case above, you have the ‘Investor’ acting as the Sellers Listing Agent. In that case the Listing Agent has a duty to get the Seller the Highest + Best Offer possible. Now consider that an offer for $200,000 was received from a buyer and the Listing Agent failed to present it to the Seller, and INSTEAD told the Seller that no one will buy the property and that it should be sold to them for $150,000 because ‘that is all someone is willing to pay’. The Seller Agrees and closes with the Investor, then the investor turns around that same day and closes with the End-Buyer. That is Fraud because they had a fiduciary duty as the LISTING AGENT duty to present all offers.
Actually, there is another popular fraud is for the seller to ask a buyer to pay him cash in exchange for a lower offer to be accepted. The buyer will lower the property tax, the seller will pocket the cashe and leave the bank with the loss.
Don’t know how the lender deal with this.
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