Kind of ironic the banks which are nowing trying hard to defraud their depositors by playing games with when deposits are actually credited and wiithdrawals counted against the account to maximize overdraft fees to the depositors are now being defrauded themselves!  Even stories of Nigerian scammers infuriates me as the banks have to know within a few days if a check has cleared and to come back 3 weeks later and say it didn't is another abuse of the general public.

No doubt witholding the oath of full disclosure for ill gotten gains describes the type of person society doesn' need, but few have been prosecuted! Unfortunately when I tried to report mortage fraud in Clayton County the officials turned a deaf ear! Really! I guess they want me to supply 100% of the evidence as 50% isn't enough! Maybe they were too busy with more serious immediate crime like all those getting shot by guns. No wonder the Wall Street Boys/Congresspeople haven't been arrested for the financial collapse?

Your article is very interesting.  I think you have some great information.  So what is your solution to the problem of people who want to get out of their mortgage and not have a foreclosure on their credit? 

Are we simply to just walk away?   Wouldn't it be great if the banks would shortsale the original loan so the seller got the equity back? 

April Moore, Broker

Coldwell Banker Mountain West Real Estate, Inc

Well said Jim.

I think homeowners who are not selling short or in distress are being underserviced in this market. Buyers are looking for deals.  Sometimes the short-sale is not the best deal, maybe a well-maintained home in a stable area will be the best investment. 

Linda Metallo Re/max Impact

Well said, Jim.  There is a difference between a fully disclosed short sale and a flip with an undisclosed intermediary.  As the broker of a large Florida Re/Max office, we have indeed been in the heart of the area where scamming is a daily occurence.  The Florida Attorney General's office is involved in a variety of investigations of this type of mortgage fraud.  We have also seen a huge number of investors who bought 4 or 5 properties at the same time, got them rented out, but stopped (or never started) making mortgage payments.  So, even though the tenants were paying on time, the bank never got paid, prompting foreclosure.  Because it takes as long as 26 months to foreclose on a property here, you can easily do the math (4 properties x $900/month/unit in rent x 26 months = $93,600 in windfall profits).  Unless these unscrupulous individuals are prohibited from doing the same thing, they will now use their profits to purchase via cash, not needing to scam banks any more!  But because there are more scammers than investigators, real estate experts like us must do 3 key things:

1.  Report abuses to local, state and federal authorities

2.  Warn our own clients and customers about such abuses and

3.  Warn each other through forums such as Active Rain as to what is going on.

Thanks for all your input in keeping things on the path.

Gary Balanoff

Broker-Owner

RE/MAX Select/Oviedo, FL

The lenders could prevent fraud and abuse by making the short sale process more functional. After all a short sale usually will get them more money at less cost than a foreclosure, not to mention that they don't have to acquire the property. When the lenders stall, rely on drive-by BPO's for determining value, understaff their Loss Mitigation so no one is available to return a phone call, just to name a few of the problems, there is an opportunity for other people to create solutions. Whether it is fraudelent or not for someone to get paid to negotiate with the bank is really an issue of disclosure. The banks seem willing to pay fees to third party negotiators, just like they are willing to pay fees to mortgage brokers to sell the mortgages in the first place.

Jim, I concur. As a former loss mitigation rep  I experienced this first hand with investors that had contacted homeowners and convinced them that they were working in their best interest, even paid them money. The homeowners would actually encourage us to work with these investors instead of listing the property with a realtor. Most lenders recognize what the investor is doing and the bottom line is they will approve a short sale at or near current market value.  When the investor's offer is 65-70% below value their offer is declined. Then these "investors" slink away when they can't realize a profit and leave the homeowner helpless and ultimately foreclosed. 

I am an investor who buys and sells short sales - with full disclosure both verbally and in writing to everyone involved. The way you wrote the article makes it sounds like this is a crime. The FBI report you have in your article states

"In a typical short sale scheme, the perpetrator uses a straw buyer to purchase a home for the purpose of defaulting on the mortgage."

There is nothing wrong with buying and selling real estate for a profit, especially when it takes so much money and time on my part as the buyer to do so saving the seller from foreclosure and in affect creating a new customer for you as an agent to help them buy a new house in 2 years instead of 5 years it would be with a foreclosure.

The issue IS not with the investor buying and and profiting. The issure IS WITH THE BUYER PLANNING TO SHORT SALE BEFORE THEY EVEN BUY - That is fraudulent and wrong.  I agree.

I would value some appreciation for the support that I give Realtors in my buy/sell transactions as you make a commission.  Why are you in such a hurry to classify an investor who profits when they buy and sell as a fraudster in a situation they had nothing to do with causing to happen? This helps noone. 

The house is short sale. Does it matter if a person is going to live in it when they buy it or sell it when they buy it? Realtors should be happy when an investor profits - just like you do on the sale of a short sale - when done ethically and with full disclosure of intent to all involved. I look forward to supporting Realtors who are happy to serve Ethical investors like myself to make the most profits from short sales because it harms noone and helps everyone.

I advised the FBI field office in Tampa and the Florida Attorney General's office of this exact practice and they both stated that they do not believe the "short sale option" to be illegal however they found it to be disturbing.

Anyway you look at it it's fraud.

In early 2000 our company was negotiating short sales before the concept had a name -it was commonly known as short pay. Once the bank agreed to a price they had no problem with a double closing. As investors we closed on the deals and simultaneously closed to an end buyer. Our profit was akin to a real estate commission. So the bank saw no harm as long as everything was disclosed.

The problems we ran into was always with Realtors. They begrudged us for our ability to find a deal, negotiate and make a profit. Numerous times the snubbed Realtor would contact the attorney general and we would get the typical cease and desist letter. Our attorney would simply submit the paperwork, cite the proper statute and the matter was dropped, for we did nothing illegal. I think it is the same today. Realtors get a bug up their butt because their hands are tied by the license they hold. And this license business is for the birds for real estate is not a hazardous business and basically requires a high school education. The powers that are (Board of Realtors) simply have it in their power to control the market and creative investors in the spirit of the American way are entitled to make a buck, as long as it is legal.

I might add that for all the realtors who begrudge the investors bear in mind this real estate recession needs all the (legal) help it can get -it benefits the entire nation to get real estate moving again. Depsite the need for a housing recovery there always remains a group of people who have nothing better to do but ride into town with the white hat to call out the so-called fraudsters to save the day.

WOW.  It amazes me how uneducated and over the top real estate agents can be.

This is the most disturbing and inaccurate post I have ever encounter here.  It is full of misrepresentations, half truths, and out and out lies.

Short Sales are NOT fraud.  They can be done incorrectly and fraudulantly but that does not mean they are fraud.

When we, as an investor, buy a short sale, we disclose that we intend to immedialtely sell the property at a profit.  If the bank doesn't like it they can not agree to the sale.  They do it because it benefits them.  They get more than if they foreclose.

The seller gets the benefit of not having a foreclosure on their record which helps them get on their feet faster. They have not lost anything, and certainly did not have any equity skimed, because the property was upside down and there WAS NO EQUITY.

As value of the property, the banks are big boys.  They independantly verify the value of the property.  If they think our offer is too low they don't agree with the sale.  If they find our offer reasonable then they accept.  We know, and they know, that we are offering less than the full market value of teh property.  We then market and sel the property market value hence our profit.

We have not defrauded any one. Everyone is aware of our motive to make a profit and the side benefit is that the bank loosesless than if they foreclosed, the seller gets out from a stressfull situation with a better, but not  clean, credit record, and in most cases have the deficiency and recourse wiped out as part of our negotiations, which won't happen if the bank forecloses.

Are their fraudsters out there?  YES.  Does that make every short sale a fraud as implied by this post? NO.  Are there fraudulent real estate sales made every day?  YES.  Does that make every real estate sale a fraud?  NO.

You should really be more careful with your acusations and get a better understanding of real estate transactions instead of just being a sales person.

Hello Jim,

Nice posting, all markets are different so what may be true for You is not the same for others.

I live in a state that closes using a promisory note & a deed of trust. While a investor (or any other

Buyer) may not care what the post-closing position is for the Seller, but the Listing agent sure should.

Most final approvals of short sales here involve the bank releasing on the DEED ONLY in order to clear

the way for the new buyer to take title. We get it by fax at the last minute of the deal sometimes

directly to escrow... it's the re-afirmation on the PROMISORY NOTE to the extent of the the short sale.

Did you tell the sellers they were walking away clean ? No IRS problems or 1099 on the forgiven debt

(because it has not been forgiven, only post-poned) The really SLICK bankers/Mtg Co. know they do

not even need to inform the Seller of this as the Seller already agreed to it when they signed the

documents at closing...o so long ago.

3 years from SS closing dateline 2012 Seller receives a call from the current holder of the NOTE, which

by the way has grown with significant interest and penalties to arrange for a repayment plan. The

note is good for 6 years. Did your CLIENT get a FULL and UNCONDITIONAL release on BOTH Note &

Deed ? Verbal assurances (worth Nothing) from the Lender / Servicer during the process are quite

common.  In our state it's debt for deed at the foreclosure sale & that is where most, informed short

sale Sellers end up, now Bush's IRS relief comes into play for MOST owner occupied borrowers. We

now have 100s of BANK OWNED properties paying full commissions and they are ACTUALLY losing $...

Hope you do not get sued in 2012.

days away from foreclosure sale

Guys, When you have a person like Gary Keller(owner of Keller Williams) say to His Agents at one of his conferences here in Az last year, we are in a market of short sales, Realtors are not short sale specialists we are Realtors that need to concentrate on your clients and getting more listings, let short sale negotiaters deal with the lenders. Also If you have a full disclosure on what your doing with the property, its not fraud! I network with alot of Agents and Brokers and I tell them exactly what were doing with the property and you will see it in the disclosure, and the lender knows exactly what were doing cause we have it all in the disclosure. Lets keep it simple people, by working together we can help alot of homeowners to avoid having a forclosure on their credit.

Maybe I've missed something here.  As a mortgage broker, I haven't partisipated in a short sale other that to prequalify a potential buyer.  They seems to take so long that the buyer almost always does something else.  However, in theory short sells seem reasonable.  A leinholder recieves an offer to buy a home.  Through a BPO or appraisal they deturmine what they would probably net if they foreclosed and sold the house.  If they feel they would get more by excepting offer and avoiding expense of foreclosure, it seems to be a good deal for all concerned.  What am I missing?  Where is the fraud? It seems like a transparent transaction.  No entity is being conned or forced to do anything.  Of course from what I hear from agents, the banks are so inept that the whole process is a waste of time.  One wonders seldom haa any skin in the game, stalling is not in their best interest.  Even if they are not actually collecting payments, they can still charge service fees to the investor.  Given recent events, I tend to believe they are no more fraudulent people in the world than bankers.  Oh well, maybe congress.  What a mess.

i fully agree with the full disclosure aspect of any real estate transaction. in order to work together toward a common goal all parties need (should) be properly informed to most all variables effecting the transaction, meaning disclosure.

as we are well aware, several hands help to stir the pot for any deal. there's the realty broker, the mortgage broker, title agents, attorneys, appraisers, etc. at the end of the day we need all these different specialties coming together because no single person can know or do it all (division of labor). in fact, all the different eyes and interests generally act as checks and balances on one another. everybody wants to make money, no one wants to be sued. so in the spirit of good business, parties to a real estate transaction will generally disclose any and all material facts pertaining to.

and this is where jim's post, while well written, blurs the distinction between the ethics of disclosure and the ethics of short sales. they are separate and distinct.

we are well aware of the need for disclosure and understand that those who choose not to are probably up to nefarious ends or are misinformed and inherently assuming unnecessary risk. not crossing you t's and dotting your i's leaves you open for lawsuits.

but to say that a short sale in and of itself is illegal is horribly disingenuous. maybe that wasn't jim's orignial intent, but a cascading chorus of posts from real estate professionals appears to be singing just this tune.

you folks are smart enough to rudimentarily understand the economic climate existing in the housing market in which short sales are proliferating. home prices have been dropping like lead weights in many metropolitan areas for months (though now showing some signs of stability here and there). unemployment in scraping 10%. we find ourselves in the weird position of having massive credit pumped into our economy but activity continues to languish. people are in financial trouble. businesses are in financial trouble (including the banks). munincipal, county, state, and federal government budgets are in financial trouble. and when folks are in financial trouble it is not uncommon for them to unload assets in order to bolster cash positions or reduce liability exposure.

this is exactly why short sales exist and are big business right now. are you in the business of advising your buyers to go ahead and pony up more than they should on an upside-down house because pursuing a short sale would be "unethical"? are you advising your sellers who have a looming auction approaching  on their upside-down property that they should not court offers to short sale because its "unethical"? who is doing who the disservice here?

if you are describing a collusive arrangement between two or more parties to a transaction whereby they inflate values and make false representations then you are talking about genuine fraud. no argument there.

but to issue the blanket accusation over all that would pursue short sale opportunities for profit is plain ignorant. name me a major lender that does not have an overworked loss mitigation department right now. these banks are carrying billions of dollars in non performing assets that they need to either get rid of or regain performance from. and enterprising investors, realtors, mortgage brokers and the like are greasing the gears to help them do just that... for a price of course.

just like the disputed anti flipping "laws" i think folks are simply misinformed about short sales and are subsequently demonizing what they don't fully understand. how else can you make a profit except to buy low and sell high? and how is it mortgage fraud when it is lenders themselves that are facilitating short sale activity by accepting payoffs for less than the outstanding balance? did the investor have foreknowledge that they were going to short sale and flip to an end user/buyer? they better have! or else that property is just gonna go to the auction block anyways where no one will buy it (still upside down) and it will wind up as an REO to be unloaded later at a lesser price. why not buy at the lesser price sooner through a short sale than incur further carrying costs to sell for the same price later?

be clear on the distinction between unethical non-disclosure in a transaction and the objective reality that short sales are an important facet of the ongoing housing market correction.

Great post Jim.

My wife & I recently attended the" Certification Classes" , &were certiied.

Lots of verygood info, if you are interested in persuing this line of business.

Great comment above.  I agree 100%

The Short Sale market in my opinion has it's areas of coruption built in to the nature of it .....The non disclosure and lack of preapproved price  cause much pain to buyes and realtors alike.  I don't know how flipping can even be considered, so thanks for your comments.  So much to say, but it's all been said.

I agree that "it's a mess!"

Thanks!

Roxy

How could a contract that states it has an option to buy and/or resell the property for a profit be a fraud? Do the banks not read the contracts? Do the investors not tell the homeowners with a distressed property that this is an option contract and what it entails? And if the buyer of the property quickly resells to someone else why would that buyers lender need to know the details of a transaction in which they are not a party of?

Well, here is another short sale scam.  Our broker associate informed us that he had a new short sale listing.  It went quickly, about 7 weeks.  Our offer was accepted by the bank...it was an answer to our prayers! But here's the catch..the seller is demanding 5k in cash at the close of escrow or he refuses to proceed with the short sale transaction.  Seller has threatened to either go to another buyer or let the property foreclose.  He claims to have 2 other buyers who are willing to give him the 5k.  He also claims if the bank forecloses, he will get cash from the bank to force him to move!  Did I mention our agent is the listing agent?!? 

We are so upset.  We have been looking for over a year and are on a limited budget.  We are being extorted for wanting to buy a house!  How can this behavior be tolerated or worse...ignored?  I expressed my disgust to our agent and he said, "the next step is up to you, I am just the messenger."