In the first part of this article, I discussed "The Good" Short sales and double closings - the good, the bad, and the ugly - Part 1 things about short sale double closings.  In the second part, I discussed the questionably "Bad" things Short sales and double closings - the good, the bad, and the ugly - Part 2 about these type of transactions.  Well this last article is the really ugly, possibly criminal stuff.  I am not going to re-iterate points I have made in the previous articles. So if you don't understand short sale double closings, then I urge you to go back and re-read the previous articles.

The ugly -

The short sale double closing transaction can get even juicier.  I've attended multiple meetings, classes, and seminars over the last year or so where the topic of short sales and double closings came up.

The first time I heard anybody questioning them was in an article by a local real estate attorney about 1 ½ years ago.  Then I read about Stewart Title curtailing these transactions.  In Fall 2008 I heard it discussed by our local Orlando Regional Realtor Association's attorney at a broker breakfast.  Then I heard about it at a small group meeting with the Florida Attorney General's office this Spring. In August  I hear about it yet again at the Florida Association of Realtor's convention - both FAR's attorney as well as the State of Florida Division of Real Estate's attorney spent about 30 minutes each discussing the topic.  When the State's enforcing officers start discussing a topic repeatedly that typically means it is only a matter of time before criminal crackdowns begin.

The constant theme I heard from all these people is defrauding either the lender or the borrower as part of the transaction.  Not only is fraud a violation of state law, but it is a violation of federal banking laws and could possibly fall into mail fraud, wire fraud, and RICO.  We are talking major criminal penalties here. It could also result in the lender unwinding the whole short sale transaction and pursuing additional deficiency judgments against the borrowers.

At the FAR convention, the attorneys both stressed on multiple occasions that if the buyer, their Realtor, the title company, or anyone else is trying to convince the lender that the property is worth one amount when they know for a fact that it can immediately sell for higher that this is FRAUD.  Especially if there is a higher offer that is already signed and agreed to behind the scenes and waiting for the closing from seller A to buyer B to happen.  That does not mean that the second buyer C's name, contact information, price, or terms have to be revealed. 

Some so-called gurus will go so far as to instruct you to send the lender low comparable sales or write up a low Broker Price Opinion (BPO) in order to influence the lender.  I've even heard some investor-buyers meeting with BPO agents to influence them about the "terrible" condition of the house. Some people will remove the hot water heater or air-conditioner; some will shake a coke can and spray it on the ceiling to look like a roof leak.  Some people will intentionally borrow a beat up car and wear shabby clothes when they meet the Realtor performing the BPO in order to somehow influence that person into feeling sorry for all the parties involved.  

Certainly I can understand why someone would want to influence the BPO to be a lower price.  And if the buyer was planning on buying the home live in it or keep it as a rental, then I don't see any big problem at all.  But if the investor is trying to convince the BPO Realtor and/or the short saling lender that the property is worth only $150,000 when they know for a fact that they can immediately sell it for $160,000, then that is most likely fraud if they don't disclose their intent.  The fraud is influencing the lender to accept the lower dollar amount via trickery, strategy, or whatever tactics.  This is very similar to some of the tactics that were done in the boom times to convince appraisers to over-inflate the value of the property. Well as the State's attorney said, the mortgage fraud law works both ways - on both over-inflated values and under-inflated values.

So here is my advice from everything I have heard, read, or discussed thus far. If an investor wants to do these short sale double closings then they either (1) need to stay far far away from the valuation and BPO process by the lender, or (2) they need to disclose in writing exactly what they are doing. This includes sending the lender a copy of the second contract (even if the C buyer's name and contact info is crossed out).

Since most investors don't want to do #2 (obviously), then stick with #1. Because if you are doing everything in your power to influence the lender that the property is worth a low value and you know for a fact that you can immediately re-sell it for more, YOU ARE COMMITTING FRAUD plain and simple.  I am not going to sugarcoat it. Do not attempt to influence the lender as to the property's value on a short sale double closing.  Let the lender come up with the value on their own and let the chips fall where they may.

Here is a link to the federal criminal code.  In particular check out sections 1006, 1011, 1012, and 1014.  The State attorneys at the FAR convention said that these laws are written liberally for a reason. And remember that nearly all 1st mortgage loans right now are either regulated by, insured by, or owned by the federal government (i.e. Fannie Mae, Freddie Mac, VA, FHA, USDA, FDIC, etc.).

In fact I am not quite sure how attempting to buy a property gives you the right to negotiate a short sale agreement between 3^rd parties - the borrower and lender are 3^rd parties.  As far as I know in all 50 states, only attorneys are allowed to negotiate contracts and agreements between 3^rd parties.  However there are typically 3 exceptions to this law - real estate brokers, mortgage brokers, and certain governmental or non-profit agencies. 

Florida Statute 475.01 provides what constitutes acting as a real estate broker. 

Florida Statue 494.001 and 494.00296 provide the law regarding mortgage brokers.

And obviously a real estate investor is not a government agency or a non-profit entity. 

In Florida practicing law without a license is a 3^rd degree felony. Some investors/buyers will argue that the owner gave them "written permission" to negotiate on their behalf.  Sorry, that bird won't fly.  An owner cannot sign a paper and make you a licensed attorney.  Just like an owner cannot sign a document allowing some unlicensed person to install a roof on their house.  Because if that was the case, then every wannabe attorney in town would simply have their clients sign a power of attorney or land trust document and thus avoid the hassle and expense of going to 3 years of law school and passing the bar exam. Duh!

I was still a little skeptical about all this actually being true fraud because I couldn't find anyone who had come flat out and put all this in writing.  But then I found this memo from Fannie Mae in July 2009.

If you notice on the Fannie Mae website, they don't talk about disclosure at all.  The title of their article is simply "Mortgage Fraud News: July 2009."  The whole article discusses how title companies and lenders can detect and avoid a short sale double closing. Read that any way you want. Again, this article is on Fannie Mae's website.

Now that I have scared the hell out of you, I want to make two upbeat and positive points on short sales and double closings. 

(1) In September 2009, Florida's largest title insurer The Fund issued a much more liberal"clarification" memo on this topic. Fund short sale memo. The Fund is not requiring that the "true sales price/value" be disclosed to the short saling lender, but they are requiring that the "right to sell for a profit" be disclosed in the contract paperwork.  However they are also requiring that "no misrepresentations as to the value or ownership of the property" which again goes back to influencing the lender. 

(2) Secondly the Fannie Mae memo does not mention an out and out ban on short sale double closings. If it did then lenders, Fannie, Freddie, and a few others would simply not allow a re-sale the property within 30 days or whatever timeframe after the A to B closing.  I do see some lenders like Countrywide/Bank of America actually stating this in their closing instruction letters. 

Lastly, I have been asked several times by sellers, Realtors, and investors, about doing A to B to A transactions.  Basically doing the short sale and then immediately re-conveying or renting the property back to the original owner or a family member at a discounted price.  I won't even go there.  Lenders make all parties sign an "Arm's Length Affidavit" at the closing.  They know about this type of nonsense.  So, enough said about it.  Don't do it!

My point in writing this whole series is not to bash any gurus or scare any investor/buyers out of the marketplace.  However before you take anyone else's word on doing short sale double closings or any other "creative" technique, you need to make absolutely sure that you are comfortable with what you are doing.  Just because a guru or their attorney claims that their way of doing things is perfectly legal doesn't make it so.  Plenty of attorneys, real estate brokers, mortgage brokers, and so-called investors have been prosecuted over the years for just about anything you could imagine.  In fact just Googling the words "short sale double closing fraud" brings up over 1 Million results. 

The good news is that I have yet to hear or read about anyone being prosecuted for any of this.  Follow the Fannie Mae memo and the Fund memo to the letter and you should be doing just fine. At least until they change the rules again.

I've said it before, and I will say it again.  The whole real estate and mortgage industry is under a giant microscope right now and will be for quite a while into the future.  Be very careful where you tread.