Are You Involved in Short Sale Fraud? Here are the Warning Signs!

By
Real Estate Broker/Owner with Jonathan and Associates, Inc
http://actvra.in/4jDG

FRAUD: intentional perversion of truth in order to induce another to part with something of value or to surrender a legal right b : an act of deceiving or misrepresenting. (Merriam-Webster Dictionary)

It's a scary word in the the real estate industry (and in any industry) and unfortunately the turn in the real estate market has sent the scam artists out in force with an army of desperate agents eager to assist them. I know this because, as an agent who lists and sells short sale properties, I get calls from these guys and their agents ALL THE TIME.

Ok, before I go any farther, let me just state for the record that I am NOT pulling any punches on these guys as WE take fraud VERY seriously. Anyone real estate licensee involved in such activity should have their license revoked and sued by the lender and seller.

So here's the deal. The listing agent either seeks out or is sought out by a seller in a desperate and hard time. They list the home with the agent as a short sale who then offers the seller a contract on the home from an investor. The contract is WAY below market value but the seller signs anyway not knowing what the market value of the home really is. That investor then starts negotiating with the bank either on behalf of the seller or the agent to get the sale accepted. Meanwhile, the agent RE-LISTS the home for sale but at a much higher price than the previously accepted contract...while the home is technically under contract with someone else. The seller is now the investor who has not yet closed on the home.

Just to recap: The seller is under contract with an investor who then relists a home they do not own with an agent who lists the home for a higher price. BUT WAIT, THERE'S MORE!!!

A buyer comes along and places an offer in on the higher asking price and the home is under contract. If the investor is successful, he will then negotiate as low as possible his contract, realize what he's getting on his contract and make a profit on the difference between the two. So at closing, the investor signs earlier and the investor's buyer signs later, transferring the house twice in a very short period (i.e. flipping).

If you're wondering...yes you read that right: a investor who didn't own the home just made a huge profit for doing absolutely nothing but by defrauding the seller and their mortgage company.

Any agent who is participating in this action should be quickly shown the door any their firm at the first knowledge that this is occurring since they are VIOLATING their fiduciary duties to the seller. After all, they stand to make a huge pay day for the hassle and the seller typically doesn't care because they don't receive anything monetarily from the short sale. The bank cares since they were screwed out of thousands of dollars that should have gone to cover the loss from the short sale.

Some banks have caught on to this practice and are putting provisions in place to prevent such fraud from occurring. Bank of America and Wells Fargo has in their short sale approval letters that the property cannot change hands over the next 30 days. On the buy side as well, most lenders (especially on FHA loans) will not lend on a home that has been owned by the seller for 3-6 months. Are you mad yet?

Here are the dangers of short sale fraud:
1. The investor doesn't make enough money on the sale, ties up the home, and it goes to foreclosure.
2. The buyer's loan is not approved because of an anti-flipping clause in their loan.
3. The bank sues Buyer, Seller, Agents and anyone they can connect to one of these transactions because they were defrauded out of THOUSANDS of Dollars.
4. Jail time is bad for business.  Just ask this agent

Typical script of a short sale scam artist:
- I am looking to invest in short sales. REO's too? No, just short sales over $300,000 up to $2 million. We have cash and are looking to help you with your short sale. We will do all of the negotiating for you and we'll even list the home with you when we're done.

If you know of someone who is involved in short sale fraud and they are an agent, contact your local association of REALTORS® and real estate commission to report them. If you ever approached by someone who wants you to commit short sale fraud, take their information and send it to the state attorney general's office or your local attorney general.

Short Sales Charlotte NC

-------------------

Update 3/24/2010: Loansafe.org just posted a new section on their site that addresses short sale fraud.  Please take a moment to review their findings.

Update 8/9/2010: Bloomberg now calls terms this "flopping". Read their article

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Re-Blogged 6 times:

Re-Blogged By Re-Blogged At
  1. Tim Krueger 03/17/2010 04:35 PM
  2. Jenna Dixon 03/18/2010 02:02 AM
  3. Linu Abraham 03/18/2010 02:19 AM
  4. Roy Kelley 03/18/2010 02:31 AM
  5. Geoff ONeill 03/18/2010 04:48 PM
  6. Lynn B. Friedman 01/09/2014 06:08 PM
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Rainmaker
245,486
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

I am amazed how many agents just don't see what is wrong with this scenario.  Their motto? "Its the American Way!"

Mar 22, 2010 08:06 AM #213
Anonymous
Rob F

WOW!,  Coach Pat is offering to clear the air here folks and no response from Jonathan.   Could it be the Great House Hunter from Charlotte, NC doesn't want to get on a call with Real ATTORNEY's and TITLE COMPANIES that understand back to back closings?  

  Come on Realtors...get out there and study this....there is nothing illegal, immoral, or unethical about Investors attempting to solve the homeowners problem here.   Investors are providing a service to the homeowner by offering CASH for their property, disclosing they are going to resell for a profit,  and when done correctly with FULL DISCLOSURE, everyone wins....including the Realtor.    The key is getting your Attorney's to review and bless the investors contracts and working with legitimate investors like Pat Martin.

Realtors...it's your responsibility to offer all solutions to the homeowner in distress,  including the option of working with investors.   If you don't believe a FULL DISCLOSURE Legal, Ethical, and Moral Short Sale Flip is a legitimate option,  beware....you may be at risk for a future law suit when your buyers walk and your homeowner goes to foreclosure.   If you are going to live in the world of solving Negative Equity problems,  you better understand ALL the options available to your client so that you can best serve your clients interest......THE HOMEOWNER not the BANK!

Realtors...here's the bottom line.....there are unethical people in the world....some are investors, some are even Realtors (gasp),  and some even work for the banks.    It's up to all of us to due our due dilligence every day to separate out the legitimate business people from the rest. Unfortunately,  it's not as simple as looking at a class of people (the investor in this case) and deciding you don't like the type of transaction they are offering.   Folks,  these are legitimate offers being made...the Title companies, and the underwriters know it,  the Banks know it, Attorney's know it, and legitmate investors know it , and you should educate yourself as well. 

I applaud Pat for offering to video his meeting with Jonathan....I just don't hear Jonathan stepping up to the plate to volunteer to be educated by Attorney's.....could it be Jonathan doesn't believe in FULL DISCLOSURE?   

Come on Realtors ....stop listening to this Bozo of a Realtor and start listening to ATTORNEY's that know back to back closings and understand the law.  This isn't about realtors or investors opinions...it's about what's legal, and these transactions are not Fraudulent if performed properly.

Now let's work together to clean up this mess!

Rob F  Dulles, VA

Mar 24, 2010 01:22 PM #214
Rainmaker
158,218
Jonathan Osman
Jonathan and Associates, Inc - Charlotte, NC
Charlotte House Hunter Group

So a new article posted on LoanSafe.org outlined short sale fraud.  According to the FBI, short sale flipping is fraud.  Please take a moment to read the article for yourself.  

http://www.loansafe.org/short-sale-fraud

Mar 24, 2010 02:03 PM #215
Rainmaker
225,408
Tim Bradford
Cleveland, OH
NMLS 250013

Jonathan,  Glad you came back to respond to the anonymous posters. 

For any consumers reading this Post, I do support Jonathan's original post while at the same time do acknowledge there are legimate ways for an investor to buy a home and then resale it for a profit.  Most realtors I do believe follow the published guidelines, it is only a few that don't. 

A long time ago, I heard a principle that says "IF THE FACTS ARE ON YOUR SIDE, ARGUE THE FACTS, IF THEY ARE NOT JUST ARGUE".    I believe the Anonymous posters are just ARGUING.   They do make a point that FULL DISCLOSURE is necessary. 

Again, Jonathan, A great post and great discussion.

Mar 24, 2010 02:22 PM #216
Rainmaker
592,134
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Johnathan,

This post keeps getting sadder and sadder!

You just just recommended an ad as a reference! Not only is the sight only reverent to CA, but it's designed to scare and mislead consumers!

Shame

Bill

Mar 24, 2010 02:59 PM #217
Anonymous
The Mighty Quin

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The brutal truth behind this topic is the fact that while there have been some very good posts submitted by both realtors and investors alike, it’s apparent MOST have no clue what their talking about.  Sad considering the individuals probably consider themselves real estate professionals. 

 

Luckily.. it’s not your fault. 

 

I strongly recommend you listen to the latest episode of The Damn Good Real Estate Show, where this topic is thoroughly examined. 

 

Your also invited to subscribe, make comments and get involved.  Everyone needs to pull together if we are going to solve this nationwide epidemic. 

 

Act now… here is the link. 

 

http://itunes.apple.com/us/podcast/damn-good-real-estate-talk/id342491231

<!--EndFragment-->

Mar 25, 2010 07:32 AM #218
Anonymous
The Mighty Quin

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The brutal truth behind this topic is the fact that while there have been some very good posts submitted by both realtors and investors alike, it’s apparent MOST have no clue what their talking about.  Sad considering the individuals probably consider themselves real estate professionals. 

 

Luckily.. it’s not your fault. 

 

I strongly recommend you listen to the latest episode of The Damn Good Real Estate Show, where this topic is thoroughly examined. 

 

Your also invited to subscribe, make comments and get involved.  Everyone needs to pull together if we are going to solve this nationwide epidemic. 

 

Act now… here is the link. 

 

http://itunes.apple.com/us/podcast/damn-good-real-estate-talk/id342491231

<!--EndFragment-->

Mar 25, 2010 07:33 AM #219
Anonymous
The Mighty Quin

The brutal truth behind this topic is the fact that while there have been some very good posts submitted by both realtors and investors alike, it’s apparent MOST have no clue what their talking about.  Sad considering the individuals probably consider themselves real estate professionals. 

Luckily.. it’s not your fault. 

I strongly recommend you listen to the latest episode of The Damn Good Real Estate Show, where this topic is thoroughly examined. 

Your also invited to subscribe, make comments and get involved.  Everyone needs to pull together if we are going to solve this nationwide epidemic. 

Act now… here is the link. 

http://itunes.apple.com/us/podcast/damn-good-real-estate-talk/id342491231

Mar 25, 2010 07:34 AM #220
Rainer
43,399
Spring Haigler
Tradd Residential - Myrtle Beach, SC
CRS, GRI, RSPS

I'm not against legitimate investors, just the bad ones. I work in a resort and second home market and deficiency waivers are not the norm on this type of property, especially on second mortgages.

I had this situation happen to me last year and it took 6 months to fall apart. It was the first short sale I had encountered with a "shady" investor/buyer and his "shady" attorney. I had the end buyer. My buyer's lender was Wells Fargo and they found out that the seller's name on the contract and the owner of record (the real seller) of the property was not the same when they received the appraisal.

#200 said "....the investor is not negating with the distressed homeowners lender.  Think about it...what loss mitigator is going to enter into negotiations with the buyer of the distressed property?  That might of happened 3 or 4 years ago...but not today!"That IS exactly what happened in this transaction. The seller/owner gave the investor/buyer permission to do just that, negotiate directly with his lender and she is the only one who ever talked with loss mitigator. It's possible that the seller/owner's lender didn't realize that the negotiator was the same entity as the LLC/investor/buyer on the offer.

Wells Fargo, my buyers lender, immediately stopped the process when they found out about the double closing. The investor did not own this property, not even for one day. I don't know what kind of disclosures were made to the real seller, but, there were no disclosures provided by the investor to me or my buyer about the way this transaction would be handled. I had to dig and find out bits and pieces until I put the whole thing together. We were lied to by the investor/buyer several times. My buyer took the case to an attorney and was told that he in fact, had a case that could be won easily.

Here's where it wasn't not good for the owner/real seller. This was NOT his primary residence and after the short sale was completed, he was slapped with a deficiency judgment from his short sale. That deficiency would have been a lot less if there hadn't been a middle man buyer involved. I found out later that the investor paid the real owner/seller's bank $180,000 for the condo. The buyer (not mine) who ended up purchasing it paid $210,000. The investor grossed $30,000 on the deal and called herself a "short sale negotiator". The seller now has a deficiency judgment on him for $120,000 as opposed to $90,000. People were lined up with back-up offers, so this property didn't need an investor to save the day.

Unfortunately for this seller, he had two other condos he sold through this investor/buyer/short sale negotiator" and ended up with deficiency judgments on those as well.

#200 said "The investor has to bring his own cash to the table to close in one complete separate transaction."The investor in this transaction and his "shady" attorney had it worked out so that the investor/buyer didn't have to bring a dime to the table for the double closing. The investor required that the transaction be handled by his attorney for both sides.

I'm just glad this deal didn't work out for my buyer and we found them an even better deal in the same resort.

Legitimate investor/buyers do help with the short sale crisis. Agents, just make sure you are dealing with one who is.

Let's not be so quick to throw all investors into the same bad-eggs barrel we ethical Realtors get thrown into with bad Realtors by the public.

Mar 28, 2010 04:28 PM #221
Anonymous
Kevin

Sorry Jon, but again you are wrong:

 

The California DRE's mandate fails to mention that if the person negotiating the short sale has a lease option or land contract signed with the owner of the property, then they are now a legitimately recognized equitable interest holder in the property, and therefore are representing themselves which does not require a real estate license. So even in the exampe that they gave, it would only be FRAUD if there was no interest held in the property by the person negotiating the short sale, assuming they were unlicensed.

 

Again for you obvious beginners: An investor with ANY type of interest in a property can negotiate a short sale and close and then resell that property for a higher price. If he discloses in his contract that he is an investor purchasing the property for the purpose of immediate resale for a PROFIT (why else would you bother) and also disclosing that his marketing of the property to find a suitable buyer for HIS OWN PROFIT MAKING PURPOSES has already begun and that any additional offers made on the property will NOT be submitted, and he uses HIS OWN FUNDS to close his side of the transaction, then THERE IS NO FRAUD.

 

Secondly, as you should be aware, the seller of a property can reject ANY OFFER for ANY REASON. So just because an offer is the HIGHEST does not mean it is the best. I.E. a buyer who needs loan offers $20,000 and a cash buyer offers $15000 but can close TOMORROW. How may times does that lower offer get accepted DAILY?

 

To be sure, let's bring it all the home now: Send me ANY Case from ANY COURT in the US where civil or criminal penalties have been issued from so-called short sale fraud. If you cannot produce not ONE SUCH CASE, you should remove this posting.


PERIOD.

Mar 29, 2010 02:25 AM #222
Anonymous
kevin

Oh I almost forgot, here is another CRAZY idea:

 

WHY DON'T THE LENDERS ORDER AND PAY FOR THEIR OWN BPO? THEN THEY WILL KNOW EXACTLY HOW MUCH THEY ARE ENTITLED TO AND IF AN INVESTOR RESELLS THAT PROPERTY FOR MORE THAN THEY ACCEPT, THAT IS CALLED CAPITALISM. WHY WOULD A BANK ACCEPT AN APPRAISAL FROM A SELLER OR INVESTOR TO DO A SHORT SALE WHEN THEY DON'T DO THE SAME FOR A PURCHASE?

Please think about that. BPO's cost $75. If they are losing THOUSANDS as you claim, why don't they just establish their own current FMV?

 

 

Mar 29, 2010 02:30 AM #223
Rainmaker
161,786
Satar Naghshineh
Satar - Amiri Property and Financial Services Corp. - Irvine, CA

As a short sale expert who has been doing short sale flips as both as an investor and as a licensed real estate broker, I just wanted to chime in and say that your blog is incorrect. I suggest you rsemove your blog or state that this is entirely your opinion and not fact.

Apr 02, 2010 12:29 PM #224
Anonymous
Making Good

Kristina Smith we hear has upset the wrong people   What we can tell you is that Jonathans post http://www.dre.ca.gov/pdf_docs/Article_ShortSales03_2010.pdf does have far reaching implications for the likes of her

About to come under federal investigation and not before time 

Apr 06, 2010 03:08 PM #225
Rainmaker
273,023
Wayne B. Pruner
Oregon First - Tigard, OR
Tigard Oregon Homes for Sale, Realtor, GRI

Good post and lots of good comments. It's always good to hear from "both" sides.

Apr 13, 2010 05:01 PM #226
Rainer
120,392
Ronald Gillis
Southwest Florida Notaries (Mortgage Notary Signing Agent) - Port Charlotte, FL
CNSA Southwest Florida. Notaries, Port Charlotte, 941-7-NOTARY

I like your beginning and the definition of fraud. Of course, I hope many here realize virtually all mortgages (the only reason I say virtually, is because I hate to say always or never, because someone usually can always find at least one loophole in the scenario) by banks in this country are fraud.  Nice to see someone attacking part of the fraud, but on a much bigger scale is the fraud upon all of us in America.  I was actually shocked to see MSNBC come out a couple weeks ago, but Dylan Ratigan gave a short explanation of the 'con job' done by the Federal Reserve System, and the banks, and interview of a Florida Congressman and mortgage broker.

Apr 21, 2010 08:30 PM #227
Rainmaker
158,218
Jonathan Osman
Jonathan and Associates, Inc - Charlotte, NC
Charlotte House Hunter Group

I just posted an update to this post as North Carolina and Georgia have both outlined rules as to who can now negotiate short sales...and the unlicensed short sale flip investor is out:

North Carolina institutes rules as to who can negotiate short sales

Have a great memorial day everyone

May 31, 2010 03:29 AM #228
Rainmaker
158,218
Jonathan Osman
Jonathan and Associates, Inc - Charlotte, NC
Charlotte House Hunter Group

In doing some research for a presentation, I ran across this article that tied into this original blog post. Bloomberg calls short sale flips - flopping (news to me).  Anyway, check it out: http://www.businessweek.com/news/2010-06-10/banks-face-short-sale-fraud-as-home-flopping-rises-update2-.html

 

Aug 09, 2010 06:38 AM #229
Rainer
135,426
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

Jonathan, if you're so worried about your distressed homeowner's additional tax liability, and not profiting from their misery as you say, I assume you take 0% commissions, correct?  Your 5 or 6% commission comes directly from the net and is added to their tax liability and/or deficiency, so don't act like all you care about is helping people.  It is reprehensible & hypocritical to demonize one group for profiting from helping people in foreclosure while you do the same thing.  Wise up.

Aug 22, 2010 07:03 AM #230
Rainer
7,623
Kathleen Kennedy - REALTOR®, SFR
Keller Williams Avenues Realty, Wheat Ridge, CO - Denver, CO
Making All Your Real Estate Dreams Come True!

Thank goodness we now have a law in Colorado that's about to take effect that deals with the issue of wholesale/short sale flip deals. HB 10-1133 was signed into law on July 1, 2010, and makes some major amendments to the Colorado Foreclosure Protection Act. It will take effect on Jan 1, 2011. I won't put all the details here, but you can read info via the link: http://www.investoradvantage.net/members/?p=3109 The highlights are; 1) FULL disclosure must be made to the seller and the seller's lender, regarding the terms of the agreement with the subsequent purchaser - including the purchase price, and 2) the same FULL disclosure must be made to the subsequent purchaser and his/her lender - including the purchase price, and 3) the subsequent purchaser, in most cases, must acquire the property within 14 days.

The new law is terrific and has been a long time in coming. It will put a nice dent into shady short sale dealings by unscrupulous investors. Also, most title companies don't handle simultaneous closings any longer, which has traditionally gone hand-in-hand with wholesale deals. They've stopped that practice with good reason, because it skates just too close to the edge. It's not worth possibly being prosecuted for mortgage fraud. If you're interested in reading further about what a big deal mortgage fraud is to the FBI, read this link: http://www.fbi.gov/about-us/investigate/white_collar/mortgage-fraud/mortgage_fraud?searchterm=mortgage+

I don't begrudge people making a living. Certainly I'm a realtor because I love the interaction with people...but also to make a decent living. But, it's time that everyone who's involved with a seller facing a foreclosure...the seller, the seller's lender, the end buyer and their lender, the title company, and anyone else involved...are all FULLY disclosed on what's happening during a wholesale/short sale flip. Keep it above board, and it will make everyone more conscious of their responsibilities, and their liabilities.

Oct 15, 2010 08:53 AM #231
Rainer
533
Barry Sullivan
Snohomish, WA

Does anyone know of a company called DC Fawcett Corp? I have an elderly client who just joined a membership with this group and paid $2300 to join. He has terrible credit and no money, but assures me that DC Fawcett with partner with him on luxury short sales purchases and flips. They will then divide the profits with him. This sounds like a scam and I am not sure why they need my client to be involved with the purchases, when they can find a local broker here in WA to locate properties for them. My client gave me the name his DC Fawcett advisor in Florida whom I called and could not reach. Any responses would be appreciated. Thanks.

Jun 03, 2011 04:16 AM #232
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Rainmaker
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Jonathan Osman

Charlotte House Hunter Group
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