IS SHORT SALE FLIPPING CRIMINAL ACTIVITY?

Short sale flipping is again a hot topic because Sergio Natera and Anna McElaney, two Connecticut real estate brokers, are scheduled to be sentenced in Hartford's federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve short sales of homes -- without disclosing that there were better offers -- and then flipping the houses for a profit.  I last wrote about this problem 2 years ago in SHORT SALE FLIP - QUESTIONABLE METHODS.

 In the Connecticut case, Regions Bank in April 2008 agreed to a short sale of a Bridgeport house for $102,375, unaware that the brokers had a bidder willing to pay $132,500, according to the plea agreements. Eight weeks after the bank sold for a loss, the same brokers resold the house for a $30,125 gain

A typical fraud involves an investor home buyer that hires a broker to appraise the property for a very low value, and then convince the lender as to the low-ball surrounding values and that the short sale contract is fair price.  The buyer does not openly disclose and conceals from the lender that there is already lined up a higher offer, as happened in the Connecticut transactions.

The government, through its Home Affordable Foreclosure Alternatives Program, in April this year began offering as much as $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who close short sales.  That may be a further incentive for flipping fraud as the program may lack necessary antifraud protections.

 A majority of the short-selling fraud is related buyers trying to make a quick profit.  

The Treasury promulgated guidelines and many lenders that have to approve short sales have require that there be affidavits  of arms length transactions and no undisclosed relationships or side deals, and a ban on re-sale of a property within 90 days of the first approved sale.

Suspected property-valuation fraud almost doubled from the end of 2007 through the first quarter of this year, according to a June 8 report by Interthinx Inc., an Agoura Hills, California- based company that sells mortgage fraud detection software.

In addition to banks losing money, this practice damages the unsuspecting homeowner who is selling the home in the short sale because they then face the possibility of a higher deficiency judgment if the lender seeks to recover the unpaid balance, or if there is forgiveness of debt, a higher income tax bill (unless the homeowner is exempt under various tax forgiveness plans of the IRS).

Borrowers are "on the hook for larger deficiencies," Ann Fulmer, vice president of Interthinx said in an interview with Bloomberg Television. "And there are indications that banks are increasingly turning to collection agencies and to civil lawsuits (to collect these unpaid balances)."

All short sale sellers should be careful of unsolicited offers at very low prices.  Use a qualified and reputable real estate agent and consult with a qualified real estate lawyer before proceeding into any sale of your home where the value is less than the amount you owe on your mortgage.

Copyright 2010 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com. 

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