Short Sale Options to Purchase are Fraud

Real Estate Broker/Owner with Liberty House Realty LLC

I recently wrote a blog titled, "Short Sale Scams Dupes Un-Suspecting Realtor...Are You One?" which created such a stir that now I am prompted to write this blog specifically concerning Short Sale Option Contracts.

So, here is how this happens.

You're in the office making calls or whatever else you do and you get a call from a "investor" who sees you have that short sale listed on 666 Money Pitt Lane and, wants to know if you would write up his Option Offer with no terms or conditions.

You're all excited because by all intents and purposes this is a really good offer, no conditions, no terms, no contingencies.....right,......wrong!

He has one condition and that is, he has the "option" to purchase the home at any time before the foreclosure sale date. He doesn't outline any price or contingencies at this time but, who cares....your seller surely isn't going to mind because they really don't have any skin in the game because they aren't getting any money in return for the sale anyways.

Now, here is where it gets even more interesting. As a part of the investors "option" to buy he mandates that he negotiate the Short Sale with the bank. He makes it all sound great because he has a guy who is on hold with the bank right now just waiting to get this negotiated and sealed for you, because he wants to make you BIG money on the deal. In fact, he has such good relationships with this bank he promises you (the Realtor) don't have to do anything, he can do it all for you! To make you more confident that this is good for you, he offers you a cooperative agreement for both the Listing Side Commission on your original listing and the Buyer's Side Commission when he turns right around and re-sells it to his "firm"....DOUBLE COMMISSION...WOO HOO!!

All he needs is your client to withdraw their listing from you, agree to have him (the investor) represent them, list the property with his firm and, sign a limited Power of Attorney saying that he (the investor) is representing them so he can negotiate with the bank.

Once all this is done, the "investor" receives all the offers from the general public, negotiates all the offers and behind the scenes is negotiating a much lower sales price with the bank for the purchase of the property by his firm.

In other words, all these offers from the general public are being held back...they aren't being submitted to the bank. Instead, the "investor" is negotiating his own offer trying to get the price 20% or more less than his highest received bid from the public.

So once the "investor" gets a high enough offer to satisfy his greed he then exercises his own option to buy the property. Keep in mind, he is purchasing the property at the bargain basement price he negotiated with the lender directly.

Now he works the offer to close and, you get the commission for the listing side, your seller walks away from the home happy to be out from under the debt burden and what do you know, the investor has found a buyer who needs representation who wants to make a great offer and the investor wants you to be the selling agent, because you were so good to work with before.

The offer "your" buyer wants to make is $35,000.00 more than what you just sold it for to the "investor", he is making out like a bandit! When in actuality he is involving you in mortgage fraud!

Just to make this a bit more the money.


  1. You list the Short Sale for $50,000.00
  2. Investor comes in, takes the property over and list it for $30,000.00
  3. Investor negotiates with the bank and gets approval for $25,000.00
  4. Investor receives an offer from general public for $55,000.00
  5. Investor exercises his option to buy and closes for $25,000.00
  6. Investor instantly sells the property to the general public offer for $55,000.00 making a profit of $30,000.00 off of an offer that should have gone to the bank.

In other words, the investor made off with $30,000.00 of the banks money! You profited twice from the deal so, you are involved in a scam if you knew it or not!



Re-Blogged 1 time:

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  1. marilyn koehler 10/08/2010 12:32 PM
Tennessee Davidson County Hermitage
Short Sale REALTORS®
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Teresa Cooper
Home Solution Real Estate Services - North Charleston, SC
SC Lowcountry - Charleston, Dorchester, Berkeley

Jesse - sounds like there's some "real estate school" out there teaching these tricks!  I ran into a very similar situation here in South Carolina, with the exception that this particular investor had already gotten a Power of Attorney and negotiated the short sale with the bank, and asked me to list and sell the property to the general public.  We sold an option on the property, and the purchaser of the option then excercised the option  I consulted a couple of attorneys on this one, and they advised that as long as all parties were aware of all the details, it was not fraud.  I think banks are catching on, though.  In working with short sales now, I'm seeing more and more that banks are not doing short sales to "assignees", and are not allowing "simultaneous closings", and are taking other precautions in these situations, both to protect their interests as well as to minimize the losses and deficiency judgements against the previous owner.

May 13, 2009 07:03 PM #1
Lisa Wetzel
RE/MAX Realty Affiliates - Carson City, NV

I hope they are investigated.  Seems like too much fraud occurs without consequence.  Thanks for the information.

May 14, 2009 10:09 AM #2
Las Vegas Real Estate Agent Dawn Barrier
eXp Realty - Las Vegas, NV
South Las Vegas, Henderson, Summerlin Homes

Not quite the heated debate here as what you had going on LinkedIn...last I saw it was at 41 comments!  I also remember seeing the letter from the title company before as well. Another concern previously was that the end buyer was not just "general public" they were also a straw buyer...that is what happened in the past to create some of the housing mess we are in now.

May 15, 2009 10:42 AM #3
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Refreshing to see others share my point of view.

Sad to see that there are those out there that insist of thumbing their nose at rules of society in favor of the ME philosophy.

Wouldn't it just be easier for them to go into a bank and rob it?

May 15, 2009 10:15 PM #4

There are many ways to skin a cat... There is no fraud as long as everything is disclosed to BOTH banks. Disclosure must be given to both the selling lender and buyers lender. Yes, there are investors out there that cut corners and do give everyone else a bad name. But if you do it right - it's not fraud. I have asked 3 lawyers and they all said the same thing, if it's disclosed and the bank accepts a lower offer then you can buy and sell it at a higher price. Isn't that what real estate investing is all about - buy low, sell high. Why else is buying a home called a person's biggest investment?

Many Agents are quick to throw the fraud word out right now, because times are hard and they are not making the money they use to make during the boom. I can tell you the same Agent claiming fraud now were the same ones selling houses to unqualified buyers and could have cared less if the person could afford the payments as long as they sold a house and got their commission. 

Wait the investor is making lots of money by reselling- you say. Not fair he is not an agent - how dare he. The answer is yes. The investor is the one on the phone negotiating for months with bank. He is the one making the sale possible to someone at a price the home can sell. Period. 

How many Realtors are doing that right now. I can guarentee you very few, most of the ones I know stay away or hate short sales. I meet them everyday. They all say the same thing, if a buyer wants to see a short sale, the agent replies "why would you want a short sale, they take a long time and the bank will most likely say no."  These are the same realtors that are losing their homes because they don't know what to do with them. I get a call from a Realtor wanting to sell their home as a short sale at least onece a week.  If you don't believe what I am saying than you are in denial of what is going on the market and you are in no way helping you client sell their home.

Let me ask you this? Where is the agent when the seller's home has been listed for a year and has not sold. What do you do when the owner goes into foreclosure. As a matter of fact, if you have ever listed a short sale and let the owner go into foreclosure, then you have no right to critize an investor. You did not provide your seller with a valueable service and are just as guilty as those investors that scam people. 

Some of the same Agents claiming fraud now - were the same ones accepting developer incentatives for bringing buyers who never truely intended to live in those homes or pay for them. Most of them would split the incentive with the buyer. I don't have enough fingers and toes to count the Agents in Florida that did this sort of thing. Again if you partipated in developer incentives and your buyer never made a payment. You have no right to critize an investor.

So please before you call an investor a scammer or what he does fraud. Take a good look at yourself and your fellow agents and ask yourself if you did any of the questionable things I mentioned above.

Now why the investor should get paid, he saves the homeowner and Realtor time and gets the house sold, because he is buying at lower price with cash and can sell at a discount below FMV. The bank is always told the investor wants to buy to resell (its in the contract), its up to the bank to decide to accept the offer, if they do the investor buys and sells to make a profit. 

Hold on. I know some of you are ready to respond to me and say "It's Fraud because the bank is never told of the higher offer" only an Agent who has never done a short sale would say this or one that believes in waiting and submitting multiple offers to the bank. What do most agents do, they wait for an initial offer to submit the short sale package or others wait until they have multiple offers and accept the high one to submit to the bank.  How much time do you think is wasted waiting for that initial offer or waiting for multiple offers? Some agents want a higher offer so they list the house higher than market value or just list the property and hope for an offer. Meanwhile, the owner sits at home stressed and worrying, agents don't see that, to them it's just another listing, they rationalize the owner should understand it's the current market's fault, not the agent's.

Let me go further. What does an agent do after an offer is submited to the bank and higher offer comes in a couple of months later. I tell you what they do, they save it as a backup, most banks only accept one offer at a time. Sending a second offer after the initial offer has already been submitted actually causes more harm than good. It delays the process longer because now both offers need to be compared by the bank/investor, which offer has a higher chance to close. Is one cash or the other financing? See what I mean?

A true short sale Realtor will tell you only one offer should be submitted. Most ethical Realtors will tell you the initial offer should be the one submitted, since it was first. The bank decides yes or no, if the bank says no at least with the investor the listing Realtor now knows what the bank wants to net and the Realtor can now market the property more aggressively.

Last thing, yes banks are catching on, some like Countrywide include a 30 day no resell approval. Guess what guys, everything is negotiable. The 30 day no resell can be removed by offering the bank more money, it's been done already and Countrywide is more than happy to remove it if it means more money to them.  So its all a negotiation game, banks want more and investor wants to pay less. Eventually they agree on what is acceptable to both and everyone wins- seller, bank, realtor and yes the investor.

So guys please can't we all just get along and work together to help the homeowner and let's make some money. This debate will be over in a couple of years when short sales dry up, so enough dirt slinging and lets all work in an ethical and productive way. 

May 22, 2009 03:56 PM #5

Ever's comments are right on the money. 

Since when is buying and reselling illegal?  There is no fraud involved in the scenario you are presenting.  Where is there mortgage fraud?  The investor pays cash and the end buyer brings in a new mortgage from a bank that has done their due diligence and meets their appraisers value.  This sounds like a win-win-win-win scenario.

Let's see:
The bank moves a losing property. - WIN
The Realtor sells a house they probably would not have sold otherwise.  And gets paid. - WIN
The final buyer, gets a great deal on a house made possible by the work the investor did. - WIN
The home owner in lis pendis gets to avoid a foreclosure and MOVE ON WITH THEIR LIFE. - WIN

I know of many realtors who flip these as well.  If it was illegal, why would attorneys all over the country be closing them?  Just because you don't like anyone else making money in real estate besides you, mortgage brokers, appraisers, title companies, insurance people, etc., etc. and you feel "investor" is a dirty word, doesn't mean that you're correct.

I know when you have an "investor" who buys 10 peoperties from you, you're happy to have an "investor".  When you buy additional property, are you not an investor as well. 

In fact, when the housing market rebounds it's going to be because investors have been helping to move these houses for you to sell (and get paid on)

You've heard the the banks are holding on to their REO's to drive prices up, right?  I guess that's ok.  Like Ever said, many of you were complicit in putting unqualified people into homes you know they couldn't afford.  Liar loans became known in large part due to Realtor word of mouth.  Come off your high horse and sell some houses!


Aug 04, 2009 07:12 AM #6
True Value
It is a scam. When A realtor take a true value property of 250k (current market) and list it for 150k and then gets a contract on the 150k to give to the bank. The bank comes back with bottom price they will take. The agent has already put his on option to purchase contract before ever listing it. Then the agent buys for 175k because he submits his on bpo from his buddy - many of which are signed up with these banks as bpo providers-and this realtor assure the bank that this is all the property is worth by originally listing it for 3 days- taking it off of the market for 6 months and then relising for the 150k- looking to the bank as if it is not selling. So then seller gets off by the negotiation and not paying balance- seller does not pay the tax on 1099c because it is owner occupied (ripping off the government) and all of the neighbors are pissed because this idiot has just dropped values on the neighborhood. Realtors should be promoting value of homes - not working in a conflict of interest for their own gain. It will come out and guarantee you that these shady realtors that give the industry a bad name. In the end they will get a new home -called prison.
Feb 22, 2010 01:32 PM #7
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