SHORT SALE SCAMS EXPOSED - "THE $10 OPTION CONTRACT"
Hopefully that title got your attention!
If you are reading this, you fall into three categories:
You are with me - You are likely an agent who values fiduciary duties and ethics over money, or a consumer who does not tolerate rip off artists.
You are against me - You are likely an investor or agent who disagrees with me, who would likely value money over ethics and fiduciary responsibilities.
Or you have no clue what I'm talking about!
If this blog post is angering you already, I definitely know which category you fall into! Those of you who know me, know that I'm not in the business to make friends with the world. I do have great friends and people I'm close to in my life. But, I am not always the most polite person on the face of the Earth, especially when I see injustice going on or the subject is something I feel passionate about. I say it like it is. I am going to state my case, and then I challenge ANY "short sale home buyers", investors, or Realtors(R) who disagree to a debate, right here, right now!!
For those that don't know what I'm talking about, the option contract seems to be the most common instrument that investors use to try to "buy" short sale homes. There are other ways investors purchase short sale homes, I've heard them all. Pretty much all of which I believe to be unlawful and unethical in some way, but the $10 option contract seems to be the most common scheme I run into.
Here is how it works:
In a nutshell - The investor puts signs up around town saying something like "we buy houses" or "stop foreclosure" or "John Buys Homes - CASH". The investor also may start websites claiming to offer solutions to home owners in hardship. Either way, the investor puts himself out there as a "cash home buyer" ready to buy your home TODAY!!. Unsuspecting home owners who are upside down on their homes and in hardship call the investor looking for some kind of solution to avoid foreclosure. The investor then asks the home owner to sign a $10 option contract, giving them the OPTION to purchase the home for an extended period of time. Once the option is recorded, it is basically another lien on the property! The investor considers this to be "ownership interest" to the property. Once the home owner is out of the property or has signed their life away, the goal of the investor is to basically manipulate the situation in ANY way to get the home approved as a short sale by the home owners lenders as cheaply as possible. Once approved, the investor tries to find a REAL buyer to flip the home to PRIOR to purchasing, then ONLY buys the home (using cash/hard money funding) if they can put the deal together and flip it to a REAL buyer by buying and selling at the same time.
Here is why the $10 option contract is not only unethical, but illegal:
1.) These investors do NOT buy homes like they say they do! They are really "transaction coordinators", not a "short sale home buyer", right?? I mean after all, they ONLY buy the house if they can find somebody to flip it to right away. If they can't find a REAL buyer to buy it, the property goes into foreclosure, destroying the borrowers credit (could still be liable for money owed!). The investor is out a whopping $10. These people aren't even worthy of being called "investors", as investors take real capital risks. Scam artist I feel is very appropriate. I have talked to MANY sellers who were under the impression that the investor/con artist was the person actually buying their home!
2.) The law has determined that "token consideration" ($10) doesn't constitute a valid contract, period. This means you can't legally say you own a home, and can't make decisions like an owner could when offering token consideration.
3.) What if the lender asks that the short sale deficiency be repaid by the home owner?? This is a very common occurrence. What if, the investor tries to manipulate the lender and steal a home for $150K, instead of the $180K it may fetch when sold immediately to a REAL buyer? What if, because the home sells for less, the lender asks that the home owner repay $40,000, instead of say $20,000 or nothing if the home had sold for a higher price. How could the risk of this possibilty be in ANY home owners best interests? What about agents who agree to hide offers that come from legitimate buyers from the sellers lender, only to present to an investor who is not the REAL seller? Also what about agents who misrepresent the value of the property? I challenge ANY agent who claims to have ethics or values to tell me why they should be allowed to have a real estate license if they approve of this.
4.) There are title seasoning periods on FHA and VA loans. For the layman, this means that even if a buyer wants to buy one of these short sale flip properties, they can't get financed typically with an FHA or VA loan. Specifically created to keep consumers and lenders from being duped in these exact types of property flips, title seasoning periods keep the property from changing hands in a quick manor. In some areas, these types of loans account for as high as 75% of all mortgage loans!
Agents, our job is get a property exposed and make it available to as many potential buyers as possible, right? How can DRAMATICALLY reducing the pool of potential buyers for a property, by as much as 75%, possibly be in the sellers best interests? Reality is, its only in the scam artists best interests.
I'll save some other reasons for anybody who cares to debate with me!!
Because of my involvement in the short sale industry, I am constantly bombarded by these con artists trying to recruit me into their gangs of schemers. It is people like this in my opinion who are the epitome of "American Greed", and are the reason half the world despises our country. When approached by these people, the first thing they ALWAYS go after with me is, "You'll make 6% on the buying side, and 3% or 6% on the selling side". They come at me very hard, and its always ALL about money with them. Probably heard that statement 100 times. They are an extremely aggressive and manipulative bunch.
I'm not for sale, sorry to disappoint.
Realtors, we must stand for something, or we will fall for anything! Don't let one of these con artists talk you into selling your values.
Sellers!! If you are in financial hardship and considering a short sale on your home, beware of short sale scams and mortgage fraud out there! The $10 option contract is just one method these guys use to tie up properties, rob your lender, and play games with home owners credit and financial future. There are MANY others!
ONLY use an agent who will look out for YOUR best interests, NOT their own! It makes sense to say that it is impossible for anybody to look out for your best interests, while trying to profit from your misfortune as much as possible!
If you are looking for a good short sale specialist in your area who is pre screened, very experienced, and must agree to the strictest ethical standards and practices, above industry standards, visit www.short-sale-specialists.com.
Long blog post! If you want to read some, comments 74-83 are some of my favorite arguments
UPDATE - December 7th, 2009
Wow! Lots of discussion and argument below about short sale scams! As expected, my post really got under the skin of some of the folks using these methods to rob home owners and their lenders. A big reason why this article was made extremely confrontational in content, was to pull some of these scam artists out into a public forum, and expose them for exactly what they are!! I feel it worked excellent if you read through everything.
If you choose not to read the entire content, here are some other resources and blog articles for sellers to consider that support this one:
Emerging Fraud Trends - NEW from Freddie Mac !!
The New Flipping: Short Sales - Herald Tribune
Two Connecticut Realtors indicted on "Short Sale" Mortgage Fraud
Sellers Beware of Short Sale Scams
Mortgage Fraud 101 - Short Sale Fraud
The Ethical Dilemma with Short Sale Option Contracts
Short Sale Companies - Another Scam? You Bet!
New Short Sale Scam Taking Root
By the way, I just had a conference call last week with a Vice President and the head of the loss mitigation department and distressed property division from one of the largest banks/financial institutions in the country. He stated that they also view these types of transactions as mortgage fraud. They are also constantly taking measures, such as the arms length affidavits discussed below, to avoid these deals at all costs!!
Hopefully this statement, along with one made by the Assistant US States Attorney below is enough to help home owners Watch out for short sale scams and short sale mortgage fraud using the option contract.
Remember, only use an agent who will look out for YOUR best interests in the transaction, not their own!
***BEST COMMENTS TO READ (I'm not the best with words)
PS - I love the points Greg made in comments 74-76 that completely put Bradley Gaskins and the others in their place, and finishing them off in comment 83!
Also Frank Hernandez The Short Sale Dude from Nasheville showing his true dishonest, manipulative, scam artist nature by getting caught red handed on here posting as "Amanda" and also "Tommy T" (see comment #13 then #18 and 22) a few minutes after bragging about his ethics! - some great stuff!
Update 6/5/10 - ***Freddie Mac just put out an article about these EXACT types of short sale transactions. They clearly state they see them as fraud as well! Its so funny how these scam artists talk about being compliant with Fannie and Freddie Mac Guidelines, but they just put out an article declaring these exact types of transactions as fraudulent: