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.
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