IS SHORT SALE FLIPPING CRIMINAL ACTIVITY?

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

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

See our easy to understand articles at:

TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Deborah "Dee Dee" Garvin 06/12/2010 02:55 AM
  2. Marty and Laurie Gale 06/12/2010 03:09 AM
  3. William J. Archambault, Jr. 06/12/2010 03:58 AM
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Rainmaker
621,534
Deborah Byron Leffler BzyBee Real Estate Lady!
Keller Williams Realty Boise - Nampa, ID

I have very mixed feelings....the investor I have worked with in the past who was "flipping"  did send over his contracts with the seller disclosing he was an inestor..would be reselling the property....and he was using his own money to complete the buy....not the banks money.  

Where I have problems with the banks being the "victim" is how are they the victim.....they send out their own independent bpo brokers/appraisers....they then determine the price....in our area...the property was listed...at a higher price...again...that information would have been disclosed to the bank...but if they chose to accept the offer that was presented to them....how can they be the victim?  

We are no longer doing these as the real estate commission in our state will not allow them to be completed....so we are complying..  But I still am puzzled....oh and did I mention that in the case where the bank did not accept the investors offer and an end buyer was already secured...the investor stepped aside to let the transaction continue without him being involved or receiving a penny for the work they had done to negotiate the sale.   

Jun 12, 2010 02:54 AM #2
Ambassador
1,985,593
Silvia Dukes PA, Broker Associate, CRS, CIPS, SRES
Tropic Shores Realty - Ich spreche Deutsch! - Spring Hill, FL
Florida Waterfront and Country Club Living

While there is nothing wrong with buying low and selling for a profit, the key for me here is the phrase "The buyer does not openly disclose and conceals from the lender that there is already lined up a higher offer".

Jun 12, 2010 02:58 AM #3
Rainmaker
592,907
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

"Oh what tangled webs we weave when first we practice to deceive!"

It's not the flipping it's the deception!

Great post, it may take a few jailings to make the point!

Bill

Jun 12, 2010 03:58 AM #4
Rainmaker
4,797,822
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Richard.  Great information and those that are perpetrating this kind of fraud deserve to be jailed.  Both unethical and immoral.

Jun 12, 2010 06:13 AM #5
Rainmaker
1,142,325
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

THis is what I keep telling folks. Get as much as you can for the property to protect the seller. Just because it is a distressed sale does not mean the property can be stolen. There are other ways to create equity if you want to flip.

Jun 12, 2010 08:18 AM #6
Ambassador
1,229,956
Melissa Zavala
Broadpoint Properties - Escondido, CA
Broker, Escondido Real Estate, San Diego County

I agree with BB. I have some serious concerns about the short sale flips. Whenever I write a blog about this matter on AR, the investors jump down my throat. If the shoe fits.....

Jun 13, 2010 03:06 AM #7
Rainmaker
427,439
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

Sounds trite, but thanks for a very helpful post. Your information is a perfect example of the role of social media....started with a few hundred copies of Common Sense, now it's instantaneous communication through blogging.

Jun 13, 2010 04:37 PM #8
Rainmaker
526,367
Wendy Rulnick
Rulnick Realty, Inc. - Destin, FL
"It's Wendy... It's Sold!"

Richard - The issue, though, for non-flip situations, should a higher offer than the primary accepted contract be presented to the seller, would be - Should the seller present a back-up contract that is higher to the bank? That would thus create an auction situation.  Contract precedence would certainly not be followed by the bank.  I am not talking about flagrant, low-ball versus fair market offers.  I am talking about the odd higher back-up offer that comes in. If this were the case, then most buyers would not "stick" to the contracts, would not place earnest money deposits, would write multiple offers on properties, etc.  Thoughts?

Jun 14, 2010 12:17 PM #9
Anonymous
Puzzled

I had a short sale offer of $89,900 declined a few months ago by Wachovia with a "must-have" response of $117,000 net. This was after working this offer with Wachovia's negotiator for several months. (BTW: They had previously declined a $99,900 offer.) The buyer declined on the "must-have" $117,000 counter, foreclosure happened the following week and condo was sold at the courthouse to an investor for $47,100. Investor turned around and sold to the original buyer for $89,900. Wachovia was completely aware of all possibilities and chose to sell for $47,100 rather than $89,900.

Jun 18, 2010 04:06 AM #10
Anonymous
Investor7777

It is the full disclosure by the Broker and the "fiduciary duty of the Broker to his/her listing Seller" that  is the key here.

Many respected investors are making great, and perfectly legal, deals in this market with the intention of flipping the properties for profit.  If I as a investor want to buy a REO or short sale property clogging up the banks' books with the intention of reselling and making a profit, then that is just plain,old fashioned American capitalism and perfectly legal.   Some of the best known and respected investors in the country do this all the time and we do not hear everyone crying about it. 

 Would you rather overpromise and overprice your bad assets and let them sit and linger on the market piling up losses for 1,2,3 years or more??!! Believe me, that is happening in some markets where short sales and REOs are in "BPO Fantasyland" and no buyer will payed the inflated prices.

Many Realtors and Brokers along with their Sellers have greatly contributed to this real estate bubble by creating an "auction environment" in 2004-2007 bidding prices way above what all market indicators and wage affordabilty  indices were indicating the majority of buyers  could afford.  Then, Banks created Option Arms to stretch qualifications to unsustainable levels.  So if anything, homeowners and investors should be suing these Banks and Realtors who greatly contirbuted to the collapsing RE market.

Jun 19, 2010 12:31 PM #11
Rainer
51,460
Real Estate Investing |Real Estate Investment
| Real Estate Radio USA - Fort Lauderdale, FL

@ Melissa...maybe the reason some "jump down your throat" is because you keep saying investors are the problem. The two perps in this article were...you guessed it, Realtors!

The problem isn't the real estate arbitrage that we are happily and LEGALLY engaged in, it's the weekend warriors out there masquerading and knowing just enough to get themselves in trouble.

It continues to amaze me, time after time, how people do not understand how to structure their re-sales and short sale purchases correctly.

Maybe someone should create a course and show them...oh yeah..I did!

 

Jun 20, 2010 04:19 PM #12
Ambassador
2,081,169
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

This is great information!!! I am glad I found your blog!!!

Jul 05, 2010 01:43 AM #13
Anonymous
AZ Common Cents

In the state of Arizona many realtors see this type of transaction as unethical to the lender, and I agree but only when their is a back up offer that is not being disclosed to the lender. However if an agent who is representing an investor "fully discloses" to the the lenders, buyers, and sellers that after close of escrow the investor(s) intend to sell for profit. SO BE IT.

We all know that its the realtors responsiblility to put together their own CMA or BPO for their buyer to be sure they are getting a "good deal". And if this "good deal" amount is 85-95% of what the lenders third party BPO comes in at, ITS A WIN/WIN/WIN.

I wonder how many of these BPO agents the banks higher don't want the short sale to happen in hopes they will get the listing?

Funny how many agents throughout the "housing boom" were OK with pulling comps and seeing that the appraisal the appraisal on the subject property came in at 3-5% above all sold comps and list comps....and that the neighborhood has realized 15-20% increases in less than 12 months...wonder where all their ethics were to let their first time home buyer Johnny and Sally Smith buy that home. Not to mention in a loan that was to reset in 2 years....with no documentation of their income... or assets...

Hmmmm

Investors have a right to buy as many short sales as the good lord will allow...as long as full disclosure occurs....something that lacked in the mortgage brokers, underwriters, realtors, and home owners just 3-5 years ago.

Just my 2 cents... :).

Oh and Ron Paul 2012!!! Liberty, Love, Logic, Rhetoric!

Nov 11, 2010 12:53 PM #14
Anonymous
William Gassett, Jr.

Hi Richard,

Have you ever sat with a successful short sale investor and walked through one of these deals?  I can tell you that if this is your way of living, you follow the laws explicitly. 

When reading your blog, I feel as if you've never gone through any of these with an investor because all I'm reading is the same regurgitated stuff I've read from other online publications. 

Let's go through this a bit.  An investor doesn't HIRE the broker or BPO agent.  That person is hired by the LENDER.  BELIEVE me we would love to "convince" the lender to take a low offer, but the lender does their own independent valuation.  We don't pay for that person to valuate the property.  We may hire an appraiser if the valuation is completely out of line from the bank...so let's see, that would be practically ANY HAFA short sale as the lender seems to LOVE to over value the property.  Where is the outrage there?  How EXACTLY are we CONVINCING a BPO/valuator the property is worth less?  Can you give an example?  You can't convince someone of something if they don't believe it.  I can't CONTROL someone else.  C'mon?!?!?

You know the bank hires their own valuator.  I'd love to know how I can convince them the property is worth less than market value.  Let me in on the SECRET PLEASE!

Now do investors make LOW offers?  YES.  Do they make LOWBALL offers?  Maybe, but any investor that's been doing this for a while just like any agent and lender, know the bank will only take an offer within a range of the BPO price.  Richard, investor or not, I'm sure you've seen enough contracts to know that ANYONE who offers cash, makes a lower offer.  The higher offers tend to be the less qualified FHA offers.  Anyone offering cash will typically offer a lower amount.  Again the servicers have guidelines they follow on what they will accept for an offer, which may be the exact bpo price or a % of that price.  Let's face it, if a lender accepts 80% of the BPO price it's not unrealistic to have an offer of $320,000 accepted on a property that was valued at $400,000.  So if an investor buys it for $320,000 somehow it's fraudulent?  It's completely ok to buy that property for $320,000 and sell it for $350,000.  FULL DISCLOSURE!!  I've disclosed to the bank I'm immediately reselling it and belive me with a spread like this the investor would be lucky to walk away with $5000 in his pocket after Realtor payouts, closing closts, any third lien payoffs etc.

I know  you also know that servicers have guidelines they follow on whether or not they pursue a deficiency, so it doesn't matter if an INVESTOR makes the same offer as Joe and Suzi Smith.  If the offer falls within certain guidelines, the lender MAY reserve their right to pursue the deficiency.  It doesn't matter who put the offer in.  So just because an investor made the offer doesn't mean it opens the doors up to an automatice reservation of deficiency.  The servicer follows certain guidelines that dictate that outcome.  Joe and Suzy Smith's offer could have the same result.  Most investors know that servicers will only take a % of the BPO price, so to be honest, it's difficult if not impossible to get a "lowball" offer accepted.

"Suspected property-valuation fraud......."

Again, SUSPECTED.  I'm sure you can read headlines.  How many actual cases of fraud are there out there??  SLIM TO NONE if you do the research.  Yes the Connecticut case made headlines.  So far it's one of the only ones I know of where people have been arrested and convicted of short sale flip flaud.  You are pulling data from a company that's PAID BY THE LENDERS!!!  Can you say BIAS?  It's the same as taking Corelogic data...it's a joke.  If you want TRUE data, go to an unbias source like the FBI.  The data you are reviewing with Corelogic or Interthinx is literally more like a marketing brochure.  It's not unbias data.  SUSPECTED.

There is nothing wrong with buying and selling on the same day if you are lucky LUCKY enough to make a bit of profit so long as there is full dislosure. 

It's frustrating when you read things written by those who don't possibly understand the process, as they promote unaccurate information which strikes a LOT of fear in people.  It's definitely frustrating for someone like me who works hard to run a reputable business.

Jul 09, 2011 02:14 AM #15
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Bill -

The article contains information from the article in Connecticut.

I agree that the lender gets the BPO, but I know from representing plenty of investors that they or their buyer broker tries to be at the property when the BPO is done to try to point out items that should be value deductions, thus resulting in hopefully a valuation close to or meeting the offer being made by the investor.

In criminal activity, there can be shenanigans with the valuations - which means the BPO agent is being given false information or they are in on the conspiracy too - not an unheard of situation (in as much as the lender often gets a pretty nominal fee for the BPO).

Jul 09, 2011 09:49 AM #16
Anonymous
William Gassett, Jr.

Is pointing out a short coming with a home misrepresentation?  If the investor is providing TRUE FACTUAL information, I see no issue.  If the investor is sliding the BPO agent $200 bucks and saying "hey can you do me a little favor?", well obviously there is a huge difference.

I work with a LOT of agent and BELIEVE me Realtors do the same thing.  They show up to BPO's comps in hand with, repair estimates, inspection reports, etc.  Now if an investor does the same thing is it fraudulent???

I think the problem I have is the HUGE amount of information that spreads like wild fire on the internet about short sale fraud when if you TRULY look into it, there is LITTLE.  The FBI has "no solid numbers" -

I don't consider Corelogic a credible source as they are paid by lenders and they too have just been brought up on appraisal fraud charges this year.

I encourage you to sit with a reputable short sale investor in your area before you write such articles that are misleading.

I have a LOT of respect for you and your blogs and MOST of the articles you publish.  You are WELL versed in short sales, but I honestly have to say NOT well versed in short sale investing and a purchase and immediate resale of property.

Jul 27, 2011 06:08 AM #17
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Understood William (#17) - But....

The blog article was actually reporting events as reported.  See http://www.ctpost.com/news/article/Bridgeport-man-pleads-guilty-to-aiding-bank-fraud-362422.php and http://www.fbi.gov/newhaven/press-releases/2010/nh021910a.htm -- as such, I was primarily being a messenger the article and I was not taking the pulpit.

Since I wrote about similar issues in the past, I linked to that prior blog article.  The problem in the cited case was not appraisals but non-disclosure.

All agents, buyer or seller reps, are interested in getting the submitted contract accepted for a number of reasons - and if the contract is so low it is unsupportable, then the agent was not doing its job with its seller client advising them of what offers should and should not be accepted and submitted to the lender.

Investors that are on the premises to promote their own contract are always suspect as they are not there to typically just see what is going on, but to self interest promote why the offer is reasonable.  You are right - in that respect the difference between the agent and the investor is pretty blurred.

I try to write it as it is - not as I see it (unless I say so in my article) and not as it should be "in theory".  None of my readers need theory - they need practicality and reality.  Your comment is as always, appreciated.

Jul 27, 2011 11:57 AM #18
Anonymous
William Gassett, Jr.

The Connecticut case is interesting.  The fact that a higher offer was not disclosed isn't truly alarming to me as you can have a property with MULTIPLE offers but only one can be accepted and submitted at a time.  The seller may choose which offer suits them and it COULD be a lower offer.  Has the seller or buyer committed FRAUD?  Not in my opinion, but of course I'm not a lawyer either.

Now if there was a high offer signed and accepted and suddenly now a second lower offer comes in and is also signed the lower offer is submitted to the lender, then clearly this has proven to be fraudulent.  I also would question HOW a seller could have two contracts signed at the same time?  The Connecticut case was clear fraud by misrepesentation.

Agents AND investors giving supporting comps are providing information to support their offer.  If they are providing factual information I don't see an issue.  There could be MANY things to consider when a BPO agent valuates a property that may never be seen UNLESS it's brought to the attention of that agent.  For example, a listing agent I worked with showed up to the BPO and knew there was an encroachment of 15 feet on the property, and also knew the water line was tied to the foreclosed building next door.  Now, that ABSOLUTELY affects the value, however unless the agent was there to give this information, it may never have been known.

Richard, I have a high respect for you as I've stated.  What I would LOVE to see on the internet or in the newspapers is HOW an investor can legally, and ethically buy and sell for a profit with short sales, instead of re-reporting reports (marketing collateral) from bias mortgage fraud detection companies with an agenda of their own. There are a ton of articles of what MAY BE or COULD be fraud, but very few that show investors how it can be done in an ethical and legal manner.

Jul 27, 2011 02:32 PM #19
Rainmaker
281,515
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

William - actually I believe I did write about how it could be done, but it was years ago and I will have to dig through the library to find it and update it.  Thanks for the idea!

Jul 27, 2011 03:44 PM #20
Anonymous
William Gassett, Jr.

Thanks Richard!!  I think that kind of information would TRULY be appreciated by many investors.

Corelogic just published ANOTHER sketchy "marketing report" (I refuse to call it statistical research) in which they indicated double closings were suspicious.  They also went further stating investors having two different contracts on the same property is also "suspicious" striking MORE fear into people.  What I find interesting is NEVER EVER do they report in any of the double closings or two contracts was there non-disclosure.  If I'm disclosing to the lender I'm planning on reselling the property for profit and all subsequent offers will be directed to me, WHAT exactly was done that was suspicious???  There is SOOO much propaganda I'm SICK.


Unfortunately short sale investors have a bad reputation for very little reason.

 

Jul 28, 2011 10:12 AM #21
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