Short Sale Fraud

Just when loan fraud begins to die down we are facing a rapidly growing new fraudulent scheme- short sale fraud   Short sale fraud can manifest itself in many different ways and affects unsuspecting buyers, seller, and agents.  Short sale fraud is any type of fraud, deceit, or trickery that takes place during a short sale transaction.  The types of short sale fraud occur on a continuum from an incident done on one person to a large, well-organized fraud ring.

Some examples of short sale fraud include:

Fraudulent short sale flips

Short sale negotiator scams

Short sale package scams

Improper payments

 When you’re down and out you’ll believe anything”

Because short sales are so complex, difficult, and drag on for a long duration of time, they are highly susceptible to scams.  Short sellers are already in financial distress so many times they forego hiring experts to assist them with the complicated financial, legal, tax, credit, and other issues.  Sellers are also trying to close the deal as soon as possible to avoid a foreclosure.  When under this immense stress, short sellers are easily swayed by the lure of a quick fix.

Agents and other real estate professionals can get caught in the middle between the scam artist and the homeowner and others are reeled in by the design because their participation lends credibility to the fraud.  Real estate agents are often targeted because they are the first point of contact for distressed homeowners.  They are ability to list and market properties and can get deceived into paying for phony short sale lead generators, farming lists, marketing tools, training seminars, coaching services, etc.

Short sale scams are difficult to detect because the scam artists typically look clean-cut and professional and have a kind, helpful, and trustworthy demeanor.  Their companies appear to be established, respected, and reputable   They often employ names that employ altruism, for example, Short Sale Advocates.  They may be misleading and make it appear they are administered by an agency of the government.  Scammers can be appraisers, accountants, attorneys, bank officers, landlords, tenants, friends, and colleagues   They may use affinity marketing tactics to get their victims to trust them by pretending to be members of the same racial, religious, social, or other group.  They may pretend to be in the military to recruit members of the military as their victims or even join a church to lure their victims by gaining their trust and then defrauding them.

How do I protect myself from short sale fraud?

Always remember if it sounds too good to be true, its because it probably is.  Before entering into business with someone, check out their legitimacy and qualifications and make sure their business entity is properly licensed.  Ask for and follow up on references.  Check their background  credentials, and reputation.  Look for them on the internet and search public records and trade group memberships.  Even if this all checks out, it does not guarantee that there is no risk of scam, but it will be significantly diminished.

Do not make any rash decisions because you are distressed.  Confer with people you trust and thoroughly research to find as much information as is available.  Ask a lot of questions and look into different options and what financial, legal, and tax ramifications are involved.

Understand all aspects of any agreements you enter into prior to doing so.  Read all documents carefully and never sign if there is anything unclear or that you do not understand.  If you are working with someone who speaks a different language do not trust their translator- bring your own.

Do not sign any documents with any blank spots or false statements.

Red flags- be wary if you are dealing with someone who:

sounds too good to be true

makes unqualified promises and assurances

is unconcerned about sales price or other significant aspects of sale

is unconcerned about the sellers financial situation

is involved in a sales transaction where the seller is not the current owner

is involved in a transaction where a notice of default has been filed

is involved in a transaction under the Home Equity Sales Contract law

is involved in a sales transaction where the owner has purportedly given someone a option to purchase

represents that the buyer is an entity (trust or LLC)

creates more than one sales contract for the same property

asks for payment for services upfront

asks for payment only in cash, cashier check, or wire transfer

asks for something to be done without delay

asks for power of attorney

asks for transfer of title or an interest in the property outside of escrow

asks for signatures on a grand deed or deed of trust

asks for signatures on a document with spaces left blank

fails to provide copies of signed documents

fails to provide written confirmation of a verbal promise

instructs the seller, listing agent, escrow officer, or others to not contact the short sale lender

instructs client not to discuss the situation with a housing counselor, banker, accountant, attorney, family, friends, etc.

has an answer for everything

engages in shop talk that sounds good but doesn’t make any sense

Types of Short Sale Fraud

Short Sale Flip

A short sale flip or an AB-BC transaction is the resale of a property simultaneously or shortly after a short sale.  First, Seller A sells the property to Buyer B, as approved by Seller A’s lender.  Next, Seller B resells the property to Buyer C for more money

Short sale flips are not necessarily illegal but scam artists routinely use illegal and improper tactics to close these transactions.  They may attempt to deceive Seller A’s short sale lender into believing the property value is less than it is while they are reselling the property for an increased price.  These scammers typically use the time elapsed while waiting for the short sale approval to find Buyer C.

Sometimes Seller A, Buyer B, and Buyer C are aware of the flip but the scammers will make them believe that it is legal and may even compensate them for their participation.  Buyer B can be a trust, a LLC, or a straw buyer who is involved in the scam or a victim of identity theft.

What legal problems result from a fraudulent short sale flip?

The legal claims vary depending on the circumstances but claims include, but are not limited to:

Mortgage Fraud:  Anyone involved (including buyers, sellers, agents, etc) who misrepresents or actively conceals a short sale flip are liable for mortgage fraud, common law fraud, misrepresentation, and unlawful business practices.  Federal law state that mortgage fraud includes anyone who knowingly makes a false statement for the purpose of influencing a federally-insured mortgage lender or other financial institution as specified.  Violations of federal mortgage law are punishable by 30 years imprisonment and a $1 million fine.

Breach of Contract:  Sellers, buyers, and agents who make false statements in the lenders short sale agreement are liable for breach of contract.  If Seller A falsely states that the sales transaction is at fair market value, no other offers have been received  and the seller has no hidden understandings or proceeds they are liable for a breach of contract claim in a civil lawsuit for monetary damages or rescission.

 Breach of Fiduciary Duty:  Agents who fail to exercise due care in a fraudulent short sale flip can be held liable to their clients for monetary damages.

Licensing Violation:  Agents can have license revoked or other disciplinary actions taken by the DRE.

Other Criminal Violations:  Illicit short sale fraud may hold sellers, buyers, and agents liable for criminal claims including perjury, conspiracy, and aiding and abetting a criminal scheme.

Even if the seller is not making any sales proceeds their involvement is grounds for criminal and civil liability.  Additionally there can be financial  legal, tax, credit and other ramifications.

How does a legitimate short sale flip work?

Some factors to consider in legitimate short sale flips include but are not limited to:

How close the sales price in the AB transaction is to fair market value

How well the property is listed and marketed to attract buyers

If seller A and buyer C are represented by their own real estate agents, attorneys, accountants, etc.

Whether the parties negotiated an arms-length transaction

Whether aspects of the transaction including the profit made are disclosed and approved by all parties and lenders involved

How much time elapses between close of escrow in the AB transaction and the close of escrow in the BC transaction

Extent of repairs, renovations, and improvements that Buyer B makes to the property

How much money Buyer B invests for the purchase, maintain, repair, renovate and resell the property

Whether or not the profit Buyer B makes is reasonable under current market conditions

Whether are parties are in compliance with licensing, agency, RESPA, and other laws

Whether compliance is in writing and well-documented

Short Sale Negotiator Scams

A short sale negotiator typically negotiates and facilitates a short payoff with the seller’s lender.  Short sales involve a lot of paperwork and frequent attempts to contact the lender and a legitimate short sale negotiator can expedite and facilitate the process.  The negotiator can be the listing agent, someone else in the listing office, or someone in another office.  With full disclosure, hiring a short sale negotiator is not illegal but scam artists impersonate or use short sale negotiators to aid their fraudulent schemes.

What are examples of a short sale negotiator scam?

Scammers can lure their victims by promising to expedite the short sale and guarantee approval by the lender.  They are actually putting together and submitted falsified short sale packages, performing little to no service, or engaging in other wrongdoing.

Some scams involve the payment of the negotiator’s fee.  The short sale lender may deny payment to a third-party negotiator so the scammer will have a hidden agreement for someone to pay the fee outside of escrow.  For example, the purchase agreement can say that seller will give the buyer a credit but in all actuality, the buyer is using the credit to pay the short sale negotiator fee.

What legal problems arise from a fraudulent short sale negotiation?

Licensing Violation:  Agents involved can have their license revoked or other disciplinary action taken by the DRE

Mortgage Fraud:  By misrepresenting or concealing a short sale negotiator fee, involved parties become liable for mortgage fraud, common law fraud, misrepresentation, and unlawful business practices.

Breach of Contract:  Make false statements about short sale negotiations makes involved parties liable for breach of contract.

Breach of Fiduciary Duty:  A negotiator who fails to exercise due care is breaching their fiduciary duty to do what is in the clients best interest   The listing agent or buying agent may also be held liable to their clients.

RESPA Violation (HUD-1 Statement):  Omitting from a HUD-1 Statement any negotiator charges paid at settlement may violate the Real Estate Settlement Procedures Act (RESPA).

RESPA Violation (Unearned Fee):  Charging or accepting a negotiator fee without performing any service violates RESPA.

Other Criminal Violations:  Depending on the circumstances, involved parties may be liable for other criminal claims including perjury, conspiracy, and aiding and abetting a criminal scheme.

How can I tell if a short sale negotiator is legitimate?

Some factors to consider to ensure that a negotiator is legitimate include, but are not limited to:

Whether the negotiator and their employing broker and licensed with the DRE and bonded as a foreclosure consultant

Whether they are qualified to perform short sale negotiations

Whether they actually perform the services promised

Whether their fee is fully disclosed and approved by all parties and lenders

Whether the fee is reasonable

Whether the party paying for the services voluntarily agrees to pay and is allowed to consult with a real estate agent, attorney, accountant, or other professionals

Whether the negotiator does not received payment until after all services are completed

Whether they comply with agency laws, RESPA, laws against fraud, and other laws and MLS rules

Short Sale Package Scam

A short sale package scam is the intentional misrepresentation of information in a short sale package to increase the chances of lender approval.  The misrepresentations may be in the original package or disclosed in subsequent interactions with the lender.  A scammer knows the lender’s requirements and then manipulates the truth to improve the chances for approval.

Tactics include misstating the truth, making up stores, concealing pertinent facts, submitting false documents, and forging signatures.  Some examples include, but are not limited to:

Fabricating sellers hardship and creating false supporting documentation when the seller’s hardship does not meet the lenders requirements

Making the transaction appear to be an arms-length transaction when the seller is actually selling the property to a related person in contradiction to lenders requirements

Making it appear that the property is owner-occupied when it is actually being rented and occupied by a tenant

Making it appear the sale has been listed in an open market for several months and sold at fair market value when the sale is actually prearranged to a straw buyer at a price below fair market value as part of the AB sale in a AB-BC short sale flip

Making it appear the property is sold in good faith at fair market value when the scammer utilized improper means to ascertain the lowest price that lender would approve and then wrote that price into the contract

Making it appear the sales documents are the sum total total of the agreement when other arrangements for the distribution of money have been made

What legal problems can arise in a fraudulent short sale package?

Mortgage fraud as well as breach of contract, common law fraud, RESPA, and perjury.  In addition to criminal and civil claims, disciplinary action can be taken by the DRE.

Improper Payments

Scams can involve improper payments including undisclosed payments and upfront fees.  An undisclosed payment involves the payment of money or other valuable times without the knowledge of an interested party including the seller’s short sale lender or buyer’s lender.  This is typically paid outside of escrow in attempt to escape the purview of interest parties.

One example is if the short sellers’s senior lender authorizes a payment of $3000 to extinguish a junior lien but the junior lien demands an additional $9000 outside of escrow.  Concealing this may amount to mortgage fraud and omitting from the HUD-1 Statement charges may violate RESPA.

Another scenario is when a scam artist uses monetary incentives to entice a seller to participate in a fraudulent scheme.  The arrangement can be simply for the payment of money or under the pretense it is from the purchase of seller’s furniture, for moving expense, or other reasons.  The payment can be made outside of escrow.  This violates mortgage fraud and RESPA.

Undisclosed payments may violate other laws and regulation and additional civil and criminal claims may be raised, they may be subject to fiduciary duty as well as license revocation and disciplinary action by the DRE.

What is a scam involving an upfront fee?

The scam artist negotiates with the lender or performs other services for an upfront fee.  This is known as phantom help because the scammer is performing little to no service and will eventually abscond with the money.  Any services provided can be performed by the victim on their own.  The victim loses money and valuable time needed to make short sale agreements to avoid foreclosure.

A phantom scam artist will know what to offer, how to offer it, and what to say to add credibility.  For example, they may promise to get lender approval in two weeks and to add credibility they will say that a loan officer or loss mitigator is a close relative so they have special access to bank insiders.

What legal problems result as from an upfront fee scheme?

The law prohibits anyone who negotiates, attempts to negotiate, arranges, attempts to arrange, or offers to perform a loan modification or other form of loan forbearance from claiming or demanding any upfront compensation.

 

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