SHORT SALES AND FRAUD
It is illegal in the State of Florida for REALTORS® to help property owners obtain loan modifications, to give legal or accounting advise to distressed property owners.
If you are considering participating in a short sale transaction, please see the “Short Sale” link on my homepage for “20 Things the Listing Agents Don’t Tell You About Their Short Sales.
Short sale transactions are one area where fraud occurs frequently in Southwest Florida real estate transactions. The Florida Real Estate Commission can not keep up with licensing fraud. This leaves very little time for FREC to peruse the more intricate, and creative ways that REALTORS® and non licensed individuals are actually doing illegal activities in Florida today.
A news article released July 20, 2011 says that last year sales associated with short sales comprised half of all fraud investigations for mortgage companies like Freddie Mac, according to Rober Hagberg, an investigator for Freddie Mac.
The “same-day” resales are on average cheating the lender nearly $50,000 per short sale transaction. Short sale fraud is expected to cost lenders more than $375 million this year and has increased more than 20 percent from last year according to CoreLogic.
Beware that often a short sale listing agent may recommend the seller hire the services of a short sale loss mitigation company which negotiates short sales for a fee. The listing agent could ask the buyer near the end of the short sale to pay for all or a portion of the loss mitigation company fees. These fees can run from $1,500 to $4,500. This last minute “surprise” is unethical, but it still happens.
It is also common practice for the REALTORS® not to tell a lenders asset manger when a buyer has withdrawn the offer to purchase. The REALTOR® hopes find another buyer before the short sale is approved to the first buyers. Most often, short sales are approved to a very specific buyer, with specific terms for the seller and limited time period to close the transaction. If the lender agrees to take another buyer, this starts a part of the short sale approval process over with the lender needing to approve the new buyer which can result in more delays. It is not uncommon for a REALTOR® to say that a short sale is “approved” by the lender when the process has not even been started. The short sale REALTOR® will also tell the cooperating broker or interested buyer that the short sale process should only take 30 to 60 days when in fact is could take 9 or 10 months! The phrase “approved short sale” is highly abused. The phrase is also a great indicator of an attempt being made to mislead the public/buyer/lender or to do a last minute bait and switch or flip (which could be fraud).
Sometimes the listing agent knows that the lender will accept a specific price, via the failed counteroffer or contract with the first buyer. However, they will put the property back on the market for less than they know the lender said they would approve, in order to get another buyer quickly. When the new buyers´ offer comes in less than the first buyers´ approved price, the short sale process starts over for the new buyer and seller at a new price with more time delays. Listing the property for less than the agent knows the bank will accept and risking the sellers’ timeframe, as he now heads toward foreclosure is irresponsible!
It is not uncommon for the foreclosure department of a financial institution to continue the foreclosure process, at the same time as the sellers’ agent is trying to do the short sale. Lenders are aware that REALTORS® will list friends, relatives or their own properties and try to work them as short sales just to buy time for the friend/seller to stay in the property and hinder the foreclosure process. Therefore the foreclosure department does not always stop its´ process just because there is a potential short sale in process.
Short sale transactions take so long to close that the listing agents want any kind of offer to initiate the process and therefore, often, list the properties under market to attract the first buyer. They want to get the process started with the bank to find out if the bank is even receptive to helping the seller with a short sale transaction. Many short sales have multiple buyers though out the entire process. This is why many agents take multiple offers either to get better offers or back up offers on short sales.
The Florida Association of REALTORS® short sale addendum actually says that the seller can continue to market the property to get more offers once an offer is accepted by the seller.
The potential for fraud with this type of transaction is only limited by the amount of whiteout and ink that any particular party to the transaction might possess.
Some agents who participate in fraudulent short sale transactions might not have enough experience to suspect that there is anything wrong with what the listing agent is requiring them to do in the transaction.
There is a mentality in our profession that if one agent is doing something, often by advertising or expressing it in the MLS, that it must be OK. Next thing you know, everyone is doing the same bad behavior. And that, is exactly how “short selling” spread like wildfire through out our profession.
Scam artist, working with an investor or real estate agent might make a low ball offer on a property, then the address of the property might be misstated to the appraiser or for the “broker price opionion” so they can persuade lenders to do the short sale on the undervalued property.
The following is one generalized example of how fraud can occur with short sales.
Let us say agent #1 has a short sale listing in MLS.
The MLS or agent comments say, or the agent says when called for an appointment; the seller prefers simultaneous closing or cash buyers only, or, approved short sale, quick closing, or must close by specific date. You may even be told the 2nd buyer must close the same day because the first buyer does not have the cash to close in the first place! They might even tell you that the title agent will record the Deeds in the sequence needed to convey to buyer #2.
REALTORS® and title agents who are involved with fraudulent short sale transactions, also forge documents, change names on bank statements (proof of funds) to submit with an offer, change names on contracts, and/or timeframes that show how long properties are listed in the MLS.
Now, listing agent #1 tells buyers´ agent #2 the property is a flip and that the bank/lender is aware that a flip is being done. Buyers´ agent #2 decides that as long as all parties are aware of the flip, it should be OK, provided the situation is disclosed to everyone.
Short sale contracts are required to be non-assignable for the lender to consider them. Which means you can not resell the property for a higher price to someone else prior to closing the transaction.
Contract #1 is contingent upon lender approval.
Now, buyers´ agent #2 discloses the contract to their buyer, so they know it is a flip. And they make sure to include a Disclosure in the contract to go to the bank or lender in the short sale transaction. Buyers´ agent #2 is expecting listing agent #1 to pass on their disclosure to the short sale bank or lender or loss mitigation company. Buyers´ agent #2 has no way to follow up or contact any of those parties to the transaction.
Buyers´ agent #2 is relying on agent #1 to pass on their Disclosure to the bank or lender, who probably has no idea this is going on and agent #1 is orchestrating a fraudulent transaction and has no intention of passing on buyers´ agent #2s´ Disclosure. But agent #1 has a pen to sign the Disclosure . . . and returns it to Buyers´ agent #2.
Buyers´ agent #2 wanting to really make sure this is done properly, also writes this second offer contingent upon seeing the final approval for the first short sale transaction, to see whether or not there is a holding period for the property on the short sale before it is flipped.
Agent #1 is equipped with “whiteout.” Buyers´ agent #2 has no real way of knowing what the short sale bank requirement is regarding holding a property.
The only knowledge I have that a bank or lender would agree to allow a short sale property to be sold to a second buyer for more money on the same day is from words spoken out of the mouth of other REALTORS® saying it is OK.
It makes no sense that an asset manager would agree to this type of transaction unless they too were a party to the fraudulent transaction. Remember seller #1 may have the opportunity to take multiple offers to get higher bids.
In my example, I am using a seller who is an investor who wants out of a property.
The investor seller #1 paid $250,000 for property and needs out. He is told by his REALTOR® friend to do a short sale with the classic statement “it will not hurt your credit as much as a foreclosure.” Then the REALTOR® tells him to stop making his mortgage payment so the bank or lender will consider his hardship case for the short sale. Then the seller is told to list the property as low as possible to get an offer quickly. So agent #1 checks to see who has the lowest priced property in the neighborhood and gets seller #1 to list his for less.
Investor seller #1 agrees to list the property at $75,000.
(These example numbers are a typical of the real “lost equity” in Southwest Florida today. Our market has been hurt severely by the constant pounding down of values by the competitive REALTOR® short sale market.)
Buyer #1, the “flipper” already in agreement with listing agent #1 via agreement to buy and flip short sales makes full price offer of $75,000.
Several months later the short sale is approved with a counter offer of $85,000 by the lender. There is a required closing date in 30 days and the seller will have to give a promissory note of $3,000 to the second lender to payoff the second loan on the property.
(Often the short sale lenders BPO- broker price opinion- will come back higher than the listed price. The first contract buyer might then decline the banks counteroffer because they feel mislead by the listed price, or the counteroffer is maybe higher than the buyer can pay.)
Seller #1 gets approval for the short sale at $85,000. Listing agent #1 now tells the seller that because he is an investor that he may get a 1099 for the “shorted” amount of the mortgage. And because he lives in Florida a deficiency judgment could be placed on his credit in the future, but the sellers´ listing agent #1 reassures him this will “never” happen.
Buyer #1 agrees to the higher price of $85,000 and to complete the short sale in 30 days per the lender approval.
Buyer #1 and agent #1 relist the property in MLS at $130,000 requesting a cash only buyer.
(REALTORS® in Naples have been making contracts assignable and flipping high end properties, often with the listing agent as the purchaser via this strategy in our MLS for many, many years.)
Buyer #2 sees the listing on line and tells buyers´ agent #2 they want to buy it. Buyer #2 is going to use their retirement money to buy the house with cash.
Buyers´ agent #2 explains to buyer #2 that the property is a flip. Buyer #2 offers $125, 000 and a quick closing. Their offer is accepted.
Our example situation can have two different endings for seller #1.
If seller #1 does not agree to the short sale terms he may decide to let the house go to foreclosure and take his $3,000 and file bankruptcy, in which case he may also be relieved of his other creditors and debts.
Selling agent #1 and buyer #1 can resort to plan B, because they just set the seller up for the foreclosure process. Now, they can track the property thru foreclosure to the bidding date to bid against the bank or lender at the foreclosure court ordered sale. These sales are now done on line in Southwest Florida. They may get the property for even less than the short sale?
Let us say seller #1 agrees to the short sale terms and buyer #1 (the flipper) has agreed to the purchase.
Seller #1 is obligated to repay promissory note for $3,000.
Buyer #2 is ready to close do a simultaneous closing at a price of $125,000.
Buyer #1 makes $40,000 the same day with the help of agent 1# and agent 1# gets second commission from the flipped transaction. It is likely that agent #1 also shares in the profit.
Obtaining buyer #2 as a customer is a good way for agent #1 to control who knows what in the real estate transaction, so often these agents will not cooperate with other agents, but will wait for their own buyer #2.
If the bank or lender knew they could get $40,000 more for the same property the same day should an asset manager agree to this transaction?
If seller #1 knew that buyer #1 was going to make $40,000 off his house the very same day he sells it to buyer #1, while he has to take a promissory note to repay $3,000 to one of his lenders, why would seller #1 agree to that? Why would the seller agree to take a 1099 for significantly more than he would be obligated to the IRS if he knew buyer #2 was willing to pay $40,000 more?
Where could the money come from for the first buyer if this is not a simultaneous closing and none of the participants in the “flip” had any money? The title company agent, who is also a likely party to the short sale flip, is working with several other REALTORS®. The title company agent tells one of those other REALTORS® buyers who will have a large cash amount to bring to settlement to wire the money in advance of closing, to make sure it is received on time. The same title company agent has the power to delay that buyers´ closing, simply by saying they don´t have the sellers´ payoff, or they have a doctors´ appointment and can´t close till tomorrow or any other excuse to buy time to use that buyers´ money. In the meantime, the title company, listing agent #1 and buyer #1 close with unsuspecting other REALTORS® buyers´ funds and then turn around and close the next sale with buyer #2. Buyer #2 provides their money for closing as replacement and the other REALTORS® and buyer never suspecting a thing.
The title companies in these fraudulent transactions control the sequence of recording the deeds. Sometimes groups of “investors” provide the funds to close on “short sale” flips.
This type of activity has been going on since the advent of the term “short sales” to the REALTOR® vocabulary. The amount of money that these #1 buyer/investors are making is worth the long wait. For a couple of years now incorporated investors and LLC buyers have been finding agents who will write multiple short sale contracts and wait out the short sales process. Knowing that some will fail and others will get completed. Every REALTOR® has gotten that call, “I represent a group of investors who want to make 20, 40, 60 or 100 offers on short sales.
I have heard recently, that there are now agents who take short sale listings with no intention of really working them for the seller, but hoping to set the seller up for foreclosure. By setting up the seller for a “failed short sale,” they can “pick” better quality properties to bid on at the “online foreclosure sales.”
Some REALTORS® may be inadvertently participating with buyer #2 without really knowing or caring how the seller is going to obtain title to the property. If they know they are participating in a simultaneous flip with their buyer #2, I do not know how they could proclaim to be innocent of any wrong doing, should there ever be an accusation or investigation in the future for fraudulent activity. And because it is disclosed to buyer #2, I do not know if buyer #2 would be a victim or considered a participant if they too have acknowledge that the property was a short sale “flip.” Would it be OK for the buyer if they just said my REALTOR® told me it was OK?
Florida is not a “non-recourse” State and some lenders´ have started to put deficiency judgments against sellers in Florida. In Florida the lender has 5 years to place a deficiency judgment against the short sale seller and then options to renew for up to 20 years. The sellers´ agents will tell the investor seller that they are not likely to get a 1099. However, the Federal Law requires the lenders to send a 1099 on a short sale to everyone. Those in bankruptcy and primary homeowners who did short sales will be exempt when filling the appropriate paperwork. Investors are not exempt from the 1099 obligation. The amount is the difference between the short sale and the amount owned by the seller on the mortgage.
Originally, when REALTORS® were doing short sales, the contracts where not contingent upon the sellers approval of the lenders terms to complete the short sale and many sellers´ agreed to unattractive terms via promises by the REALTOR® that there would be no future consequences. Most, short sale contracts now have a clause to protect the seller from having to accept the terms the lender requires on the short sale approval letter. The buyer who has waited months for a short sale may find that the seller is unwilling to follow through once given the lenders´ approval terms.
The seller may or may not have been told at the beginning of the short sale by the listing agent #1, that any of these consequences could happen or to consult an accountant or attorney.
The Good Samaritan REALTOR® comes to the rescue with the soothing words, “it will not hurt your credit as much as a foreclosure.”
Currently there is no track record to indicate that “short selling,” will have a more lenient impact on the consumer in the future or guarantee that someone who completes a short sale will be allowed to buy another property any easier than someone who lets their property go to foreclosure or filed bankruptcy. What is evident is that lending institution requirements are getting stricter by the minute. I had a seller call me right after he closed on his short sale with his listing agent. He wanted a buyer broker in his next transaction, he said, “I´m ready to buy another house now,” and asked where he could get a loan. He really thought he could qualify to buy another house right after his short sale
The short sale listing agent feels protected against any non-disclosure to the seller because the Florida short sale addendums tell the sellers´ to consult attorneys and accounts.
If you want to see a short sale listing agents´ blood boil, tell them you saw their seller walk into a bankruptcy attorneys´ office. Many investors who want or need to get out of a property find a way to file some kind of bankruptcy. The property gets foreclosed under the “shelter” of the bankruptcy and is not suppose to show on the future credit as a foreclosure. And there is no potential for a deficiency judgment or IRS tax obligation.
REALTORS® are the best salesman in the world, they specialize in talking people into accepting terms and make light of the consequences of the sale. We also have one of the worst reputations as a profession for being unethical.
Real estate transactions today are drenched in fraudulent activities prompted by an unregulated, short sale real estate market. Lack of guidance, rules and education regarding shorts sales promotes unethical REALTOR® behavior.
“Short sales” originated in the years when REALTORS® where having tough times making money, sellers no longer could “bring money to the table.” Just before “short selling” started in my area, I saw one seller bring $80,000 to the table to get out of his investment when the market began to decline.
I believe the REALTOR® organization, from the very beginning of “short sales,” has gotten between the banks and the homeowners. They have prevented the banks from having to come up with their own solutions to work directly with the homeowners. Short selling has slowed the natural foreclosure process, which might have netted more for the banks and kept property values higher. Worst of all, listing agents are continuing to bombarded property prices downward, sometimes cheating the sellers and the financial institutions by “flipping” short sale properties. REALTOR® short sales are damaging property values nation wide.
I cringe every time I think about the listing agent who complained to me about a seller who had the nerve to go behind their back, to work with the bank to get a loan modification to keep their home!
Sometime around 2006, maybe earlier, a few savvy REALTORS® were so desperate to make money, or to unload their own investment properties, that they began negotiating a “short payoff” with the lender to make sales happen at prices buyers were willing to pay.
The real estate market was stagnant and national publicity was telling everyone “the bubble is going to burst.” Sales were slow because people were not buying much property.
Attorneys and loss mitigation companies are making lots of money off desperate property owners, their success rate for short sales is not much better than REALTORS®.
Our local, State and National REALTORS® organizations continued to encouraging REALTORS® to participate in short sale transactions with frugal attempts to provide guidance in transactions which frequently result in fraud or foreclosure of the property owner. The National Association of REALTORS has pressured the government to exclude REALTORS from the new MARS written disclosure requirement.
We need some drastic changes in behavior (not more useless TARP, stimulus or grant money) before there will be any housing market recovery.
Is it possible that if property owners had to resolve their own issues with their banks that they might have a greater chance to get a loan modification?
I am a REALTORS® and I believe short sales are not the way REALTORS are suppose to be promoting and protecting property ownership.
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