How Short Sale Fraud Works

March 15, 2010 No Comments »

short sale

There’s been a lot of talk about short sales lately, and considerable concern about related fraud. After all, there is lots of potential profit to be made by selling properties below market value.

Up in the hard-hit northern San Joaquin Valley region of California, the “hottest fraud” reportedly involves short sales, per an article in the Merced Sun Star.

The way it works is pretty simple:

A homeowner falls behind on mortgage payments, or simply tells the bank they can no longer keep up with payments.

They inform the mortgage lender that they’d like to execute a short sale because the current mortgage balance exceeds the value of the property; this is also known as being underwater or upside down.

This is pretty common, as nearly 25 percent of the nation is currently underwater on the mortgage, and 2.4 million mortgages in California alone are in negative equity positions.

Oh, and apparently 67 percent of California homeowners sold their homes last year because they couldn’t afford to pay the mortgage.

Anyway, the lender agrees to a short sale (assuming they receive an offer they deem acceptable), and hires a real estate agent to resell the property on their behalf.

The unscrupulous real estate agent then creates a limited liability corporation (LLC) that offers to buy the property, but for a lowball price.

Meanwhile, legitimate offers from genuine buyers are kept a secret, and the real estate agent returns to the lender with just the one offer from the aforementioned LLC. And probably tells the lender the market is worse than they thought! Shucks…will this work?

The lender (possibly, most probably reluctantly) agrees to accept the short sale offer, and the property is sold to the newly formed LLC for a loss.

Then the LLC flips the property to one of the real buyers (whose offers were never reported to the lender) for a much higher price.

And voilà, a nice little profit is realized and the lender is none the wiser. Oh, and the real estate agent probably earns all types of commissions along the way too. How nice for them.

There are probably many variations of the same scheme, and it’s very troubling considering the new streamlined short sale program has been set-up to rely on real estate broker price opinions instead of appraisals.

This is why we can’t have nice things. If you can’t trust the actors involved, how are supposed to recover from this mess?

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