As the number of foreclosures has increased nationwide, so has the amount of fraud activity related to short sales. The unfortunate truth is that shady characters in all parts of the country are committing fraud with short sales to take advantage of homeowners who are losing their houses in foreclosures and the banks that are being saddled with these homes. If you are in arrears on your mortgage and considering a short sale, you need to be aware of the red flags that could indicate a fraudulent situation.
Typically, those looking to commit short sale fraud will attempt to get the homeowner out of the house and rent the house out until it forecloses. The one perpetrating the fraud collects the rent. They will string along the bank as well as the sellers to thinking they are arranging a short sale, but in fact, they are doing nothing while they continue to cash the rent checks. Eventually, they will either say that the short sale fell through or simply pull a disappearing act once the house goes into foreclosure.
In a legitimate short sale scenario, there is no reason for you to leave your house. If your real estate agent is telling you that you have to vacate the property to negotiate a short sale or find a suitable buyer, they are lying. You can stay in your house until all of the papers are signed at closing.
The second type of fraud is known as flipping (also sometimes called flopping). Flipping is not illegal, nor is it fraud, unless used in the wrong circumstance. In a typical flipping scenario, a buyer will purchase a house at one price and sell it at a higher price. This is perfectly legal, even if they resell the home right away. However, if a realtor is negotiating a short sale on a home, the law stipulates what is called an “arm’s length agreement.” This means that the person who is short selling the house cannot also be the buyer.
In a fraud situation, the realtor will negotiate with the bank to short sell a house at one price while they also start marketing the house for a higher price. For example, the realtor might get an agreement from the bank to short sell a home for $150,000, but they find a buyer willing to pay $180,000. The realtor buys the home at $150,000, per the agreement with the bank, and within a short time – sometimes within the same day – resells it for the larger amount, making an instant profit. In doing so, the realtor has broken the arm’s length agreement and committed fraud.
In addition, the realtor is responsible for getting the best and highest price in a short sale. If they found a buyer willing to pay $180,000, they are obligated to present that offer to the bank, even if the lender has agreed to sell the house at a lower price.
The third type of short sale fraud involves agents who charge an upfront fee for a short sale. Generally, they will collect the fee and disappear. A legitimate short sale agent will never charge you a fee. Short sale agents make their money from the commission that the bank pays them to do the work – the homeowner doesn’t pay the agent a cent.
The fourth type of fraud is unwittingly deeding your house away by mistake. Never sign a deed unless you are at the closing table with a full payoff letter from your lender. If you are signing a deed at your kitchen table, you are likely in a fraud situation. Look for the word “deed” at the top of any document that your agent asks you to sign; for example, “title deed” or “warranty deed.” If you sign a document that says “deed,” you have effectively transferred ownership of your house to the other person – they are the legal owner of the property, but the mortgage stays with you. That’s right: You owe the money, but they own the house. Obviously, you want to avoid this situation at all costs.
Finally, never sign over a power of attorney to somebody. The only time you should execute a power of attorney is if you need somebody close to you, like a family member, to make a financial transaction on your behalf. If you’re signing a power of attorney to a broker or agent, you are more than likely in a fraudulent situation.
You can learn more about the characteristics of fraud schemes related to short sales on the Fannie Mae website at www.eFannieMae.com. If we can answer any questions or otherwise be of help, please give us a call.