SHORT SALE FRAUD IN FLORIDA REAL ESTATE

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SHORT SALE FRAUD IN FLORIDA

It is illegal in the State of Florida for real estate licensee to help property owners obtain loan modifications, to give legal or accounting advice, to short sale sellers.  Please see the Short Sale link.

It is illegal in the State of Florida for real estate licensee to help property owners obtain loan modifications, to give legal or accounting advice to distressed property owners.

A news article released July 20, 2011 says sales associated with short sales comprised half of all fraud investigations for mortgage companies like Freddie Mac, according to Robert 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 cost lenders more than $375 million  in 2011.

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It is also common practice for the real estate licensee not to tell a lenders asset manger when a buyer has withdrawn the offer to purchase.

When the lender agrees to take another buyer in place of the first 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.

A real estate licensee will say a short sale is approved by the lender when the process has not even been started. The short sale real estate licensee 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 by listing licensees. The phrase is  an attempt to mislead the a buyer.  It is an indicator of a last minute bait and switch or flip which could be fraud.

Sometimes the listing agent knows 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 for less than the first buyers approved price, the short sale process starts over for the new buyer and seller with more delays.

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 real estate licensees 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 the process just because there is a potential short sale in process.

Short sale transactions take a long time to close.  The listing agents want any kind of offer to initiate the process.  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 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 a short sale 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  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 the real estate profession that if one licensee is doing something, often by advertising or expressing it in the MLS, that it must be OK. Next thing you know, many real estate licensees are doing the same bad behavior.   And that, is exactly how short selling spread like wildfire through out Florida.

The following is one generalized example of how fraud can occur with short sales.

Let us say agent #1 has a short sale listing.

The  agent #1 says the seller prefers simultaneous closing, cash buyers only, or, approved short sale, or must close by specific date. You may even be told the  buyer must close the same day because there is another buyer #1 who does not have the cash to close in the first place! They might even tell you the title agent will record the Deeds in the sequence needed to convey to buyer #2.

Real estate licensees and title agents who are involved with fraudulent short sale transactions.  They 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.

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, 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.

This 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 from buyer #1 to buyer #2.  They know it is a flip.  The licensee includes 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 to contact any of the other parties to the transaction, except the listing licensee.

Buyers agent #2 is relying on the sellers listing licensee to pass on their Disclosure.  The bank or lender, probably has no idea this is going on or that the sellers listing licensee is orchestrating a fraudulent transaction and has no intention of passing on buyers agent #2 Disclosure.   The sellers listing licensee signs the Disclosure forging the other required signatures and returns the Disclosure to buyers agent #2.

Buyer s agent #2 wanting to really make sure this is done properly, also writes a s contingency to show buyer #2 the final approval for the first short sale transaction.  Buyer agent #2 wants to know whether or not there is a holding period for the property on the short sale before it is flipped.

The sellers listing licensee is equipped with whiteout.  Buyers agent #2 has no real way of knowing what the short sale bank requirement is regarding holding a property.

It makes no sense for an asset manager to agree to this type of transaction.

To further illustrate how short sale transactions occur.

Investor/seller #1 paid $250,000 for property and needs out. He is told by his real estate licensee friend to do a short sale.  He is told it will not hurt his credit as much as a foreclosure. Then the real estate licensee tells him to stop making his mortgage payment.   The bank or lender then will consider his hardship case for the short sale. The seller is told to list the property as low as possible to get an offer quickly.   So the sellers listing licensee 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 Florida short sale transactions.  The real estate market is hurt severely by the constant pounding down of values by a competitive short sale market.

Listing licensee obtains Buyer #1.  Buyer #1 is an investor and in agreement with listing licensee #1 via to buy and flip multiple short sales.  Buyer #1 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 #1 will have to give a promissory note of $3,000 to the second lender to payoff the second loan on the property.

Most often the short sale lenders will come back with an approval higher than the listed price.

Investor/Seller #1  and buyer #1 agree to the banks approval for the short sale at $85,000. Listing licensee now tell seller #1, 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.  The sellers listing licensee reassures the seller this will never happen and to move forward with the sale.

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 listing licensee immediately relist the property at $130,000 a cash only buyer.  Because there is a resale waiting period in buyer #1  transaction approved by the bank.

Buyer #2 sees the listing online and want to buy it. Buyer #2 offers $125,000 cash to buy the property.  The offer is accepted.

Investor/Seller #1 is obligated to repay promissory note for $3,000, may have to pay taxes on the difference between the shorted mortgage amount and sale price via a 1099.  And investor/seller #1 may received a deficiency judgement.

Buyer #1 makes $40,000 the same day with the help of the investor/seller #1 listing licensee.  The listing licensee gets the commission from the first sale and the second commission from the flipped transaction. It is likely the sellers listing licensee  also shares in the profit received by Buyer #1.  Because Buyer #1 wants to do multiple short sale flipping transactions with this listing agent.

Obtaining buyer #2 as a customer is a good way for the sellers listing licensee to control who knows what in the real estate sales transaction. 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  knew  investor/seller #1 was going to make $40,000 off his house the very same day it sells it to buyer #2, and he has to take a promissory note to repay $3,000, 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 otherwise, if he knew someone would pay $40,000 more the same day?

Where does the money come from for buyer #1 to close?  In a simultaneous closing the title company agent, who is also a likely party to the short sale flip and possibly shares in the profit.   The title agent tells buyer #2 who is paying $125,000 cash, to wire the cash in advance of closing.  And pays the investor/seller #1 lender $75,000 from Buyer #2 $125,000 cash.  So, buyer #2 actually provides the money to close both transactions. The title company records the deeds with buyer #1 first and then buyer # 2.

Sometimes groups of “investors” provide the funds to close on “short sale” flips.

This type of activity has been going on since the addition of the term short sales to the real estate licensees vocabulary. The amount of money that these #1 buyer/investors are making is worth the long wait.  Corporate investors and LLC buyers have been finding licensees who will write multiple short sale contracts and wait out the short sales process. Knowing some will fail and others will get approved and completed by the sellers and lenders.

Some real estate licensees may be inadvertently participating with buyer #2 without really knowing or caring how the seller is going to convey title to the property.  Would buyer #2 would be a victim or considered a participant if they  have acknowledge the property was a short sale flip? Would it be OK for the buyer if they just said my buyers agent told me it was OK?

Florida is not a non-recourse State. Some lenders have 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.

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.

Most, short sale contracts  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 lender approval terms.

The seller may or may not have been told at the beginning of the short sale by the listing licensee any of these consequences could happen or to consult an accountant or attorney.

Real estate agents in affluent communities have been making contracts assignable and flipping high end properties for many decades.

Often the listing licensee is also the purchaser.  New homes contracts in new developments are a big target for flipping.  Some builders caught on and stopped making their contract assignable, others have not.

An assignable contract allows investors to front deposit money to start the building process.  Some developments require 50% of the building or section to be sold before they can actually start the building process.  Assignable contracts by investors makes it possible for the builders to start their projects.

Short selling begins when the real estate market becomes stagnant. Sales are slow because people were not buying much property.

Real estate licensees, attorneys and loss mitigation companies are make a lot of money off desperate property owners who are underwater with their mortgages in difficult economic times.

I cringe every time I hear a sellers listing agent who complains because a seller  had the nerve to go behind their back, to work with the bank to get a loan modification to keep their home!

It is possible for property owners to resolve their own issues with their banks. When they do, they have a greater chance of getting a loan modification and keeping their home.

“The most important thing a buyer can do is first of all work with a buyer broker.”

As stated by AARP and the Consumer Federation of America in REALTOR® NEWS

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