New short-sale scams on the rise
Lenders, seniors losing money on 'back-to-back' closings
By Tom Kelly, Wednesday, July 27, 2011.
Crooks always look for a new wrinkle, and short-sale scams are quickly moving to the top of the fraud world.
According to a new study just released by CoreLogic, short-sale fraud is expected to rise 25 percent in 2011 with lenders and servers incurring losses in excess of $375 million. The primary states of concern are California, Arizona, Colorado and Florida.
However, short-sale fraud is also popping up in other states. Deb Bortner, director of consumer services for the Washington State Department of Financial Institutions, was one of many state officials to say there was anecdotal evidence that short-sale fraud is on the rise.
A short sale is a real estate transaction in which the borrower, being unable to pay the mortgage on the property, is permitted by the lender to sell the property "short of" -- or less than -- the total amount due. Hence, the lender accepts a loss.
One of the more glaring results of the CoreLogic study was that short sales resold on the same day had an average of a 34 percent gain ($56,947) between the sale prices.
How is this possible?
According to CoreLogic, the same-day turnaround of a short sale can be achieved by what is known as a "back-to-back" closing. In such, the investor has two separate contracts: a purchase contract with the short-sale lender as well as a sale contract with a third party.
The transactions are choreographed and presented to a title company on the same day. The purchase transaction is first executed, followed immediately by the sale contract.
"Reasonably, an investor may buy a short-sale property, perform verifiable improvements to the home over a period of time, and resell the property for a legitimate financial gain," the CoreLogic authors wrote. "Nearly one in six (16 percent) 'suspicious' short sales is resold on the same day, making legitimate increases in value doubtful."
One method investors use to obtain profits without improvements or repairs is to list a property they do not have authority to list at a price less than a lender is willing to accept via a short sale.
This is done in the hopes of generating a bidding war from multiple interested buyers. The investor would then choose the highest price, negotiate the lowest sales price possible with the lender, and execute the back-to-back closings on the same day.
This also has occurred to homeowners (typically elderly) who own their homes free and clear but are forced to sell to move into a nursing facility. The scammers list the property at a low price, take the highest offer, negotiate a deal with the senior, and stage a simultaneous closing. The investor pockets the difference.
According to the study, "suspicious" transactions are short sales that may have caused the lender to incur unnecessary losses. "Suspicious" short sales are defined as:
- A new transaction less than one month after the short sale where the new sale price is at least 10 percent higher than the short-sale price;
- A new transaction less than three months after the short sale where the new sale price is at least 20 percent higher than the short-sale price;
- A new transaction less than six months after the short sale where the new sale price is at least 40 percent higher than the short-sale price.
The study examined more than 450,000 short sales of single-family homes in the past three years. It noted that some legitimate property rehabilitation and "flips" -- where repairs and improvements were made -- have occurred within the "suspicious" time frame.
Neither the lender nor the homeowner wants to go through the foreclosure process. It is time-consuming and expensive for both, and the credit damage a foreclosure can do is significant. While both sides also lose in a short sale, it is viewed as the lesser of two evils.
And, where there is anxiety and loss, there always seems to be someone there to make things worse.
Tom Kelly's book "Cashing In on a Second Home in Central America: How to Buy, Rent and Profit in the World's Bargain Zone" was written with Mitch Creekmore, senior vice president of Stewart International, and Jeff Hornberger, the National Association of Realtors' international market development manager. The book is available in retail stores, on Amazon.com and on tomkelly.com.
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Submitted by Antoine Pirson on July 27, 2011 - 4:00pm.
If sellers would not be so dumb to think they can short sell their place without an experienced real estate agent, and banks would not be so stupid to ignore the services of real estate agents in short sales, then this would not happen. The best chance for an arms lenght transaction is via a realtor. Investors want to buy cheap, and will tell any story to any home owner to get the property.
Banks have not realized yet that real estate agents are there to assist them. However, banks are forcing the commission down in short sales. Penny wise and pound foolish.
Antoine E Pirson, Broker, MBA
Submitted by Kathleen Scanlon on July 27, 2011 - 5:41pm.
I have to comment on this utter nonsense that Corelogic and the banks are propagating about "short sale fraud".
First of all, the banks conduct an independent appraisal of the property by obtaining a BPO or, if they weren't so cheap, an actual appraisal. As such, the bank is free to determine whether or not they will accept the short sale offer. It is a business decision.
The fact that the purchaser is going to resell the property is not fraud. There is no relationship between the prospective purchaser and the bank as much as the bank would like to fabricate same. The privity of contract is between the Seller and the bank and does not extend to any prospective purchasers. As such, the banks' attempts to put a restraint on alienation is untenable and unenforceable.
The only fraud usually takes place with an unethical real estate agent who engages in self-dealing. The violation of the agent's fiduciary duty to the seller by failing to present the higher offer or cash funneled back to sellers is the sum and substance of any short sale fraud - not the resale of the property by the purchaser.
Submitted by William Gassett on July 27, 2011 - 8:27pm.
Tom, has NO ONE picked up on the fact that Corelogic is PAID BY THE LENDERS!!! Of COURSE they are going to point all their "un" bias studies and reports to how much fraud their is. THEY WANT TO STAY IN BUSINESS.
Corelogic is being SUED FOR APPRAISAL FRAUD. Nothing in this article is illegal or even remotely suspicious. The investor is DISCLOSING to the lender they are reselling that exact SAME property for profit!!
When you write articles highlighting Corelogic's incredibly masterful marketing material (NOT UNBIAS STUDY) you lead people to believe that buying and selling property on the same day for profit is NOT LEGAL and IT IS LEGAL!! (with full disclosures) and on a 2.5 million dollar home, a $56,947 selling price is NOT so far fetched. AND PLEASE keep in mind the investor did not just pocket that amount...minus out all the expenses and you're looking at about an $18,000 profit.
This GROSS regurgitation of marketing material from Corelogic MUST be highlighted.
I agree with Attorney Scanlon.
Submitted by William Gassett on July 27, 2011 - 8:38pm.
Oh and just one other thing about your post, the investor can't have a purchase contract with the lender. It's not possible. The lender doesn't own the house yet.
They MAY have a legitimate contract with the seller and then at approval time, initiate a contract with the 3rd party buyer.
Submitted by Mark Eibner on July 27, 2011 - 10:09pm.
This article is total smoke and mirrors. A distraction piece from the real issues at large. Short Sale Fraud! Get off it already. Are we that brainwashed to think...OMG someone is making a profit? Anyone remember the 80's? Remember RTC dumping whole shitpiles of houses and flip profits at insane levels...oh I guess no fraud there because some autocrat at RTC sold the units off in an auction? Some people lose and some people win IN THESE TYPES OF MARKETS. Between the Regulators needing to justify their fees/jobs with witch hunts and banks acting like victims, this makes me sick.
I see banks turn down short sale deals that then go to auction that then sit for months and then sell through a REO broker for thousands and thousands less than the Short Sale contract. They are then bought by an investor and sold for a profit 1-180 days later. Where is that study from Corelogic?
The only FRAUD Tom, is the current American Banking System. The King pin of the whole banking fraud being The Federal Reserve.
How about the fact that the Federal Reserve is a private frickin bank, owned by private corporations, not even American Nationals. Yea, latest audit shows some 16.1T (that’s Trillion) going to friends and family not only in the USA but European banks? Why not write about that? You could take all the Short Sale fraud in the entire country and spend it in seconds compared to $16 Trillion.
How about the fraud perpetrated on the American public that is known as fractional reserve lending. These practices put unlicensed ponzi schemes in prison while allowing “licensed” ponzi scheme banks to get bailed out with our TAX money and than taken over by other banks...where is the non fraud in that.
People are borrowing nothing except electronic debits and credits that represent no real wealth. Loans are created from thin air using fractional ponzi schemes of 7-1, 10-1, 50-1 and some leveraged at 70-1 reserves. Electronic debits and credits in exchange for sticks and stones on dirt. That is Fraud.
You trying to tell me that Wells Fargo using Wachovia paper they bought at .20 cents on the dollar then foreclosing for a 300% ROI is not Fraud? WTF over.
Where is the FRAUD of using a totally WORTHLESS Fiat paper money system? Article I, Section 8 states: "The Congress shall have Power...to coin Money". Notice that it states "coin" not "print". Anyone who reads James Madison's notes of the Constitutional Convention, The Federalist Papers, etc. will find that one of the purposes of the Constitutional Convention was to do away with paper money--entirely! Thus for the first 72 years from the founding of our nation the united States' Government only minted gold and silver COINS for money. How about the Fraud of a 1913 dollar being worth 2 cents today? Gold was at $1,620+ dollars today. Have you considered that inflation is theft?
History shows that the real “dollar” is a coin containing 371.25 grains (troy) of fine silver. History also demonstrates that official Washington, D.C., has no conception of what a “dollar” really is. The reason for this self-imposed ignorance is obvious. By reducing the “dollar” to a political abstraction, the government has empowered itself to engage in limitless debasement (depreciation in purchasing power) of our money. A “dollar” that must perforce of the Constitution contain 371.25 grains of fine silver cannot be reduced in value below the market exchange value of silver. A pseudo-“dollar” that contains no fixed amount of any particular substance per “dollar,” on the other hand, can be reduced in value infinitely.
Why not write about real FRAUD and dump the Keystone Cops article.
Submitted by Ron Ballard on July 28, 2011 - 4:00pm.
Anyone who is interested in the blatantly flawed analysis contained in this "study" is encouraged to read the June 6 & 7 articles at
http://californiashortsalelawyer.com/ .
The study came out over a month ago and has been soundly discredited since then. This is very old non-news.