Hat tip to Blue Streak for sending this along – link here for full article, with excerpts here:
June 10 (Bloomberg) — Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.
Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed — known as a short sale — without disclosing that there were better offers. They then flipped the houses for a profit.
“Short sales are an important tool that can help both the bank and the borrower,” said Morgan McCarty, executive vice president for mortgage servicing at Birmingham, Alabama-based Regions Bank, which lost money in the Connecticut case. “It’s just that criminals are always trying to find ways of profiting.”
A prevalent scam involves a practice called “flopping,” Barofsky said. In that scheme, investors or home buyers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit, as in the Connecticut case.
“Flopping” occurs in more than 1 percent of short sales and may cost lenders $50 million this year, according to estimates from CoreLogic Inc., a real estate data and research company in Santa Ana, California. About 12 percent of existing home sales, or almost 622,000 houses, were short sales in the 12 months through April, data from the National Association of Realtors show.
(JtR note: We could find $50 million in flopping fraud in SD County!)
The Treasury has “put reasonable protections in place” to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days, said Laurie Maggiano, policy director of the department’s Homeownership Preservation Office in Washington.
“We have language in our short sale approval letter that prohibits the flipping of a property and after closing we will audit transactions to identify ‘flips’ or ‘flops,’ ” Bauwens wrote. “It’s not in the best interest of our investors or communities at large to encourage or allow flipping.”
The company requires a full appraisal before a resale, McCarty said. It also demands short-sale buyers sign statements affirming the transactions are arms length, with no hidden buyer-seller relationships, and that there are no agreements to resell the property.
In the Connecticut case, Regions Bank in April 2008 agreed to a short sale of a Bridgeport house for $102,375, unaware that Natera and McElaney had a bidder willing to pay $132,500, according to the plea agreements. Eight weeks after the bank sold for a loss, the pair resold the house for a $30,125 gain.
“…without disclosing that there were better offers. They then flipped the houses for a profit.”
This would have been far more difficult to prove if there would not have been better offers and if the holding period were longer. The agents who are profiting from people buying the homes to live in is far more difficult to prove.
Let’s see… I’m an agent. I represent the seller. Before I go further, maybe someone could explain fiduciary responsibility. Now I buy the home and immediately resell it for a sizable profit?
BTW, this reminds me of a friend. I checked the listings online, which I do often. I said, “I thought you sold your house.” He replied, “I did.” I asked, “Why is it still on the market?”
A few days earlier he was telling me about the great selling price. He really made lots of cash, blah, blah, blah. Then his happiness turned to anger when he saw his same home go pending for an extra $100k 14 days after he closed. No improvements. No changes. Just a different moment in time. This was back at the peak of the market.
Unless the bank did a sting where they sent in offers via a 3rd party that weren’t forwarded how would they know the listing agent wasn’t sending them?
Funny thing is banks could eliminate this problem by removing agents from the picture and letting the market decide prices.
shadash-
“…by removing agents from the picture and letting the market decide prices.”
Someone must approve a given sale–there are no free lunches here, as we have previously discussed.
This situation is more akin to hiring someone who steals. Just because there is a bad employee doesn’t mean we need a new model.
“Unless the bank did a sting where they sent in offers via a 3rd party that weren’t forwarded how would they know the listing agent wasn’t sending them?”
There are agents MAD AS HELL when they lose a sale. Shall I say, some of those are starving agents. If you are an agent, and you submitted a legitimate cash offer and it was rejected, and then your buyer is looking at the same property a few days later, wouldn’t that be a clue to call the previous security holder?
Don’t play with feral dogs.
JP2,
I like your fire but I don’t know what you’re talking about.
To give an example of how annoying short sales are. I have an offer out on one (through Jim). Admittedly it’s not for list price. But I have no contingencies. The listing agent is trying to put something together with another offer that has contingencies. So basically the listing agent is betting that the other offer will sell their current house and be able to buy before I get discouraged and move on to another property. (Or there’s something fishy going on between the other offer and the listing agent. Jim’s doing my offer by the book)
If the bank would eliminate the listing agent and just accept the market price my offer would be number one. Assuming there’s a time frame on the sale.
I guess the bank don’t believe in commerce.
Also the banks are ripping us of, our hard earned cash is deposited and they give us 1-2% in a CD, then they turn around and lend it out at 5-6-7%, not only that because of the fractional reserve system they can lend 8-10 dollars for every 1 dollar we deposit.
No one should buy things cheaper than they sell them for. Von’s,Ralphs and all small shops holders should not be allowed to make a profit.
They must sell everything at cost.
Everyone is equal, just banks are more equal than everyone else!!!!!!!
shadash – how does a bank research neighborhood specific info, market, show, homes without the listing agent.
Remember the Asset Mgr has a lot of homes and cannot be onsite at each one spread across the county/counties?
How are you going to do this work on such a large scale? Just saying, let the market do it isn’t reasonable…thoughts???
“No improvements. No changes. Just a different moment in time.” – There’s the money quote.
clearfund,
I believe banks should put houses on the mls themselves for $1 but also put a “going to sell date” (at least a month later) in the remarks. As the date draws closer post updates in the remarks of the highest offers. Don’t post anymore updates 1 week before the sale date. (At this time you’ll know who’s really interested/qualified) Finally let the interested partied bid against each other. On the sales date sell the house.
As jim will likely confirm, there is more work involved to selling a home properly than just putting it in the MLS.
I believe JP2 hit it accurately with “This situation is more akin to hiring someone who steals. Just because there is a bad employee doesn’t mean we need a new model.”
Sellers/Banks need to do a better job of screening and leveraging the very informed and valuable real estate agent community.
The major benefit to the reo seller side is free labor…which as a business owner and employer of many, cannot be underestimated. Its relatively expensive work being performed with no expense on the books.
Hire better agents, fire the scammers, asap and root them out to the community and DRE.
We’re experimenting with our own in-house disclosure form that every buyer/offeror is mandated to sign when submitting an offer. This form requires their agent to submit the offer to the listing agent AND fax/email it to us (seller) immediately. This info is also put into the general comments so that the buyer’s agent is aware of it w/o relying on the listing agent to disclose.
Hopefully, it will significantly tighten the noose on the agents and will cause the ones seeking to game the system to not want to work with us.
ps: we’re also experimenting with financial penalties to the broker for violation of our listing agreement (of which the disclosure requirement is attached as a condition).
Enjoy
shadash- Clearly you want auction type pricing.
That said, there is no difference in the final price, with the right assumptions. I’ve discussed this in the past.
That said, if you submit a cash offer on a short sale, and it sells for less than your cash offer, then you and your agent should be rather upset.
Example:
Home listed for $900k (round number)
Your cash offer: $800k (example only)
Another offer is accepted, and the home sells for $750k. Now you are looking at the same home that just sold for $750, new listing-not a short sale, for $850k, when you made a legitimate offer of $800k.
Both you and your agent should be rather pissed.
You best believe that I’d be on the phone to the former lien holder (public record) letting them know of the potential fraud.
Sol- I wonder if the market changed that much in the short time, a few days…
I once sold a car, and I had a very similar conversation with my dad. He said, I see your car is still listed in the paper. I said, “I sold the car and canceled that ad a couple days ago.” He read it to me, and I said, “That’s not my ad.”
The buyer purchased my car to re-sell immediately. I have no idea how much he sold it for, nor do I care. I was happy with the sale amount. My phone was not ringing off the hook–maybe he is a better salesman? Maybe he’ll get few more bucks?
That said, we are not talking about $100k.
I should note that my friend was bragging that he received the full-price offer on the home in just a couple of days. The agent was wonderful, blah, blah, blah. All that changed when the home went pending 14 days after closing, and eventually sold for the additional $100k.
To those arguing that this is an employer/employee problem, well, yeah, duh, but it’s more than that.
I work at a pharmaceutical company. One of the former AP managers was scamming money to his personal account.
The company, of course, fired him. But, they did one correct step further and talked to the police. You see, stealing isn’t just a tort, it’s criminal. You go to prison for this. We have decided as a society that we best deter crime by punishing it. I am sure you can guess that the AP manager we have now would never take a penny without considering the last one who is still in a California medium-security lock up. That’s a powerful message to send.
We sometimes talk too much about the overall effect on the market these transactions have, but we forget that there is a serious morality problem here if we condone theft in broad daylight; it send the message that there are no consequences for your actions; getting ahead is as good as any reason to do anything. I don’t believe it is.
Chuck
clearfund- Any minimum amount of time that the listing stays active? Leaving the listing active for a minimum amount of time for exposure would be important. JTR has discussed those 60 second listings–you know the ones where the place goes pending immediately.
You make a good case, however, to list a property and accept offers after 14 days, or whatever. Basically a silent auction with a reserve.
Chuck Ponzi- JTR’s post outlines the illicit aspect: “Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal.”
Yes, you are right, if you suspect a crime, report it. As a potential buyer, however, I am not sure that a crime has occurred. I would not call the police to suggest my offer to buy was not accepted.
Wouldn’t it be great if they also banned a relationship between seller’s and buyer’s agent. It has happened twice to me now that the listing agents ends up using his own offer for the short sale over an identical offer that comes from another agent because he could make twice the commission. To avoid raising red flag, they even make offers through other colleague agents.
JP2 – We like to see our listings out for a couple weeks before accepting an offer.
Because we’re more hands-on and smaller than a large reo shop we can get a bit more granular with our detail and feel we get a pretty solid handle on pricing.
However, we’re more interested in moving fast if we get a good offer above our pricing requirements and then get it closed before someone f’s up the market with more foreclosures, bombs, terrorism, Iran, DC, etc bring the market to a halt someday…no one wants to be caught holding the bag.
So if we get what we need, and some $$$ ends up left on the table, so be it. I’m looking at 200 homes and not focused on maximizing 1 individual home.
JP2 – I hear ya. I don’t have any answers, just observations.
There are many things not right with the general real estate picture, not to mention the wider economic structure. It didn’t happen overnight. Somewhere, somehow lots of things started changing. I suspect deregulation and lack of oversight to be main culprits, among others. There seems to a pervasive attitude of corruption floating in the air tinging everything. As if – no consequences, no problems. Until the powers that be start to get a clue, it’s the status quo baby. Sometimes I’m a afraid for this country’s future, but I try not to dwell on it too much. You could make yourself crazy in a hurry.
Sol,
“With your head in the sand you can’t tell who’s kicking your ass”
clearfund- I know that real estate has been hit hard, but your style of management is what I seek when investing. Clearly you don’t have any major impact on the total market, but you are making the best of the situation.
“So if we get what we need, and some $$$ ends up left on the table, so be it.”
That’s basically how I felt about my car sale. It really wasn’t worth my time and effort to try and squeeze another dollar out of the deal. Maybe it’s worth it to the other guy?
Unfortunately over-leveraged home debtors are very sensitive to each additional dollar. I hope it 100% obvious that 6% of $10k = $600. And 600/2 = $300, and $300 split further is less than $300… This applies even where there is no underlying debt, but ROE isn’t impacted the same, since E is relatively large. (Let A = market value, rather than book value.)
Thanks for the reply.
JP2,
Yes, the tactic that was illegal was to withhold competitive bids in favor of a non-arms length transaction with a related party.
As a potential buyer or any other person, you should see it as illegal. If the house was worth 130K in a competitive bidding situation, and the house ended up selling at 100K to someone the listing agent knew despite better offers, that is taking money from the bank and giving it to the perpetrators.
Since we all backstop the bank as citizens and taxpayers of the US, holders of US denominated assets, or borrowers from banks, that is not a victimless crime; we all pay for that theft.
What seals the deal is the “flopping” part of the theft, when the buyers quickly sell the property; proving that the property was worth more than it sold for.
That is fundamentally different than finding a nugget of gold on the street. Everyone walking along the street is able to see and potentially pick up the nugget, regardless of whether they believe it is valuable or not. The same could be said about finding a rare and priceless antique for sale in a shop where the owner does not understand the value.
However, if the shop owner does not understand the value while one of his salespersons does; who then conspires with a buyer to sell it for less than it is worth for personal gain, then that is a crime. It’s not a matter of opinion, it’s law. Agents have a fiduciary duty to their employer.
Chuck
Chuck Ponzi- “If the house was worth 130K in a competitive bidding situation, and the house ended up selling at 100K to someone the listing agent knew despite better offers, that is taking money from the bank and giving it to the perpetrators.”
We need to be very, very careful here–Occam’s razor must be present. If there is *any* difference between the two offers, we need to make sure that we know how much the seller valued the difference.
For example, a $100k cash offer without contingencies might be worth more to a seller than the $130k offer that has some contingency. If this is the case, then no fraud has taken place. Ultimately the seller should be making the decision, not the selling agent.
Oh, and I should add that I know a guy who took a much lower offer with a high earnest deposit rather than a much higher offer with essentially no earnest deposit. The high earnest deposit suggested he was dealing with a serious buyer–he’d rather sell the place to a serious buyer rather than have problems with a flake.
Thanks JP2 – I will 100% credit my view of real estate, and the economy, with my institutional real estate experience (i.e. morgan stanley realty funds, etc).
No time to go into detail, but learning the business from that perspective (i.e. investing funds for pension funds/endowments/etc) is VERY different from the local investor’s perspective. They are not even close to the same industry.
This is why a common thread for me is watch the macro trends and don’t get caught up in the micro level noise.
I follow the following theory: Cannot fight the tide, just want to know if its coming in or going out so I know where to lay my towel.
22.Oh, and I should add that I know a guy who took a much lower offer with a high earnest deposit rather than a much higher offer with essentially no earnest deposit. The high earnest deposit suggested he was dealing with a serious buyer–he’d rather sell the place to a serious buyer rather than have problems with a flake.
JP2 | June 10th, 2010 at 1:17 pm
I know what I would do in that situation. Counter both offers with the higher price and higher deposit, see if somebody bites.
shadash- appearances can be deceiving.
I personally think these short sales are bogus in the first place.When you buy an other asset you dont get to wiggle out of the deal and have banks take losses.Seems really bizarre to me.
Geotpf- “Counter both offers with the higher price and higher deposit, see if somebody bites.”
Any counter offer is a decline of the first offer. That deal is dead. DEAD! Don’t ever count on the buyer offering that deal ever again, and in fact, the earnest deposit must be returned with the counter offer. The earnest deposit could actually go down, or possibly the next offer from the buyer could go down, and not up.
Yes, I know that counter offers are routinely accepted, but if you’ve ever had someone walk when you’re trying to squeeze the buyer for a couple of dollars–some times it’s just not worth the risk.
By the way, I’m the guy that makes the lower future offers–I make it clear that my first offer is my best offer. Yes, I have walked on many sellers who’d rather have taken my first offer.
I guess sellers assume that I have some sort of love for their property. Buzz, Wrong.
Next.
I’m not sure why this is a crime. The agents made an offer to the bank for a short sale. The bank, because banks aren’t very good with money, accepted the offer. The bank could have hired their own agent to review and appraise the deal. So, its illegal to low ball offer to a bank, but its legal for banks to charge fees to modify a loan and then not modify it? Nice system. I say this shouldn’t be a crime, it should be celebrated. Houses are freed from debt, banks can clear potentially toxic loans from their books and the brokers make money for their efforts. I see zero wrong with this.
There is gray area here, because without a listing agreement or other binding contract between bank and agent, what obligation is there?
The case mentioned in the article is not clear-cut, but they pled guilty and sunk their own boat.
Banks should at least have the listing agents sign an agreement that creates a fiduciary duty, that way when they audit the files and catch someone, they’ll have grounds.
The Associations of Realtors and/or state licensing boards could do something specific to incorporate rules and regs for guidance, but you don’t hear a peep out of them. Many agents are oblivious to any wrong-doing here, and if there were rules and regs, with some enforcement and perp walks, it would help.
“A homeowner in California’s Inland Empire bought for $350,000, refinanced during the boom for over $700,000 (cash out), and put in a pool, fixed up the house, and bought some toys. After house prices collapsed, and his loan reset to the fully amortizing rate, he talked his bank into a short sale (the homeowner is a real estate agent) – to his cousin for $350,000! The previous homeowner is now leasing the home from his cousin …
The house was listed on the MLS for one minute at midnight (to satisfy the bank). And then listed as pending. These one minute listings are a red flag for possible fraud. Whether the transaction is not arms length (as above), or the listing agent is just trying to get both sides of the commission – this is not the best deal for the lenders (and frequently taxpayers).
This is a classic agency problem. As part of a short sale agreement, I think the bank should hire the listing agent – and also require the property to be listed openly for a minimum period.”
http://www.calculatedriskblog.com/2010/06/debt-problem-contained-in-europe-market.html
Note: The guys with a “real finance” background all basically think the same.
When offering a short sale to a bank, isn’t there a form you sign specifically saying this is not a sale to a relative or yourself? That’s the crime.
Lying on a form is actually a pretty common way to catch crooks. There are immigration forms that literally ask “Are you affiliated with terrorist groups?” Nobody *ever* answers yes. But they’ve thrown many terrorists into prison for answering no. Hope that clears things up.
I had to sign forms saying I didn’t beat my fiancee, we don’t use drugs, have never been a communist, and so on and so forth. To them it’s not about what you say – it’s about making a legal paper trail.
Wait, #30 banks don’t sign listing agreements with their agents??? WTF?????? It never crossed my mind thaty they wouldn’t have that agreement in place on each home..
This market is like an onion….the more they keep peeling away the layers, the more it stinks!
This is a classic agency problem. As part of a short sale agreement, I think the bank should hire the listing agent – and also require the property to be listed openly for a minimum period.”
http://www.calculatedriskblog.com/2010/06/debt-problem-contained-in-europe-market.html
This is **exactly** what needs to be done.
Either that or mandate that ALL taxpayer-backed/insured lenders (directly or indirectly backed or insured) post every single short-sale or REO listing on an auction site run by a govt entity (Freddie, Fannie, or?), and have all buyers pre-qualified through the GSEs in order to get a bidder ID number. The listing should remain open for at least 30 days, at which point the buyer with the best price and terms (all clearly visible and transparent to all parties throughout the entire process) wins the deal. Every transaction/buyer/seller should be tracked and audited for any fraudulent activity.
If a “seller” owes more than the loan amount, they (and their agents) should be removed from the transaction. It’s now a matter between the banks/lenders and potential buyers. The lender alone should control the selling side of the transaction.
“This market is like an onion….the more they keep peeling away the layers, the more it stinks!”
First of all, I still cannot get over there was no agreement between the bank and the agent. That’s where I started in #1, “fiduciary responsibility.” With no agreement, what responsibility does the ‘agent’ have? Whose agent is the person?
Now moving forward regarding the onion, I often wonder if the real news isn’t found here:
http://www.theonion.com/
lol
Let’s clarify how a short sale happens:
1. Defaulting seller hires whoever he wants for a listing agent (usually after being solicited heavily by “SS experts”) and signs listing agreement.
2. Listing agent finds a buyer, makes deal, and usually has seller sign it before sending into bank for approval.
3. Bank reviews seller’s financials and determines the value of the property.
4. If everything jives, bank approves offer submitted and pays all costs and commissions on behalf of seller, including any buyer credits (which usually offset the SS negotiator’s fee).
None of the realtors have a written contract/fiduciary duty with the bank. In the final paperwork the bank will ask the buyer and seller to sign that they didn’t commit fraud.
Oh, I thought this was a case of REO, not short.
I haven’t read through the whole thread. But I’ve heard of investors getting their short sale offer accepted by the bank, and then finding a 2nd retail buyer, and creating a spread between their offer and what they have a retail buyer willing to pay. Then the investor closes with transaction funding (meaning they only take title for a few minutes before the retail buyer closes), or does a double escrow. And then pockets the spread. There are a lot of Real Estate Gurus teaching this.
Since these agents who are screwing around are easy to pick out, seems the solution is for the bank to require agents to submit a deposit to the bank for the right to carry short sales and if they are found to violate any of the obviously much needed better rules (like minimum time on market) they forfeit their deposit and they are black listed by the banking industry, as a whole. Certainly the banks can share data on this, no?
Jim, per your last comment, this is why I don’t see the harm here. If the banks want to protect themselves, they can hire agents.
Former RB Resident,
I think you may have missed the class on ethics. If you are hired on as a listing agent to represent a bank property. They are expecting you to work in their interests. Not your own or the buyers. The BANKS INTERESTS. That’s how the game is supposed to work.
It is screwed up – the banks have gone along with the short-sale program, and unscrupulous agents take advantage of them.
Nobody seems to care within the industry.
It is so bad that each listing agent makes up their own short-sale program. I have one right now where if we wanted to make an offer, the listing agent would only entertain it if we agreed to pay $12,000 to his short-sale negotiator.
“Nobody seems to care within the [banking] industry.”
At least one REALTOR cares. JTR, for starters.
“It is so bad that each listing agent makes up their own short-sale program. I have one right now where if we wanted to make an offer, the listing agent would only entertain it if we agreed to pay $12,000 to his short-sale negotiator.”
This reminds me of people who complain “the shipping is more than the cost of the item.” That may be true in some cases, but that’s not the correct issue. The underlying question is how much is the item worth delivered.
In other words, let’s take a total offer value of $100k (as established by the buyer, and it should be noted that we don’t know what the buyer is really willing and able to pay, we may be at the buyer’s maximum.). The offer is $100k inclusive of all the fees, expenses, and so on.
$12k negotiator fee?
Offer $12k fee+$88k real = $100k total.
Now if the buyer values the place at $200k, and it’s going to cost an extra $12k beyond the $100k, then he might be willing to pay $112k, but the buyer should, using game theory, walk if he believes that no other buyer is willing to pay more than $100k inclusive of the $12k negotiator fee.
As always, if you’re Gates, pay the $12k.
It should also be noted that 12k is 12% of 100k, but only 1.2% of 1M.
Shadash, I am not an agent, I’m a lawyer, so I get the ethics issues. But, as I read this story the agents in question represent the Seller. Depending on the Seller’s role in this triangle, then I don’t see the problem. The agent representing the seller owes no loyalty to the bank.
I don’t see the problem
Agreed that the listing agent probably hasn’t done anything illegal for which he could be prosecuted.
The association of realtors should champion this issue, and direct agents to handle them properly, or get kicked out of the association. It certainty isn’t fair to other agents trying to make a living.
Just because it’s not illegal doesn’t mean it should continue, and if the associations don’t do it, then either the banks themselves or the government will, and that won’t be pretty.
One issue I see is that people have come to think that a “short sale program” is something formal and official.
Effectively, its just calling the bank and saying I’ll payoff my debt for X when I owe Y…do you accept that mr. banker? That’s it.
The fact that the banks are poor business people and negotiators is their own fault. Remember, all banks do is make loans (and poorly at that). They don’t market, list, invest, etc.
My suggestion is that banks outsource all their short sale requests to some private equity asset management shop (aka Blackrock, etc) who can do this work for them. Those sharks won’t let anything get past them if you do it in a JV format with a share of the upside.
If banks just foreclosed, or offered a deed in lieu with a cash payment, right away (i.e. w/in 6 mo of default) then they’d be able to spin the house quickly equal/better to any short sale price, only their net would be better given the 1+ yr they would save in NPV costs and sliding of home values over that time.
This is exactly why I was so confused:
“Shadash, I am not an agent, I’m a lawyer, so I get the ethics issues. But, as I read this story the agents in question represent the Seller. Depending on the Seller’s role in this triangle, then I don’t see the problem. The agent representing the seller owes no loyalty to the bank.
Former RB Resident | June 11th, 2010 at 9:04 am”
I know it says, “Their crime involved persuading lenders to approve the sale of homes for less than the balance owed — known as a short sale — without disclosing that there were better offers,” but I still have a difficult time understanding the crime. The only thing I can imagine was that the agent made gross misrepresentations to the lien holder.
I guess the heart of the problem is the sellers don’t care what the home sells for in the case of a non-recourse short-sale.
This is completely unethical and illegal. I notify the DRE everytime one of these listings comes up. One came up today in the Crosby on Top O The Morning. I called to schedule an appt and the agent said oh an offer was sent to the bank already by an investor and there will be no showings. I have started contacting the banks when I come across these listing to expose these less than ethical parties.