We’ve covered this topic in full, but glad to see this article mentioning the specific penalities for short-sale fraud – up to 30 years in prison! From the latimes.com:
Are banks and distressed home sellers getting rooked on a massive scale in the booming short-sale arena — leaving hundreds of millions of dollars on the table for white-collar criminals?
A comprehensive new study estimates that they will lose more than $375 million this year when they sell undervalued houses to tag teams consisting of realty agents and investors. Worse yet, the trend appears to be growing at the rate of 25% a year.
CoreLogic, a large real estate and mortgage data research firm in Santa Ana, studied 450,000 short-sale transactions across the country during the last two years and offered these examples of how lenders are losing big bucks:
• A house in Kings Beach, Calif., was purchased near the height of the boom in 2005 for $530,000. On Oct. 28, 2009, it was sold for $247,500 to an investment group in a short sale — an arrangement in which the lender allows the delinquent owner to avoid foreclosure by selling to a third party at a price lower than the loan balance. Later that same day, the investors resold the house to a non-investor purchaser for $375,000. This produced a quick $127,500 profit — a 52% gain for the investment group in a matter of hours.
• A house in Gilbert, Ariz., sold for $400,000 in 2006. On March 2, 2010, it was bought in a short sale by investors for $220,000 and resold the same day for $267,500 — a gain of $47,500.
How do investors manage to turn such quick profits? Are they just super-sharp shoppers or is there something else going on? Law enforcement and banking industry experts say it’s frequently fraud, and it works like this: Local real estate agents partner with investor groups. The agent’s job is to spot borrowers in financial distress — usually people who are underwater on their mortgages, meaning they owe more than their homes are worth. They persuade the homeowners to sell to investors in a short sale at a low price. Then they contact the bank with the investors’ short-sale offer.
Meanwhile, the agent finds legitimate buyers who are willing to pay more for the property, but the agent never presents their offers to the bank. To back up the investors’ lowball offer, the realty agent produces an appraisal or a “BPO” — a broker price opinion of the distressed home’s value that confirms the low valuation. The bank then sells to the investment group. After the closing, the investors sell the house to the legitimate purchasers at the higher price, and the realty agent and the investors split the profits.
For example, Connecticut real estate agents Anna McElaney and Sergio Natera are awaiting sentencing hearings in July and October in connection with guilty pleas in federal court to short-sale bank fraud. According to the U.S. attorney’s office in Connecticut, McElaney and Natera participated in a scheme in which Regions Bank, headquartered in Alabama, agreed to a $102,375 short sale on a house it financed in Bridgeport, Conn. The buyer was BOS Asset Management, an investment company controlled by Natera. Unknown to Regions Bank, however, listing agent McElaney had earlier received a signed purchase contract from a private buyer for $132,500. After closing at the lower price, BOS resold the property to the private buyer, yielding Natera and McElaney a fast $30,125 profit.
The original federal charges against the two agents alleged short-sale frauds on three other houses, including properties financed by Wells Fargo Bank and a mortgage unit of the global financial services firm Credit Suisse. The guilty pleas, however, solely involved the Regions Bank house in Bridgeport.
Though banks are the primary victims in short-sale scams, homeowners can be hurt as well. When distressed owners are pressured to sell to investor groups for less than the highest offer available, they can end up deeper in debt to the lender. In the majority of states where banks can pursue borrowers for mortgage balance deficiencies after foreclosure or short sale, homeowners may be subject to debt collection actions by banks. California does not permit lenders to demand payment of deficiencies from borrowers on mortgages used to acquire residences. However, refinancings may not be protected, according to legal experts.
But the bottom line here, as seen in the Connecticut guilty pleas, is that short-sale thievery is federal bank fraud. Realty agents and investors who participate in these schemes risk prison terms of up to 30 years, big fines plus restitution of the funds they stole.
Laws are only followed when they’re enforced.
Like this one?
http://www.redfin.com/CA/Rllng-Hls-Est/4640-Marloma-Dr-90274/home/7742618
Homes in the area sell for 1M plus. Been looking in the area for over six months and NEVER saw this prior to sale.
I saw this article in the paper yesterday. Made immediately think of the home on Paseo Capuchina that had a strange double escrow last year. A short sale that sold in the morning, then resold that afternoon at a higher price to someone else.
Yep. It’s fraud. Just like lying on a loan doc. Fraud. Now if only these laws would actually be enforced and punish the perpetrators. Since that’s unlikely, I guess the fraud will continue. Not a level playing field out there, not for a long time.
Short sale fraud doesn’t sound sexy to prosecute — it won’t advance the political career of the prosecutor in most places. The bank is the injured party, and nobody there has any motivation to press the matter, since it makes the bank employees responsible for approving the sale look bad. Thus, almost none of the frauds are pursued.
The system needs some minor adjustment so that the financial incentive to cheat is held in check by the likelihood of getting caught and punished. The current situation provides too little motivation to those who are in a position to act against the criminals. Unfortunately, the typical response is to call for higher penalties when the real problem is that virtually nobody gets prosecuted. If the current laws were visibly enforced, the rate of fraud would drop.
#2 That looks like the smallest house on the block, a 2BR in an area of 3BR houses, and sold for only a small discount on a $/ft basis. Depending on condition the pool, cabana, separate garage, and solar system may not be worth much. There isn’t an immediate resale at a higher price, so it isn’t obvious that it’s fraud. If the listing agent played games with the MLS to keep the price down for a favored buyer, someone would need to prove it. Who has the motivation to do that?
The extent of short sale fraud and the existence of “short sale flippers” should be enough to keep most rational prospective buyers away.
As pointed out in the last paragraph, this will be prosecuted in some states if only because somebody will get ‘tricked’ into agreeing to a fraudulent short sale.
Some of you are just jealous because you don’t have the knowledge and expertise to do these deals. Although some agents and investors have committed fraud in the pursuit of profits, there are legal ways to buy wholesale and sell retail. If a seller is willing to sell the property for a lower price, and the bank approves of this price, then what’s the problem? The seller stays out of foreclosure. The bank makes a deal–and a bank only does this because they think it will cost them less than holding the prop as an reo. No one is taking advantage of the seller, because the seller NEEDS to sell–or get foreclosed on. Believe me, a seller would rather have a buyer the first day than have a listing agent who is trying to get a high price. BTW, the agent’s duty is to the seller (to get it sold and avoid foreclosure). The agent’s duty is NOT to the bank.
What’s impressive is I remember this issue being brought up by Jim and others in this blog quite some time ago long before it was recognized more in the media. Now, more and more newsstories as well as the legal arena are catching up. I think we are really something things here on the ground floor before they hit the media or become more widely recognized.
No one here has yet identified where the “fraud” comes in. Clearly, if an agent “falsifies” a value in order to trick someone (the bank? a buyer?) into thinking the property is worth more or less than it is, then there might be some “fraud” at work. In fact, everyone in a real estate transaction is obligated to perform due diligence (as agents are quick to remind clients). Also, there are different opinions about value. RE websites such as movoto or redfin will give low, medium, and high estimates from zestimate and from eppraisals or other such websites. Most people acknowledge that value is somewhat subjective. But because some smart investors have figured out how to help sellers by purchasing these properties with cash AND have negotiated good deals for themselves, some people are upset. With all due respect, perhaps the reason people are upset is because they don’t understand how these transactions are done. And what the mind does not understand, it often rejects. There are plenty of short sale experts and trainers in San Diego who can teach you how to do these transactions.
There definitely is short sale fraud out there, but if a bank knew the actual value of the property, then they would not let it be sold for 20/30/40% less than its’ current value. If the bank is dumb enough to trust a BPO from the listing agent, then they deserve to lose a ton of money. (Some BPOs are not even done by an agent, but by an unlicensed assistant in their office).
If they hired a qualified appraiser to tell them what the property was worth, then this wouldn’t happen. But then again, half of the appraisers out there are idiots also.
Vernon: you are so right! Usually, the BPOs are NOT done by the listing agents, but by a third party bpo agent or appraiser. Listing agents may flatter themselves that the value they submit is the final word, but it (usually) is not. But banks ARE willing to NET below the bpo because it is advantageous for them to get rid of the property, rather than continuing to lose money on an reo. The “value” of a short sale is “distressed” even if it is an otherwise perfect house, because there is NO fair market value if buyer and seller are under time constraints. Once the liens are paid off, the property is ready for prime time and can attract a “retail” buyer. It takes study and technique to pull this all together. If most agents really understood it, they would become investors.
Just because the government doesn’t have the staff to prosecute, doesn’t make it right.
If all parties had all the facts, would they make different decisions? If the answer is yes, then it’s wrong.
You may have to be an agent to go to jail – but if you saw more people being prosecuted, would you stop?
All you did was find a hole in the system, and now are exploiting it for everything you can until the well runs dry. One the banks figure out a way to stop it, you’re done.
“After closing at the lower price, BOS resold the property to the private buyer, yielding Natera and McElaney a fast $30,125 profit.”
These guys are amateurs compared to the “real estate investor” that netted a cool 118% profit off Sarah Palin’s recent purchase.
Source – http://www.scottsdalemlsupdate.com/2011/05/sarah-palins-new-home-may-have-exposed-short-sale-fraud-video/
why cant the banks auctions those houses and let all interested buyers submit cash offers? That will be fair to everybody I think.
It is all a question of information. It should be mandatory for realtors to produce the latest sales numbers for all properties they are selling. That would put a stop to most of the problem. They should do this anyway out ethical and feduciary responsibilty.
It’ll be how it ends, one way or another.
Either realtors can get out in front and police their own – it wouldn’t be that hard – and create the future, or let the banks handle it on their own and risk being cut out of the equation.
All the banks would have to do is insist on open auctions, and we’re toast.
Friends, “Open Auctions” exist: they are called Trustee Sales, and they take place at the courthouse every day. In addition, after banks foreclose, the banks also often auction them off, as well as putting the on the MLS (with an reo agent). It is still possible to get good deals and make profits on these houses.
These are not the same as Short Sales, where the homeowner is still the seller, and has the choice to accept a contract. Once that contract has been accepted by the seller, the bank’s role is to say how much discount they are willing to accept. The banks are accepting the discount. It’s not an auction situation. The banks have patently stated that they do not want to have multiple offers from multiple buyers submitted. This would be illegal anyway, since a seller cannot sign multiple contracts with multiple buyers on the same house. THAT’s the law.
The banks know that investors pay cash for properties, and the best investors DO disclose that they intend to sell for a profit. I have been told by a bank VP :”I don’t care what you do with the property, just as long as you close.”
If an agent can find a retail buyer who is willing to pay top dollar, wait for months, come out of pocket to pay for surprise liens that pop up and solve other problems related to condition and title that often arise on these properties, then that agent doesn’t need an investor. But many short sales can’t attract a buyer (because of the above mentioned problems), and in those cases the investor can be very helpful.
Finally, it is not required by law to have the purchase price listed in public record. A buyer can request to have that information NOT made public.
Stop your tap-dancing – we’re not talking about trustee sales.
You brought up flipping short sales, and chided us about being jealous of you.
How about if you identify yourself, and lay out the details of your last short-sale flip, to allow us to see how you operate.
BTW, you have no friends here.
http://californiashortsalelawyer.com/2011/06/ill-logic-of-corelogic/
This link might help you and your readers get some more information and analysis.
btw, in the Scottsdale/Sarah Palin example, the article states that the house was purchased from JP Morgan (which would make it an REO). The investor held it for a year before selling. The only reason to hold for so long is when there is a rehab going on. So, this investor got a good deal on an reo, rehabbed it and sold a year(and many holding and rehab costs) later. Has it come to this, that even a lengthy transaction such as that is considered fraud? I’m beginning to think that the definition of “fraud: is “when someone other than yourself makes money doing something you don’t have the expertise to do.”
Nice try, but your lawyer friend is incorrect.
The Palin example and all others that have an amount of time between the second sale can say that they improved the property.
I am only talking about short-sales flipped the same day, where the second sale is recorded right behind the first.
I have documented them here on this blog, and gone around in one case with the “investor” who says he disclosed to the bank that they are selling immediately for a profit.
Just because people can get away with it, doesn’t make it right.
Here’s the link with video and 50 comments:
https://www.bubbleinfo.com/2010/12/02/short-sale-fraud/
Jim: That’s a very interesting thread. I do agree with you (and more importantly, so does the DRE) that agents should not handle both sides of a short sale transaction. The perfect model is one where the investor’s intentions are disclosed. However, there is no obligation to disclose the details of one escrow to the parties in another escrow. In fact, I believe that it is against the law to do so. Short selling lenders may with to place restrictions on how soon a buyer can re-sell, and they have, in some cases, done so. Did you know that there are some states (such as Michigan) in which it is against the law to place these kind of restrictions on the owner of a property? That’s not the case in California, so sometimes investors do need to hold the properties. But that’s ok.
Generally speaking, the price an investor is able to re-sell the property for is not a price which anyone is willing to pay when the house is still in short sale status. That being said,there are times when a short sale can attract a “retail” buyer who is willing to endure the process. In those cases, an investor’s presence as the middleman would not be contributing any value.
Just so we are clear, it’s because the realtors control the outcome of these that I get so irritated. It is a(nother) nasty stain on the realtor reputation.
As listing agent, they have a simple choice. Either uphold their fiduciary duty to the seller and sell for top dollar (because the seller would owe less in case there is recourse later), or conspire with their own inside buyer to manipulate the price lower in order to flip.
They can do either and get away with it, because nobody is enforcing anything.
I have implored the local associtaion of realtors to create rules and guidelines to help direct agents on how to handle short sales. They refused.
Cry me a river.
Here’s my easy solution for eliminating short sale fraud: foreclose on the stupid property and then sell it.
Oh, but that causes too much pain for the poor banks?
Good grief…
A fraud is a fraud. These behind the scene “arranged” deals smell like fraud no matter how you cut it.
If there is no misrepresentation of material facts, then there is no fraud. I have just learned of cases where the banks relied on a listing agent to provide them with a BPO agent in their area. Then the BPO agent performs a valuation which may be fraudulent. In order to be truly fraudulent, however, it would need to be completely off the spectrum of high-low comps that can be found in many neighborhoods. However, if a BPO agent gives a valuation which is on the low side because the house is in pre-foreclosure (a condition which affects value,is this fraudulent?
An interesting side note: many agents prefer to list the house a little lower because the seller is in pre-foreclosure and needs to get it sold. Some agents feel that their “fiduciary duty” to the seller mandates that they do everything in their power to prevent the foreclosure. A lower price will facilitate that. How many short sales have turned into reos because the listing agent was looking for the highest price?
Hold on – you’ve heard about cases?
Don’t tell me now that you have just heard about them – when you were making fun of us it was because you are actively involved, correct?
Let’s cut to the chase.
State your real name, and address of the last short-sale flip you did. I’ll research it, and give it to my friend at the District Attorney’s office for an opinion.
Jim with all due respect, call me naive, but I did not know until today that banks might rely on a listing agent to provide them them with a BPO agent. I learned that from someone who is researching the topic. In any transaction that I have been involved in, the BPO was performed by an agent or appraiser appointed by the bank and unknown to me.
I like the above stated idea Jim. Some of these clowns need to be outed for who they are and the fraud they are perpetrating. Anyone have American Greed’s number or email? 🙂
Jim,
I’m the attorney who wrote the article cited in comment #20. (BTW I don’t know who Senor Fish is.) Please clarify what is “incorrect” in my article.
My goal is to keep agents and investors compliant UNDER THE LAW, not under the bank’s wishes.
Can you (personally) sell a short sale for the same price as a non-distressed sale property? Please provide examples. The overwhelming statistical data shows short sales selling far below non-distress properties, so it would be very difficult NOT to resell one for a profit once the title is clean.
This is an incorrect statement:
In California, county recorders do not permit title insurance and escrow companies to record two deeds for the same property on the same day.
The link above goes to one example where not only was the two sales recorded the same day, but their county recorder’s doc numbers were sequential.
The rest of your argument is ivory tower-ish about their must be a distress-sale discount on every short sale. Buyers are willing to wait for top-quality short sales at close-to-retail prices.
Your “overwhelming” evidence shows the scum in the business, which reflects badly on all realtors because as a group we just look the other way. I’m glad you keep agents legal, but are they doing what is right? If they are flipping short sales the same day by manipulating the sales process in order to get the first buyer in at a below-market price, it is wrong. That was the case in the property linked above.
The same agent tried to do the same stunt two-doors down, but got foreclosed instead. Was that good for the sellers? It actually might have been better.
My specific beef is with the listing agent who doesn’t expose the property to the open market.
I’m sure you can prove it’s legal for the investors, but buyers and sellers deserve the right to interact in an open marketplace.
In addition, the agents have a cooperative agreement/MLS Club where he gets to sell my listings, so I should have the right to sell his.
Setting up the first sale behind the scenes at a below-market price and then putting it on the MLS for a retail-plus second sale doesn’t count.
Jim, I in no way condone illegal or unethical market manipulation.
The majority of investors are not engaging in manipulation. My clients obtain an extensive affidavit from the seller showing they understand their alternatives and that this is an investor buying to make money.
The bank is given notice directly in the short sale contract that the buyer is an investor who does not intend to occupy the property. The bank then conducts its independent valuation to decide how much of a discount to accept.
The end buyer is advised in the counter-offer, and usually in MLS notes, that the property is being marketed on behalf of the investor so that the end buyer can avoid the uncertainties and delays of a short sale after the purchase is closed. This leg of the transaction is an open, competitive sale which will bring a higher price due to the removal of the short sale stigma and increase the comps for the neighborhood.
As to the short sale discount, local markets and individual properties will vary. For the first quarter of 2001, RealtyTrac reports that it was 20.2% on average in California.
See
http://www.realtytrac.com/content/press-releases/foreclosure-homes-account-for-28-percent-of-q1-2011-sales-6586
for a wide range of short sale discounts throughout the country.
No sensible buyer should pay retail-plus second in any market, especially this one. Any fake-investor trying to sell over retail deserves to fail. And any buyer who pays that price likely is stupid and/or was ill-advised by a real estate agent seeking to maximize commission at the expense of the buyer.
You have the investors covered – congratulations.
If both ‘legs’ of the short-sale same-day flip are open to the public for all to participate, then it is right.
But generally they aren’t – and that’s where the listing agent is at fault.
Jim: Sellers are looking for a buyer, not a listing. Agents know this and this explains why a common marketing technique among agents soliciting listings is to tell sellers “I have a buyer for your house.”
It doesn’t make it right.
Lay out your name and personally-involved deals. You’ll get off scot-free.
I want to go after your realtor – he’ll be looking at 30 years for fraud.
If the association of realtors would start kicking out members for not playing by the rules, it would help. But they are complicit.