I still see 1-3 of these per day, with no end in sight.  Excerpts from this article at msn.com:

Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.

Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright’s brokerage office who wanted to buy it for their own use. She didn’t think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.

When she asked the listing agent why, she was told to “leave it alone.”

Wright says she is still not sure if the servicer or owner of the property ever saw her clients’ much higher offer. All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.

“It’s just robbery,” she says. “And I don’t know how to stop the robbery.”

For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called “facilitators,” or middlemen negotiating with the banks and buyers trying to flip the properties.

Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.   

Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.

Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.

In Wright’s case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.

“The thing that really bothered me was the lack of ethics,” Wright says. “Sure I can find my clients another house; what I couldn’t explain to them very well was how (something like this) can happen.”

Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.  “It set an all-time low for that neighborhood,” he says.

Glenn Gulley, a real-estate fraud investigator with the district attorney’s office in California’s Stanislaus County – one of the nation’s hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.

“In 4½ years, I’ve never had a bank call me and say we’ve been defrauded,” he says, though he adds that they’re slowly starting to respond as they put more staff in charge of mitigating these losses.

Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.  “I’m getting people calling and saying, ‘I offered $300,000 for a house that sold for $200,000.'”

And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as “sale pending” at 9:01. “Then you know the same agent double-ended it” and is bringing in his own buyer, Gulley says.

Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.

Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.

The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren’t sure that BPOs should take the place of full-fledged appraisals.

“There are no real standards for how to pick the comps to establish the value that you receive,” Fulmer says. “You can pick the lowest of the low balls and skew the results.”

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Jim the Realtor
Jim is a long-time local realtor who comments daily here on his blog, bubbleinfo.com which began in September, 2005. Stick around!

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