It is no surprise that the housing market crash of the last few years has birthed an abundance of mortgage scams, and a major player is the short sale scam.
While foreclosure scams abound, short sale fraud terrorizes unsuspecting homeowners in a much more dubious manner and avoiding a short sale scam may not be as easy as you would think. In fact, many homeowners caught up in short sale fraud never saw it coming.
To avoid fraud, you need to fully understand a legitimate short sale, and what scenarios constitute short sale fraud.
The short sale in a nutshell
- A homeowner cannot make their mortgage payment and foreclosure is looming.
- The mortgage lender and seller agree that selling the house, in lieu of foreclosure, is the best financial solution for both (AKA, the Short Sale).
- The mortgage company agrees to accept a loss on the mortgage balance owed.
- The proceeds from the sale are given to the mortgage lender and the seller is potentially forgiven of all or part of the loss.
- Under The Mortgage Forgiveness Debt Relief Act and Debt Cancellation, the seller’s debt that is forgiven is not considered income subject to taxation so long as the loss through the restructuring is on the borrower’s primary residence and under $2,000,000 (debt forgiven on second homes, vacation homes, and rental properties does not qualify).
The benefit of a short sale to the homeowner is the possibility of avoiding foreclosure and, of course, a major hit to their credit record. On the mortgage lender side of things, a detailed analysis determines that a short sale is often the best financial resolution for the company. Both parties involved are typically trying to minimize the inevitable fallout of terrible situation …that being the homeowner is forciby removed from their home through the foreclosure process.
So what is a short sale scam?
A short sale scam can take on many faces. Here is one scenario:
- The real estate agent listing the home presents a low-ball offer of purchase to the lender, but does not present other offers – especially higher offers.
- The listing agent is actually attempting to buy the property him or herself through the guise of a company that he or she owns or is heavily invested in.
- Once the transaction is complete, the homeowner is out of a home and the buyer (in this scenario, the prior listing agent) puts the house back on the market, selling the house at a profit.
A few sneaky variations on the scenario presented above go like this:
- The listing agent is not buying the house him or herself. Instead, the listing agent is working with a buyer/investor (a “straw buyer”) who is aware that other offers (especially those higher) will not be presented to the lender. The listing agent gets a kick-back for their cooperation.
- The homeowner is involved on the short sale crime. In this case, the homeowner knows that short sale fraud is taking place, but is willing to go along with the scam to receive a much needed financial kick-back after the transaction is complete. Or, the homeowner may have a friend, relative or other close associate buy the home at a rock-bottom price without disclosing the relationship to the lender. Once the transaction is complete, the original homeowner and the buyer work out a deal where the original homeowner gets to stay in their home, or the new owner transfers the property back to the original owner. In these cases, the listing agent may have no idea that the homeowner and homebuyer are in cahoots.
Here are a few tips to help you avoid a short sale scam:
- If you’re behind on payments and looking for a solution through the use of a counseling agency (or, you’re approached by an agency representative), be absolutely sure that the agency is listed on the Department of Housing and Urban Development’s list of approved counseling agencies.
- It isn’t difficult for criminals to find out that you’re having difficulty making your monthly mortgage payment. When they do, they’ll be right at your door offering you an array of solutions. Often, they will allow you to rent your home back from them after you sign over the title to your home. This practice very often leads to the homeowner ending up homeless. Do not sign over the title to your home unless you are working directly hand-in-hand with your lender.
- If you’re using a real estate agent to negotiate the short sale, be sure to scrutinize his or her references and demand to see any lender approval letters. It’s best to include a real estate lawyer to check (and double check) any deed related activities.
- Keep your lender in touch with any program you are considering. They are well educated about short sale rights and wrongs, and in the end, their go-ahead is critical to the short sale being successful.
Short sale fraud is a growing crime whose momentum has just begun to develop. In fact, according to Analytics firm CoreLogic, 1.9% of all U.S. short sales over the past two years (approximately 15,000 nationwide) are fraudulent. That’s one out of every 53 deals. The impact of short sale scams are far and wide; from scammed homeowners ending up homeless, to cheated lenders, to the devastation of neighborhood property values. Sadly, due to the minimal enforcement and the difficulty in prosecuting the crime, many criminally minded believe the payoff of short sale fraud is well worth the risk.
Don’t get the idea that all short sales are bad. A short sale might help you make the best of a bad situation, and it certainly might help you resolve your situation without undergoing foreclosure. But remember: if it seems too good to be true, it probably is. Do a serious amount of investigation into any agency or real estate agent that claims to be prepared to help you get out from under a sticky mortgage situation by means of a short sale. And remember, while a short sale is usually faster and less expensive than a foreclosure, it does not necessarily forgive the remaining balance.
About the Author:
Chris Adams is with Show Appeal Realty, an Arizona real estate brokerage selling Scottsdale Homes and Phoenix short sales.
