Short Sale Fraud in Florida: Florida Sellers and Buyers Both Victims of Short Sale Scams

Posted By on June 14, 2012

Short sales are very popular right now in Florida (and the rest of the country), and as we’ve explained in earlier posts, the rising popularity in shorts sales is due in large part to the changing attitude of lenders towards short sales as being a better deal for them than foreclosures.

Add to this the fact that unless Congress enacts a new law, the tax break to sellers in a short sale ends on December 31, 2012 (more on that here), and it’s no wonder that more and more sellers, lenders, and buyers are happy to do a short sale.

Which means, of course, that there are all sorts of short sale cons happening here in Florida. Short sale fraud is a growing problem.

What is short sale fraud?

Short sale fraud is any kind of scam involving the sale of a piece of real estate that is at risk of foreclosure. Short sale fraud comes in various forms and can have several victims – and the different ways of committing short sale fraud just keep popping up.

Wrongdoers are nothing if not creative in their ways of committing real estate fraud to get money for nothing.  Here’s the warning provided by the federal government at the Freddie Mac website:

The number of short sale transactions has grown significantly since the housing crisis began and, unfortunately, so has the number of scams involving short sales. … If you are selling your home through a short sale, following are some important points to keep in mind:

  • Beware of agents or companies that charge upfront fees or ask you to transfer title to your home to a third party or into a trust. The transfer of title should be completed by your closing agent, and should be done at the conclusion of the short sale process.
  • Seek the assistance of a licensed real estate professional to represent you.
  • If you engage the services of a short sale negotiator, remember that some states require negotiators to have a real estate license.
  • Seek the advice of an accountant and an attorney to discuss potential tax implications and the possibility of a deficiency judgment for the amount of debt that is forgiven or if there are subordinate liens on your property.
  • Beware of purchase offers that are well below market value, as well as any payments, transfers of funds or payoffs that are not included in the sales contract and approved by your servicer.
  • Make sure that your servicer is aware of all aspects of your transaction and that all activities are documented. Side agreements, undisclosed payoffs or hidden addenda should alert you to possible fraud.

Larry Tolchinsky’s Tip:

In 2012, lots of folks are wanting to get their short sales done before the December 2012 tax break cutoff – where lots of lenders want to get those potential foreclosures off their books and avoid adding more to their “shadow inventory,” – short sales are booming.  That’s true in Florida and the rest of the country.

However, short sale fraud is also booming.  Housing Wire suggests that short sale fraud is a big problem for investors.  And that’s true.  It’s also true that short sale fraud is a big problem for anyone looking to sell a home as a short sale, or anyone looking to buy a new home in Florida at a great short sale price.

And the scams involving short sales are numerous.  There are all kinds of scams right now.  Here are two examples of short sale fraud:

1.  The Short Sale Fraud Where Staging Fakes Lower Value

Recently, the blog Appraisal Buzz wrote a short article warning its readers about “reverse staging.” Appraisers and agents across the country were warned to be on the lookout for  short sale properties where the homes were staged not to look more pleasant and inviting, but instead to look bad.

That’s right: one form of short sale fraud is to try and drive the price of the home down in the appraisal by staging the house so it looks nasty to the appraiser, or the inspector, or both.  The article gives as examples not just the usual things you might think about here — not cutting the grass, leaving window panes broken, etc. but gives an example of possum urine being tossed over a home’s carpet with the heat turned up for a couple of days. Horrible to even imagine that smell, isn’t it?

Why would someone want the value of the home to be lower than it should be?   Here, it’s the short sale buyer that wants that value as low as it can go, so they can pay as little as possible for the home.  Often, these are investors who want to buy the home to “flip” it – and they’re willing to put some money into the place (to remove things like urine smell) after the short sale fraud has given them a bargain deal.

Who gets hurt here?  The seller.  The lower the price on that short sale, the bigger the deficiency left on the mortgage (the “short”) that remains due and owing to the lender.

2.  The Short Sale Fraud Where Money Goes Under the Table

In a legitimate short sale, everything is on paper.  Sitting down at the closing table with all those documents, every term and condition of the deal should be reflected somewhere in those documents.  That’s why closings can take so long.

Another big example of short sale fraud is where payments are requested that aren’t part of the paperwork.  These can be for hundreds or thousands of dollars, and you may hear some fast talk about something needing to be paid “outside of closing.”  Warning! Warning!  In a short sale real estate transaction, no money should be changing hands outside of anything.

In this type of short sale fraud, there is a party that’s not happy with their cut.  Short sales mean everyone is taking less in order to get the deal done, and lenders may hinge their approval of the short sale on a broker taking less of a commission, an attorney taking a lower fee, or a lien-holder agreeing to take a lower amount to free their lien on the property and allow the sale to go through.

If the company that put the pool in the back yard (and now has a lien on the property till that note is paid) asks the seller for some money in order to sign its agreement to the short sale, then that may well be short sale fraud.  Any party asking the seller or the buyer to hand over some cash on the side in order to get the deal done: it’s short sale fraud.  Don’t do it.

It’s Not Smart to be the Lone Ranger in this Wild West Florida Real Estate Market

Once again, it’s the Wild West in real estate these days in Florida, and once again, warning is given to anyone who is considering a real estate transaction much less anyone buying or selling a home or condo here in Florida.  The laws are changing.  Scams are everywhere.  Title law, contract law, fraud law — all these things are all too often coming into play in the most ordinary of Florida real estate deals and it’s the wise person who has a Florida real estate advocate to help them with things.

Especially in short sales, having an experienced Florida short sale lawyer can be invaluable — and yes, there are “short sale negotiators” out there on the web that are happy to help you for what they say are lower fees than any lawyer will charge.  First things first, you don’t know what the lawyer will charge until you ask him or her.  And second, guess what?  Lots of those internet short sale negotiators are just short sale scammers on the make.

If you have questions or comments, please feel free to Chat with Larry in the comments below, at info@hallandalelaw.com or (954) 458-8655.

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