As we all know, Florida has been hit hard by the U.S. Housing Crisis. There are lots of Florida homeowners fighting against losing their home to foreclosure – and many of them are considering a short sale of their home. Short sales can be great for both homeowners and lenders, if the banks are ready to negotiate (unfortunately, many aren’t).
However, short sales are also becoming notorious for being fraudulent – and that’s a big problem in Florida.
We’ve already discussed how banks have found ways to commit fraud through short sale home transactions. For details, read our article, “Are Big Banks Committing Short Sale Fraud?” and the links referenced there.
Different Kinds of Short Sale Fraud
However, there’s another side to short sale fraud. Just like the old adage, there’s more than one way to skin a cat, there’s more than one way to commit short sale fraud and the banks aren’t the only ones doing it.
1. Homeowner hijinks. Here, the Average Joe homeowner is facing foreclosure and decides to get a pal to buy the home through a short sale and then quitclaim the home back to Average Joe. It’s a twist on the legal short sale scenario, where Average Joe would advertise his home for sale, and once an independent third party buyer was found, then the lender would agree to the sale even though the sales price is less than the remaining amount on the note (there’s a deficiency).
Sure, at the closing table, Average Joe and his buyer (either his pal or the independent third party buyer) will sign bank prepared documents in which the parties attest to the fact that everything is on the up and up, that the buyer is buying the home for their own purposes, and with the seller, in some instances, acknowledging that there is still an amount left on the note.
The short sale fraud takes place at the moment those documents are signed. Those documents are a representation to the bank that that the transaction is an arms length transaction between the buyer and seller, meaning a deal between unrelated parties and not for the purpose of defrauding the bank, when in fact Average Joe and his pal are really in a silent agreement to get the home back to Joe. The bank doesn’t want Joe to do this, and they’ll sue him for fraud if they find out.
2. Realtor Flopping / Buyer Flipping. Another growing trend in short sale fraud: realtor scams, called “flopping.” Here, realtors have several bids on the home that’s up for a short sale, but the real estate agent doesn’t share all of that information. Instead, the realtor hides the higher offers and reveals only the lower ones, so the short sale goes through at a lower price. Then, the buyer – who just got a good deal in the short sale – is free to sell that home again (it’s calling flipping it, and this can even happen the very same day that the short sale closed), and get a nice, quick profit for himself and the realtor, too.
Federal Government Fights Short Sale Fraud: Freddie Mac Affidavits
Now, Freddie Mac is imposing its own set of documents for the closing table to fight short sale fraud. In an effort to insure that Freddie Mac guaranteed mortgages involved in short sales are all short sales that are arms-length transactions, Freddie Mac will be requiring everyone involved to sign a sworn affidavit which will include an understanding that they will be liable under federal law for any misrepresentations about that short sale, whether or not it’s intentional or just a mistake.
Officially, the new affidavits don’t have to be used until January 1, 2012. However, Freddie Mac is pushing for them to be incorporated into all short sales as soon as possible — so don’t be surprised if you 2011 short sale this month or next has the Freddie Mac affidavit as part of the closing documents.
Should you Short Sale Your Florida Home to Avoid Foreclosure?
Given all this talk of fraud and hijinks by big banks and others, should you get involved in a short sale? Sure. Short sales can be great deals for buyers; an answered prayer for sellers; and a workable solution for banks.
The key is to be knowledgeable about the real estate transaction in all its details, from inspections to financing to title and closing. Seek out the guidance from an experienced Florida real estate attorney. A short sale can be smart, you just need to be savvy, patient and honest. From our website:
Short Sales are a viable alternative to foreclosure. The fundamental concept is that you owe more than your home is worth and are unable to maintain the mortgage payments. Essentially, you are asking the bank to agree to accept an amount short of the balance due, which in turn makes it possible for you to sell the home to a new owner who is only willing to pay the current value of the home. Remember though, the banks are not reducing the loan balance, they are accepting less than the balanced owed in return for allowing the home to be sold. Therefore, it is important that you carefully review your short sale approval letter to make sure the lender has waived its deficiency rights against you. Otherwise, the bank can still sue you on the unpaid balance of the note.