Watch for These Signs of Short-Sale Fraud

With short sales on the rise, California’s Department of Real Estate warns consumers to watch for four signs of short-sale fraud.

In a short sale, the seller receives an offer from a buyer that is less than the amount of the mortgage loan(s) on the property. The seller asks the lender to accept less than what is owed.

While short sales are a popular alternative to foreclosure, like all real estate transactions, they are complicated and sellers need to lookout for the pitfalls, said California Real Estate Commissioner Jeff Davi.

For example, in some instances a seller may be required to pay taxes on the forgiven debt.

In addition, a seller may be an unwitting participant in a fraudulent transaction in which an unscrupulous short-sale negotiator working with a straw buyer makes a lowball offer to the seller and, in turn, misrepresents the true market value of the property to the lender.

If the lender accepts the offer, the straw buyer immediately re-sells it at the true market value, with the profits split among the conspirators. Had the property been sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished and the lender would have received fair market value.

The signs of fraud a homeowner should look out for:

An unlicensed short-sale expert. Short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker).

Requests for payments outside closing. Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid “outside” of escrow, this may be the red flag that the payment is illegal.

Buyers who aren’t people. If your agent explains that the buyer is a fictitious person or entity, or your buyer is purchasing the property under a power-of-attorney or is a limited liability company (LLC), this may be a red flag that fraud is involved in your transaction.

An unlicensed negotiator. If you are told that an unlicensed processor, negotiator or facilitator is handling your short sale, this is a red flag that unlicensed activity is taking place.

Only real estate licensees, California lawyers acting as lawyers and investors acting on their own behalf can engage in short sale negotiations.

For more information about DRE and its programs visit www.dre.ca.gov.
Publish Date: 2010-05-05
Source: California Department of Real Estate