Short Sales Fraud On The Rise In Florida

The incidence of fraud relating to short sales is expected to rise by 25 percent in 2012. The loss to lenders and servers is projected to be more that 375 million dollars. Unfortunately, Florida is one of the states that is most at risk.

The Federal Bureau of Investigation prosecutes mortgage fraud. Their definition is, “Any material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.” The reason that short sales have become attractive to those wishing to perpetrate fraud is that the loans are held by the second lender without any equity. In order to make any money at all on the transaction, they must either receive a portion of the payment made to the primary lender, or be paid a fee by the seller. Sellers and buyers are often in a hurry to close, and so are susceptible to giving in to the demands of the second lender, especially if they are not supported with the knowledge and experience of a real estate professional.

One technique is the back-to-back closing, in which a property is resold on the same day as the original closing. For this to occur, there must be two unrelated contracts, one for the short sale lender and a contract with a third-party for purchase of the property. The contracts are processed in the reverse order, so that only the most alert Escrow agent will notice anything suspicious.

Some unscrupulous investors will list a property that they have no authority to list, at a price that is lower than a lender will accept as a short sale. The intention is to create a bidding war, select the highest bid while negotiating a low price with the lender. The investor then completes a back-to-back closing and keeps the difference.

Other suspicious transactions include those with a sale price of 10 percent or more higher than the prior, short sale price within less than a month; a sale price within three months that is 20 percent or more over the short sale price; and a transaction within six months that has a price of 40 percent or more than the short sale price. Some of these transactions are legitimate, when a buyer has had the revenue to undertake and complete improvements on the home.

Homeowners looking to purchase, as well as those looking to sell, a short sale property must be aware of the different types of fraud that are being perpetrated. Agents and other real estate professionals must be educated about them as well, because they are the best resource for protecting buyers and sellers from falling for fraudulent practices.

For the reasons described above, it is most often the junior or second lenders that are involved in fraud. All investors and lenders used should be assured as legitimate by checking their license status and reputation. An “arm’s length affidavit” should be prepared, which attests that there are no undisclosed agreements between any parties. This document is required by many primary lenders.