I am all for capitalism. Everyone is entitled to work to get the best deal possible every time they commit their dollars to buy something. Everyone includes those that are in the business of buying and re-selling short sales or otherwise distressed properties. The problem – and fraud – arises when people are not working for the best interests of those who they claim to represent. If an agent does not disclose the true value of the home to the seller, or secretly has a higher offer lined up, or lies to the bank or the homeowner about their hidden personal interest in the transaction, these are frauds committed on either the borrower or the bank, or both.
Yolanda McGill, with the Lawyers’ Committee for Civil Rights Under Law says short sales “are the next big scam coming.”
A short sale should be a straightforward transaction in which the lender gives its blessing to a borrower to sell the property for less than what the borrower owes the lender.
For example, let’s consider a house that is worth $170,000 and the borrower is “up-side down” in that he still owes $195,000. Rather than suffer through an expensive, drawn-out foreclosure process in which a disgruntled owner might trash the place, the borrower and lender might consider a short sale. In a short sale the lender agrees to take the net proceeds from the sale, say $170,000, as a full payoff.
“If an agent does not disclose the true value of the home to the seller, or secretly has a higher offer lined up, or lies to the bank or the homeowner about their hidden personal interests, these are frauds…”
Sure, the lender is out $25,000, but the company probably would have spent far more money pursuing a foreclosure, which could take several months, a period during which the lender receives no payments. In fact, the average loss in principal for prime loans that went into foreclosure was 42 percent, compared with a 33 percent loss for short sales, according to Amherst Securities Group LP, an Austin, Texas-based company that analyzes home-loan assets. So a $25,000 loss might be the cheapest way out, for both the lender and the borrower.
That is how it should work.
Nearly all transactions that involve substantial amounts of money sooner or later attract scam artists or tempt previously well intentioned professionals to make a grab at easy money. Short sale scams have arrived.
Short-sale scams now even have a name; “flopping,”
There are variations to the flopping theme, but all have two common elements: 1) Someone deflates the value of the house so the lender will permit the borrower to sell the place for less than what it’s worth, and 2) the profits resulting from deflating the property are split by the partners in crime. In any flop, the buyer is in cahoots with someone: the realty broker, loan broker, another un-disclosed party, or even sometimes the borrower.
The case of Anna McElaney and Sergio Natera is very telling. Claims filed by the Justice Department in Connecticut Federal Court accuse McElaney and Natera, both real estate agents of working a scheme to defraud a bank. The bank held two mortgages on a residential property. McElaney, who was a listing agent for the property, received an offer to purchase the property for a price of $132,500. However, McElaney told the Bank that the highest offer to purchase the property was for $102,375 from a company that Natera controlled. The bank agreed to a short sale of the property for the lower price, and released its mortgages on the property.
Some time later, Natera sold the property for $132,500 to the original bidder on the property, and Natera and McElaney split the difference between the two sales prices.
Natera and McElaney plead guilty to a Federal mortgage fraud charge, and should be sentenced this month.
As in the case of Natera and McElaney a crooked agent may have an actual interest in the profits of the flop, or the he may just have a deal to re-list the property and earn a double-dip commission. An agent might defraud the bank as in this case by withholding an offer or more commonly by taking other more complex steps to conceal the value of the property.
Who gets stung in a flop? First of all the bank takes a greater loss. But hold on, when the bank takes a big loss, the bank is all the more likely to pursue a deficiency action against the borrower to re-coupe that loss. If there has been a fraud in the sale, that deficiency will be greater.
None of this is meant to exonerate the bank in a short sale transaction gone-bad. Banks have fallen into the practice of using a “BPO” (Broker’s Price Opinion) in evaluating short sale offers. The going price for a BPO is $50 – $100, as opposed to $400 – $750 for an evaluation from a licensed appraiser. Banks also tend to assign inexperienced entry level employees as “loss mitigators”. So, in the expediency of saving a few hundred dollars, banks open themselves – and their borrowers – up to flopping scams.
Here are some tips for those involved in short sales:
• First, engage a reputable attorney and real estate professional to represent you. Both professionals should be experts in short sale transactions. Your attorney will address debtor-creditor issues, loan deficiencies, and the possibility of bankruptcy. Your real estate agent will help establish a reasonable sale price for the property, and find a qualified buyer. Most attorneys and real estate agents will take their fee out of the closing. If you need help finding reputable professionals, contact me at AmericanPropertyLaw.com, for a referral.
• If someone suggests that your lender will agree to an offer that is far below what you believe your house is really worth, be wary. That someone may have a buyer waiting in the wings at a higher price.
• Real estate professionals should insist that their clients represented by counsel. The risks to an agent in terms of civil or even criminal liability certainly outweigh the slight inconvenience of vetting all transactions through competent and independent legal eyes.
______________________________________
About the Author:
Michael T. Moss is the Managing Member of American Property Law, PC, a firm that specializes in loss mitigation for distressed property-owners. Mr. Moss is a graduate of Brigham Young University Law School, who has 25 years of professional experience representing homeowners as an advocate, and title insurance provider. Mr. Moss authored and posted a tool designed to help borrowers decide to stay with their over mortgaged property, or go into a short sale: MyShortSaleCalculator.com. Mr. Moss can be contacted at mmoss@americanpropertylaw.com.