Bad Agents, Watcha Going To Do When They Come For You?

California Tops In Short Sale Fraud

Map of US top short sale fraud states

First the FBI announced a crackdown on short sale fraud, and then Freddie Mac  they are teaming up to go after bad real estate agents.  Freddie Mac short sales have increased from 4% of completed workouts in 2000 to nearly 14% in 2010.  The California Department of Real Estate has also issued a consumer alert.

As you can see from the image above, California is in the top states for short sale fraud.

Why are they going after real estate agents?

Since short sale fraud requires the cooperation of one or more real estate professionals involved in the transactions, we have begun reaching out to Realtor associations in target markets to educate them about the latest trends in short sale fraud, the red flags to watch for, and what actions they can take to stop it. We strongly believe responsible Realtors are America’s natural first line of defense against such scams.

There should be a special circle of H*ll for agents that participate in such deception.  The article goes on to give examples of possible short sale fraud.

Falsely indicating on a new short sale listing that there is an offer on a property in order to discourage legitimate offers and protect an accomplice’s planned low bid.

Manipulating the short sale listing price by making the house look more distressed than it really is (“reverse staging”), inflating repair estimates, or using similar tactics designed to obtain an artificially low home value on the Broker Price Opinion. (Our requirements prohibit the buyer, buyer’s agent, buyer’s attorney, or a third-party short sale negotiator to be the contact point for the agents preparing the BPO.)

“Flipping” schemes where the fraudster “buys” a house at a short sale without putting down any of his own money and then sells it a few hours (or days) later to a legitimate buyer at a much higher price. These are complex multi-step schemes that use falsified title and/or loan documents to fool a lender into approving the ultimate buyer’s mortgage, which the fraudster uses to settle the earlier closing on the house he “acquired” at the short sale for a much lower price.

Manipulating the HUD-1 settlement statement so the fraudster can skim away net proceeds from the sale for himself or other parties in the transaction without the seller’s or investor’s knowledge. (The HUD-1 is the document that itemizes all fees, charges, and other funds involved in a home sale.)

Download full FBI report by clicking image below:

Link to Short sale fraud report by FBI


7 thoughts on “Bad Agents, Watcha Going To Do When They Come For You?

  1. William Gassett

    The article is VERY VERY misleading and the real estate industry at large will read this and only absorb certain particulars in the article and forget the rest. It is NOT ILLEGAL to buy and sell the same property on the same day so long as you DISCLOSED it to the selling lender up front. It’s NOT ILLEGAL for a Realtor to represent a homeowner or be a dual agent in one of these transactions so long as it was DISCLOSED.

    As far as Freddie Mac stating they need to see ALL OFFERS…NO THANK YOU. Whatever offer is first accepted by the seller is the one I’m submitting and everything else goes in back up position. Every Realtor out there knows you don’t submit 5 offers to a lender at once. Negotiators HATE THAT. If the FBI wants to sue me for holding back the other offers, what grounds do they have? There is NO LAW against submitting one offer at a time. I risk being sued by the seller and 1st position buyer if I submit other offers.

    These stupid fraud articles are COMPLETELY MISLEADING and need to stop. I understand Freddie wants to protect themselves and get the MOST money they can, but they are trying to control things they have NO LEGAL RIGHT to control. It is NOT FRAUD to FLIP if it’s disclosed. It IS fraudulent to reverse stage, or manipulate contracts, but PLEASE make sure we are differentiating these types of activitites out. The investors that do this for a living are being painted as scammers and so are the Realtors they work with. People need to look below the surface of these inflamatory misleading articles. FREDDIE MAC does not dictate LAW. I’d like to see the FBI sue me for putting other offers in back up position. If I submit the offers, I’ll get sued by the homeowner or first buyer for interference in the first transaction. My duty is to the seller, NOT FREDDIE MAC.

  2. Jeffrey Douglass Post author

    Thank you for your comments but I don’t believe the article is misleading.

    There is plenty of fraudulent activity, and certainly questionable activity going on. I don’t claim to be a short sale expert but know many that are and some of the points that you have raised are true. Lenders do like to work with one offer at a time and if you are the listing agent, you have a fiduciary duty to the Seller, not the lender.

    Dual agency in California is unfortunately legal with full disclosure. Any reader of my blog has a pretty good idea where I stand on Dual Agency and trying to serve two masters. Your statement that the first offer that is submitted to the seller is the one you present? For instance the first offer is $200,000 with an FHA mortgage and low down, the second offer is $210,00 with conventional financing, and the 3rd is 199,000 all cash. Each of these offers need to be submitted to the Seller for consideration regardless of the order they were received in. A prudent agent will regardless of the lender’s wishes, make them aware of multiple offers and terms. Since your duty is to the Seller, and the more proceeds the Seller can net, the less the short sale, thus you are getting the highest and best offer for your Client. Effective short sale agents will gather a group of offers and submit them to the Seller for consideration and counsel them on the pros and cons of each. And really, you would be at risk of being sued by the Seller and 1st position buyer if you submitted other offers?

    As a REALTOR® you are required to submit all offers through close of escrow unless you Seller has instructed you otherwise.

    How a Listing agent can represent a Seller, negotiate with a lender, and represent a buyer is beyond me.

    Once someone starts messing with the HUD-1 or presenting an offer that is clearly below market and is not arms length things turn fraudulent.. A small percentage of real estate agents in partnership with escrow and straw buyers are leaving billions of dollars on the table. It will take years to prosecute all those that participated in these illegal schemes, meanwhile the financially distressed client considering a short sale is being taken advantage of.

    I would suggest you discuss some of your opinions with your Broker and perhaps an Attorney. While I am certain that you mean well and are an honest and ethical agent, you may want to reconsider some of your positions.

  3. Kris Berg

    J – I agree with you on some points and not on others. First, I am not shocked by your heat map. While I have not witnessed first hand (with certainty) short sale fraud, there have been times I suspected. For instance, seeing a listing offering about six dollars as compensation to the buyer’s agent and then saying in the show instructions “not being shown at this time” only to see it go pending a week later does leave me scratching my head.

    Regarding submitting multiple offers to the bank, I tend to agree with William. If you have several on the table at once, certainly all are presented to the homeowner. At this point, the homeowner will hang his hat on the offer that he and his agent believe will give him the greatest chance of success — and it might not be the one with the highest price tag. If the offers are coming in succession, realize that submitting a new offer will start the bank review clock again. Keep it up, and you will never close.

    The sad thing about short sales is that the process doesn’t necessarily lend itself to achieving the highest and best price for a home that the market will bear. The homeowner is disinvested, and therefore too many agents read this as permission to NOT do the things they should be doing to market and negotiate. Who cares, right? The banks are too inundated, and they are really an unrepresented seller in effect. Such a mess.

  4. Jeffrey Douglass Post author

    Thanks Kris, of course we have all have opinions and will not always agree. As I stated before, I am not a short sale specialist. My point was that each offer should be presented to the Seller for consideration, and that may not be the first offer. I think most successful short sale agents would give a period of time to gather multiple offers prior to presenting them to the Client and deciding on which to submit to the Bank for consideration.

    Like you said the short sale process is a mess, and Banks bring no reason or logic to the table. There is no clear standard for the process and I fear we will have a decade of lawsuits over the fraudulent cases. As agents we have all been there when we cannot get a response or show the property, or it appears in the MLS already sale pending – these are not exposed to all potential buyers in the market and more often than not, something fishy is up.

    I’ve asked an Attorney friend of mine to weigh in and also solicited a response from the short sale negotiator that I recommend to shed some further light on the subject. Thanks very much for your comments & grateful your market is not entirely short sales.

  5. Pete Solecki

    This entire situation is sort of a moving target. The fraud the FBI is looking into is typically on a larger scale, and they do seem to be serious about that. I’ve been on several fraud panels with FBI agents and state & local reps. Most practitioners are dealing, however, with the everyday short sale issues, often of “iffy” ethics or legality, that are not going to draw the FBI’s attention. As an attorney, the practical answer for the agent is not necessarily just to be legal, but to be legal and not be sued, and also make sure the client isn’t sued either. Flipping can be legally done, but it has risks unless fully and properly disclosed. It is one of those situations that “smells” bad and draws the attention of the authorities. On the other hand, for their part plenty of lenders want only the first offer in the door and ignore later, perhaps higher offers, to their own detriment. The agent has the obligaiton to get their seller the best offer possible under the circumstances, especially when there can be significant negative tax implications to the seller in some instances (and how many short sellers take the time to find out what will happen from a tax perspective?). The short sale process often works poorly, sometimes shockingly poorly, and far too often it is the bank that is part of the problem rather than the solution. The agent’s goal shoud be to get his/her client the best possible deal that will get the sale done, and to do it in a manner that is legal, ethical and least likely to get anyone sued.

  6. William Gassett

    Jeffrey, I think you are misunderstanding what I wrote. If I’m LUCKY enough in this market to get MULTIPLE offers then those offers are presented to the seller. It’s up to the SELLER to chose which one they accept and THAT’S the offer I present to the lender. If a LOWER offer is accepted, that’s the one I will submit and there is NO LAW against it.

    It’s a COMPLETE misconception that HIGHEST offer is BEST offer. The BEST offer is the one that serves the seller the BEST. If an offer for $175,000 comes in and it’s cash with no contingencies and that person can close in under 2 weeks, I may take that offer all day long over a $200,000 FHA offer that needs appraisal, inspections, and at LEAST 45 days to close. Freddie Mac cannot DICTATE to me that I need to submit the $200,000 offer if the seller wants to take the lower offer.

    No matter WHAT you do, you’ll be scrutinized for it. I just read an article about 2 Washington state agents who would purposely list property at the lowest possible comped price who were penalized for it. They constantly generated a multiple offer situation and what happens?? They almost had their licenses taken away.

    I’m sorry but if you have a homeowner begging for your help who has an auction 3 weeks away on a property what are you going to do??? You’re going to list that property AGGRESSIVELY which usually means as low as possible to get an offer. Good for you if it generates multiple offers. If the homeowner OK’d it, then I don’t see why I should be scrutinized??!?!? The bank will look at that in some way now as “rigging” the sale. NO, we didn’t have enough time to properly market as you were swooping in to take take the property. I didn’t have TIME to let it sit for 6 months and gradually reduce the price…

    You HAVE to understand and scrutinize ANYTHING that’s published from these lenders. They are going to do what SERVES THEM so they can minimize losses and that MAY not be what the homeowner wants or be in the best interest of the homeowner. The lender is on one side of the fence and my homeowner is on the other. We AREN’T on the same side as much as Freddie Mac wants us to be. The same goes for publications like Corelogics “Short sale Fraud” – Corelogic is being sued for APPRAISAL FRAUD and also is paid by Freddie, Fannie and many others, so there is a huge bias in their reporting of actual FRAUD. Oh, wait, they don’t report ACTUAL FRAUD – just what they DEEM suspicious, which they pulled out of a hat. WHO deemed their definition of suspicious accurate?

    Oh and flipping property is completely legal, and so are dual contracts, closings etc., no matter how much Freddie Mac cries wolf. If a buyer has completely disclosed what they are doing, HOW is that fraud?? People need to stop persecuting the poor investors and start looking at the sources of the information. Investors are cleaning up the glut of homes.

    In my state we can be dual agents as well, however I chose to act as a facilitator on my short sales. It states in the listing I represent NO ONE, as there are more and more regulations, laws, and questions being brought into the forefront of short sales. My goal as a facilitator is to get the deal done, approved, etc., to the best of my ability and make sure the seller knows any of the ramifications of the sales, which is why I work with a lawyer and accountant to address the issues.

    Jeffrey you are NOT required to submit all offers to the LENDER…only to the homeowner and I just want to make sure we are clear on that point. I’ve spoken to the legal counsel in my state for the board of Realtors…ONE OFFER at a time, or I risk being sued by the seller or buyer that is in first position. Oh and in my state the board of Realtors do NOT encourage Realtors to negotiate short sales. That leaves it up to 3rd party firms, other agents, lawyers, title companies, mortgage brokers, etc. and guess what?!?!? Now Freddie Mac won’t allow any “buyer’s” agent to be the contact for BPOs. I mean REALLY how far is this going to go? I’m a dual agent (or facilitator), and *I* can’t be the point of contact for a BPO. It’s getting REALLY REALLY ridiculous.

  7. Jeffrey Douglass Post author

    Thank you very much for expanding your thoughts. Certainly all those that I spoke to say the process is a nightmare and you make some really good points. The article was to point at the fraudulent cases, which there are many in California. There are many competent agents, such as yourself, trying to save desperate homeowners from foreclosure while at the same time having to second guess everything. Thanks for the education!

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