Short Sale Fraud and What You Need to Know

Posted on 5th Apr 2016

It is unfortunate, but short sale fraud has become commonplace due to the overwhelming number of foreclosures following the 2008 financial crisis. There are many ways in which short sale fraud is committed. Specifically, it may involve a scheme to defraud the potential buyer or seller of a home, or to improperly receive money from a lender.

There are many different types of short sale fraud schemes but the most common is an alleged conspiracy between a buyer and seller wherein the buyer makes a lowball offer. The lender, who thinks the offer is a bona fide offer, accepts it, and receives less than should have been received for the home. As a result, the buyer gets the house at a significant discount. What may seem like an innocent arrangement between a buyer and sellers who want the same thing can be perceived as fraud, so it is important to consult an experienced short sale attorney before entering into a transaction like this.

More Complex Short Sale Fraud Schemes

Reverse Staging

Making a home look more distressed than it really is by removing appliances and fixtures is a practice known as reverse staging; and it is done to make the house appraise for a low value. The house is then sold at a low price to a co-conspirator. This is similar to the simple conspiracy scenario outlined above, but is more complex because subsequent to the purchase, the appliances and fixtures are generally returned to the house, which can then be flipped for a higher price. This is considered fraud because the lender lost out on the money that would have been received if the house had not been stripped.

Off-the-books Transactions

All money that changes hands as the result of a real estate transaction must be listed on the HUD-1 form. If an off-the-books deal is made that either reduces agent commissions or attorney fees, or any other financial dealings occur, then the FBI may investigate the sale for potential fraud. This is because when anything takes place off-the-books, somebody is benefitting from the transaction. This is enough to be considered short sale fraud.

Second Lender Scams

This is a type of fraud perpetrated by a second lender who sometimes refuses to approve a short sale unless the buyer or seller makes cash payments directly to the lender. Because the first mortgage holder has the first claim for proceeds after a foreclosure or short sale, second mortgage holders sometimes try to do this instead of receiving no money if the home is sold at a low price. It is not legal to require a buyer or seller to make payments in cash to a second lender.

Flopping

Flopping is when a realtor presents a low offer to a mortgage lender but does not disclose a higher offer. The lender agrees to sell to the low bidder who immediately resells the home to the higher bidder. This nets a profit for the realtor and homeowner at the expense of the lender.

Short Sale Service Scams

There are many scam artists who market themselves as short sale processors, expeditors, negotiators, or coordinators. When people are desperate for help, they may end up paying a person like this to help them. Be wary of anyone who is not a lawyer or real estate agent that suggests they can help navigate the short sale process for you.

If you would like to learn more about short sale fraud, contact our experienced New York short sale attorneys today. Call the Mehra Law Group today at (718) 347-6800.