Could You Be Committing Short Sale Fraud? Freddie Mac Thinks So
Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors
Short Sale Flip Fraud – It’s not a law; nor is it an official policy, but it’s definitely going to be a problem regardless. The news from Freddie Mac on short sales could cause serious legal and practical issues for real estate investors.
On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” The article stated, in short, that short sales could be fraudulent if the lender does not have information about a pre-arranged flip of the property after the short sale to another buyer. This is a serious yellow flag for short sale investors who make their living negotiating good short sale deals with banks, then selling their new properties to other buyers for a profit.
The article described scenarios and red flags for short sale payoff fraud. The scenario revolved around a short sale facilitator who set up a deal with a lender to purchase a home worth 80K for 70K while the lender took a 30K loss. The facilitator does not disclose that he already has an outstanding offer for $95,000 from a second end-buyer. When the transactions close – in this case on the same day – and the facilitator pockets the difference, according to Freddie Mac he has just committed fraud because he withheld information about a higher offer and causes Freddie Mac to take a “larger than necessary” loss on the sale.
The writer encourages everyone involved in short payoffs to look out for short payoff flags. Freddie Mac considers entities buying property, borrowers who are suddenly in default and borrowers who have not reneged on all of their loans to be red flags for short payoff fraud. The article also says that resale options in contracts can be a red flag.
Finally, sellers, buyers and lenders are all encouraged to report this short payoff fraud if they are aware of a second purchase contract for a higher price. This may not yet be a law, but the signs are not good when Freddie Mac has posted such a direct attack on short sale investors.
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