GENERAL OVERVIEW (Questions 1 to 8)

FRAUDULENT SHORT SALE FLIPS
(Questions 9 to 13)

SHORT SALE NEGOTIATOR SCAMS (Questions 14 to 19)

 SHORT SALE
PACKAGE SCAMS
(Questions 20 and 21)

IMPROPER PAYMENTS (Questions 22 to 25)

REAL ESTATE LICENSEES
(Questions 26 to 33)

ATTORNEYS
(Questions 34 to 36)

 FORECLOSURE CONSULTANTS (Questions 37 and 38)

ADDITIONAL INFORMATION (Questions 39 to 41)

GENERAL OVERVIEW

Just as REALTORS® struggled with loan fraud during the subprime heyday, they now face the rampant growth of short sale fraud in the subprime aftermath.  Short sale fraud comes in many shapes and sizes to wreak havoc on the unsuspecting sellers, buyers, and agents, often at the most inopportune time.

This legal article provides legal and practical guidelines for REALTORS® and their clients for dealing with short sale fraud.  This legal article also describes certain types of short sale scams, and explains how REALTORS® and their clients can distinguish between legitimate and illegal short sale activities.

Q1.  What is short sale fraud?

A   Short sale fraud is a loose term for describing fraud, deceit, or trickery in connection with a short sale transaction.  As background, a short sale is a sales transaction where: (1) the sales price is less than the seller’s existing mortgage loan balance, other liens, and costs; and (2)  the existing creditors agree to a payoff of less than what’s owed.  Short sales help homeowners to avoid the stress and stigma of foreclosure.  Short sales also help mortgage lenders by avoiding the costs of foreclosure, including the burden of maintaining and reselling properties acquired through the foreclosure process.

Q 2.  What are some examples of short sale scams?

A   Like other types of scams, short sale fraud can take many forms.  At one end of the spectrum, a short sale scam can be part of large, well-organized fraud ring, and at the other end, it can be one isolated incident.

Examples of short sale fraud include, but are not limited to, the following:

• Fraudulent short sale flips (see Questions 9 to 13);
• Short sale negotiator scams (see Questions 14 to 19);
• Short sale package scams (see Questions 20 and 21); and
• Improper payments (see Questions 22 to 25).

Q 3.  How could a homeowner fall victim to a short sale scam?

A  Short sale transactions are highly susceptible to scams.  A typical short sale is complicated, difficult, and can drag on for many months.  Yet, short sale sellers are often too financially strained to hire experts to advise them on the complicated financial, legal, tax, credit, and other issues raised by their situations.  Sellers are also likely to be anxious to finalize their short sales quickly to avoid the possibility of losing their homes through foreclosure.  On top of the stress and stigma of a looming foreclosure, short sale sellers may be dealing with other financial and emotional hardships, such as job loss, death of a loved one, divorce, or illness.  Given these circumstances, the sellers can easily succumb to a scam artist’s lure of a guaranteed quick fix.  As one victim of a foreclosure rescue scam said, “When you’re down and out you’ll believe anything.”

Q 4.  Can someone other than a homeowner fall victim to a short sale scam?

A  Yes.  Homeowners aside, real estate agents, appraisers, mortgage lenders, escrow companies, title insurers, and others involved in the short sale process are also vulnerable to scams, especially considering the financial strain brought about by the downturn in the real estate market.  Some real estate agents and other service providers merely get caught in the crossfire between the scam artist and homeowner.  Others are reeled in by design because their participation may facilitate or lend legitimacy to the fraudulent schemes.

Real estate agents, in particular, can be targeted by scammers for their leads as they are often the first point of contact for a homeowner in distress.  Agents may also be sought out by scammers for their ability to list and market properties.  Agents may also get tricked into paying for phony short sale lead generators, farming lists, marketing tools, training seminars, coaching services, and other bogus short sale products and services.

Q 5.  Is there an easy way to detect a short sale scam?

A  No.  Short sale scams may not be easy to detect, but see Questions 6 and 7 for helpful guidelines.  Outwardly, scam artists do not act or appear dastardly.  On the contrary, the typical scam artists look nice and clean-cut, and they seem kind, helpful, patient, and trustworthy.  Their purported companies are likely to appear well-established, reputable, and qualified to do the tasks at hand.  The companies may even have names that sound altruistic, such as Community Short Sale Services or Short Sale Advocates.  Some outfits may appear to be related to the government, such as administered by or an agency of the government.  For instance, a scammer may pretend to offer a short sale under the U.S. Treasury’s Home Affordable Foreclosure Alternatives (HAFA) program, knowing that most people are unfamiliar with the details of this new government-subsidized program.

Scammers come from all walks of life, including, but not limited to, appraisers, accountants, attorneys, bank officers, landlords, tenants, friends, and colleagues.  Scam artists may engage in "affinity marketing" tactics to attempt to lure people into their fraudulent schemes.  Affinity marketing tactics involve scam artists who are, or pretend to be, members of the same racial, religious, social, or other group as their victims.  For example, a scam artist may claim to be in the military, and use military terms and mannerisms, in an attempt to befriend someone in the military.  Or a scammer may join a church to gain the trust of other members of that church before attempting to defraud them.

Q 6.  What are the red flags for detecting a short sale scam?

A  REALTORS® and their clients contemplating or engaging in short sale transactions should be aware of the different types of scams (see Questions 9 to 25).  In addition, they should be wary when dealing with someone who does any of the following:

• Makes an offer that sounds too good to be true;
• Gives an unqualified promise, such as to obtain short sale approval, stop foreclosure, or other assurances;
• Is unconcerned about the sales price, possession of the property, and other significant terms of sale;
• Is unconcerned about the short sale seller’s financial situation;
• Is involved in a sales transaction where the seller is not the current owner of the property;
• Is involved in a sales transaction where a notice of default has been filed against the property;
• Is involved in a sales transaction under the Home Equity Sales Contract law (see C.A.R.’s legal article at http://www.car.org/legal/2008articles/home-equity-sales-contracts/);
• Is involved in a sales transaction where the property owner has purportedly given someone an option to purchase;
• Represents that the buyer is an entity (such as a trust or LLC), rather than an individual person;
• Creates more than one sales contract for the same property;
• Asks for the payment of money upfront before providing any service;
• Asks for payment only in the form of cash, cashier’s check, or wire transfer;
• Asks for something to be done immediately without delay;
• Asks for a power of attorney;
• Asks for a transfer of title or an interest in the property outside of escrow;
• Asks for signatures on a grant deed or deed of trust;
• Asks for signatures without giving a lot of time to review the documents;
• Asks for signatures on a document that has lines left blank;
• Fails to provide copies of documents signed;
• Refuses or fails to provide written confirmation of an oral promise;
• Instructs the seller, listing agent, escrow officer, or someone else not to contact the short sale lender;
• Instructs a client not to discuss his or her situation with a housing counselor, banker, accountant, attorney, family, friends, or others;
• Has an answer for everything; and
• Engages in “shop talk” that sounds glib, but doesn’t in fact make sense.

Q 7.  What should sellers, buyers, agents, and others do to protect themselves against short sale scams?

A  The basic rule is "if it sounds too good to be true, it probably is."  In addition to watching out for the red flags in Question 6, affirmative measure to take to protect against scams include, but are not limited to, the following:

• Before doing business with someone, check the legitimacy and qualifications of both the individual person and business entity.  Check whether the individual person and business entity are properly licensed (see Questions 26 to 38).  Ask for references and check out those references.  Also check someone's background, credentials, and reputation.  Search the Internet and check public records and trade group memberships.  Remember, however, that even if someone has the proper credentials or comes highly recommended, the risk of a scam is less, but is not eliminated entirely.

• Do not panic.  Do not make any rash decisions.  It’s precisely when your chips are down that you must keep a clear head.

• Before entering into an agreement or arrangement, understand every aspect of what it entails.  Read documents carefully and thoroughly before signing.  If you do not understand a document or the consequences of a document, seek the advice of an attorney, accountant, or other professional as appropriate.  If you do not speak the same language as the person you’re negotiating with, don’t use that person’s interpreter or translator -- bring your own instead.

• Do not sign your name to any false statements or documents with spaces left blank, especially if you’re told that signing will be harmless or inconsequential.

• Get as much information as you possibly can before making a decision.  Ask questions.  Conduct as much research and investigation as you can upfront.  Look into different options and their financial, legal, tax, and other ramifications.  Ask for advice and help from trusted family, friends, and professionals if appropriate.

• Always try to stay a step ahead of scam artists.  As society comes to know one type of scam, con artists will attempt to catch their victims off guard by devising new schemes.  For example, with greater public awareness not to pay upfront for a short sale negotiator’s fee, scam artists may shift to structuring a short sale to include a buyer’s credit to pay the fee.

Q 8.  Isn’t it true that no one really gets caught for short sale fraud?

A  No.  Although it seems as though scam artists rarely get caught, law enforcement activities against foreclosure-related scams are on the rise.  The current housing crisis caused in part by greed and wrongdoing during the subprime heyday is a national issue that has grabbed the public’s attention.

Reports show that law enforcement authorities are investigating and prosecuting foreclosure-related scams, and that, more and more, lenders and government-sponsored enterprises Fannie Mae and Freddie Mac are monitoring their files for improprieties, such as fraudulent short sale flips.

On the federal level, reports indicate that, as of 2010, the FBI devotes over 350 of its 13,000 agents to mortgage fraud.  On the state level, the Department of Real Estate (DRE) has reportedly revoked, suspended, or accepted the surrender of 886 real estate licenses from July 2009 to June 2010, which is a 60 percent jump over the preceding three years.  As of August 2010, the DRE reportedly had about 5,400 open investigations, including scams involving short sales.  Since 2006, the DRE has issued about 600 desist and refrain orders to unlicensed people.

Furthermore, regardless of whether the mastermind of a scam ever gets caught, other people involved in a short sale scam can easily get caught.  Let’s say, for example, a scammer solicits the help of a real estate agent in a short sale flip (see Question 9 for a discussion of short sale flips).  After escrow closes, the scam mastermind absconds with the money.  That fact does not prevent the seller, buyer, lender, or law enforcement authorities from pursuing civil and criminal claims against the real estate agent who may have been only peripherally involved in the fraudulent scheme (see Question 11).  Possible claims could include, among other things, a civil lawsuit brought by the seller for breach of fiduciary duty, a civil lawsuit brought by the short sale lender for mortgage fraud, a criminal case brought by the district attorney for aiding and abetting in a fraudulent scheme, and a disciplinary action taken by the DRE for dishonest dealings, negligence, and incompetence.  For any of these situations, arguing that the real estate agent was only peripherally involved in the scam may prove to be a weak defense for the agent.

Vikki Renfrow, Bob Beauregard, DiscoveryBayRealtors.com, or Marples and Associates are not affiliated with any government agency.
Your lender is not obligated to and may not agree to alter the terms of your loan.