Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors
Short Sale Fraud – While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. Freddie Mac’s new short sale opinion – for lack of a better word – could create 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 Freddie Mac poster went on to describe scenarios and red flags for short 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 let the bank know that he already has a buyer ready to pay 95,000 for the property. The second the facilitator puts his profits in his pocket, Freddie Mac considers him guilty of fraud because his negotiations caused Freddie Mac to ultimately take a “larger than necessary” loss on the sale of the property.
The writer encourages everyone involved in short payoffs to look out for short payoff flags. Flags include sudden default without explanation, borrowers current on other debts and buying entities. The article also tells readers to keep an eye out for resale options in their purchase agreement.
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. Short sales may not be breaking the law, but Freddie Mac’s PR team certainly wants the process to be as difficult as possible for all real estate investors.