Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors
Short Sale Fraud – The newest problem in real estate is not yet a law or an official policy, but it is definitely going to create issues in the market. 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.” Essentially, the article stated that a short payoff or a short sale can be considered fraudulent if the lender agrees to a short sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. 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 rest of the article detailed scenarios and red flags for “short payoff” fraud. The scenario was set up around a short sale negotiator or facilitator that engineered a short sale of an 80,000 dollar home with outstanding debt of 100,000 for 70,000 dollars. The facilitator does not disclose that he already has an outstanding offer for $95,000 from a second end-buyer. When both transactions close and the facilitator pockets his profit, Freddie Mac considers him to have committed fraud since Freddie Mac has now taken a “larger than necessary” loss on the sale.
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. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.
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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