Dallas-Fort Worth Real Estate Investor Club

Short Sale Flipping May be Considered Fraud

  • 01 Dec 2009 10:07 AM
    Reply # 251485 on 251251
    Deleted user
    Interesting is that if they are really concerned about the banks loosing money that they don't lump foreclosure flipping into the same bucket. One way that Fannie Mae stops this from happening is the buyer must sign a document that they won't resale for 90 days. Thanks for sharing this information!
    Last modified: 01 Dec 2009 10:07 AM | Deleted user
  • 01 Dec 2009 11:13 AM
    Reply # 251524 on 251251
    Robin Carriger (Administrator)

    From my perspective, this is a very simple matter of certain BPO realtors committing fraud.  They should go to jail.  I hope the government doesn't try to solve this in some way that will only end up hurting everyone concerned.  There's absolutely nothing wrong with someone buying a property at a deep discount, with the lender approving the short sale, and then selling the property immediately to someone else at a higher price.  I've copied some excerpts from the article below with my comments.  Thanks for posting this, Rocky.

    Someone named Tim Mattingly states "They are getting inflated appraisals. They are selling to straw buyers and they are hiding terms of their deals from lenders. It's amazing that after all we've been through, these people are still at it."  Where do they get the inflated appraisals?  Even if they pay for an independent appraisal, the lender isn't obliged to accept it.  If the lender gets deceived by a crooked BPO realtor, it doesn't justify that realtor's fraud, but the lender can insulate themselves by making a better effort to evaluate the property themselves, hiring a second appraiser or BPO realtor, etc.

    The article goes on to say: 

    Overwhelmed with distressed properties and desperate to cut costs, banks are prone to mistakes.  Notice who makes the mistakes; the banks.  If a bank decides to give you a good discount, are you supposed to say "No, that's much too low of a price.  Please let me pay more."

    Instead of hiring appraisers to value distressed real estate, banks often use computer programs to estimate values or turn to Realtors who provide what are known as "broker price opinions," or BPOs, at a relatively inexpensive $60 each.  Since BPOs are so cheap and fraud is supposedly such a big problem, why don't the banks order two BPOs using two unrelated BPO services to help protect themselves against fraud?

    The Realtors hired to estimate a property's value sometimes end up as the listing agent on the house, said Chrissi Rhea, a Tennessee mortgage banker and outspoken critic of short sale flips.  This has never happened in one of our many short sale deals.  This is a GLARING conflict of interest on the part of the BPO realtor that should be easy to detect and disallow.  Even still, unless the realtor explicitly tells the buyer about the conflict of interest, how would they know?

    "...enough mortgage lenders are reporting cases within the industry that Fannie Mae sent out a warning in July citing a trend of short sale buyers secretly lowballing banks."  There's nothing illegal, immoral, or unethical about a lowball offer from a buyer and there never will be.  A short sale, by definition, cannot happen unless a lowball offer is accepted by a lender.

    "We have been advised of instances where the perpetrator is the listing agent, and the agent presents his/her offer as the 'best' offer, even though the agent has received other, higher, arms-length offers," the advisory states.  Again, this is clearly wrong (I'd call it fraud), but it doesn't mean that there's anything wrong with normal short sales, lowball offers, etc.

    Many lenders have written into short sale contracts a requirement that buyers, sellers, real estate agents and closing agents disclose if they are related in any way.  This sounds like a good idea on the surface, but, if a known fraud is already being perpetrated, it doesn't seem like a huge deterrent to me.

    Lenders also often ask real estate agents and title agents if they are aware of any efforts to flip the short sale property.  Again, unless a conflict of interest or fraud is present, there shouldn't be any restrictions on flipping.  If that's how they choose to address this, it will simply lead to a tremendous reduction in legitimate short sales, lenders will have to take back far more properties, then number of bank failures will accelerate even more, etc.

    Attorney's Title, which provides title insurance through lawyers across the country, issued a warning letter about short sale flips in June.

    "The problem is that the original lender is not told that the buyer is flipping the property on the same day for thousands more than the lender has been told is the market value of the property," Attorney's Title wrote.  Selling the property on the same day for thousands more is NOT the problem.  If this kind of disclosure or seasoning requirements are instituted into law, it will hurt everyone concerned, including the banks, the taxpayers, etc., much more than it will help.

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