CALIFORNIA This is why you disclose EVERYTHING with short sales!

This information was taken from the Spring 2010 CA Department of Real Estate Bullentin.

Criminal Penalties for Those Who Participate in Unlicensed Activities Those who engage in short sale transactions, including the related “negotiations”, and who are unlicensed (and do not have the benefit of an exception/exemption), are in violation of California law. The penalties include fines and/or imprisonment under B&P §10139.

II. Fraud, and Questionable Conduct and Activities
In addition to seeing unlicensed activities in the market with respect to short sales, the California Department of Real Estate (hereinafter “DRE”) has also been alerted to fraudulent short sale transactions. Before discussing an example of short sale fraud that is becoming prevalent, it must be noted that the types and varieties of fraud (some quite elaborate) are many and are limited only by the imaginations of those who commit fraud. Thus, this segment and the succeeding discussion on scenario/scheme variations and legal and ethical minefields, is intended to raise concerns and issues for real estate licensees in California. But it is not intended to be comprehensive in scope.

A. Short Sale Fraud -- Flipping by Unlicensed Entities Using Straw Buyers

In some cases, unlicensed “short sale facilitators” hone in on homes that are on the verge of foreclosure and persuade the lenders to accept “lowball” purchase offers, often times by using “straw buyers”, questionable or self-interested broker price opinions or appraisals, and by failing to disclose that a sale at a higher price has previously been put on the table or negotiated.
In this case example, ABC Short Sale Services (hereinafter “ABC” -- the name has been changed for the purposes of this example), an unlicensed “short sale facilitator”, contacts a distressed homeowner and tells him that ABC will facilitate the sale of underwater property with the best possible economic outcome to the homeowner. Payments to the homeowner may even be promised to entice interest.
ABC then contacts a licensed California real estate broker (hereinafter “Broker”) with little or no knowledge about short sale transactions, and offers to refer a short sale listing to the Broker. For the business, the Broker pays a referral fee to ABC. Once ABC has a Broker on board, ABC requires that the homeowner/seller sign a contract with ABC, in which the homeowner/seller agrees to permit ABC to serve as the homeowner/seller’s “short sale negotiator”. The contract has language like the following: “Seller agrees that he will no longer market the property and grants to ABC all necessary rights to market, negotiate, and enter into an agreement to sell the property to an unrelated third party”.
For its services, ABC charges the homeowner/seller a $395 upfront fee and then a second $195 fee for the negotiation services.
In this case, $480,000 is owed on the mortgage loan to the Lender, a federally insured financial institution, and the fair market value has fallen to $410,000. The property is listed by the Broker for $410,000, and the Broker takes no part in the “negotiations”. Because lenders and lien holders do not always require the listing brokers to present to them every single offer made for the short sale property, ABC only presents to the Lender the offer(s) it so chooses. Because ABC controls all of the information provided to the Lender, ABC also decides to withhold legitimate offers from the Lender and convinces the Lender that the home is overpriced at $410,000.
ABC presents its own $340,000 offer to the Lender, in the name of a fictitious buyer or “straw person” (hereinafter “SP 1”). Because ABC has controlled all of the information to the Lender during the listing period, and has withheld legitimate higher offers, the Lender is led to conclude that SP 1’s $340,000 offer is the highest and best, and the Lender accepts SP 1’s offer. Following acceptance of SP 1’s $340,000 offer, and once escrow is open, ABC will focus on the primary objective of its scam by finding a second, legitimate buyer for more money as a “flip”. To accomplish this, ABC, through SP 1, will offer the soon to be newly purchased property for sale via the Multiple Listing Service. ABC will also contact the various buyers’ agents who presented offers higher than $340,000 during the short sale listing process, but whose offers were not presented to and withheld by ABC from the Lender.
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BC will inform all prospective buyers’ agents that “the short sale property is already in escrow”, but that it will be available for immediate sale after the close of escrow.
Buyer 1 is extremely interested in the property, and is willing to pay the fair market value of $410,000. Buyer 1 then agrees to participate in a double or simultaneous escrow and offers $410,000. ABC, through SP 1 (ABC’s confederate), concurrently enters into a $410,000 purchase contract for the property with Buyer 1, conditioned upon SP 1 obtaining title, and that the “second” sale to Buyer 1 go through ABC’s handpicked lender.
After the closing of the second sale, ABC makes over $70,000, including referral fees from the Broker and fees from the original distressed homeowner/seller.
Brief Analysis of this short sale flipping fraud example: In the case above, ABC has violated the California B&P Code by engaging in real estate licensed activities without a license. Also, they have collected advance fees in violation of California law. Then, they have made a large profit through false pretenses at the expense of a federally insured financial institution, by misrepresenting the value of the home to the Lender. This may constitute federal loan fraud, which is a serious felony offense which is punishable by imprisonment and fines.
The Federal Bureau of Investigation lists variations of short sale flipping as real estate fraud.

KimmyJ