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How to Avoid Short Sale Fraud

How do you know you can trust the person helping you out? The best thing you can do is work with a state licensed agent or broker like me who specializes in the short sale. Call me at 216-324-6637.

In the short sale news radar a bunch of articles have popped up about short sale flipping and flopping (i.e. this one in Bloomberg).  See more about flipping and flopping here (keep in mind that this article is written from an appraisers perspective and I don’t fully agree on all points).

Obviously as a homeowner who might be doing a short sale you want to avoid anything illegal when you sell.   It simply isn’t necesary and it could have the effect of making you fully liable to the house debt forever (you won’t even be eligable to file bankruptcy on it) or worse. You don’t want to go there.

There are a lot of unethical folks who target people in foreclosure looking to make a quick buck.  In general if you are approached by an investor  and you are behind in payments that investor is going to want to do a short sale and then flip that property while owning it only a couple of days.  The investor these days will typically work with a Realtor who will assist them in getting listings of similar homes sold in the neighborhood which they will use to influence the lender about the value of the home.  The investor will also typically have the Realtor market the property for them (not you) so that they will have a buyer lined up to buy from them before they ever close on the property with the bank.

Many investors will claim to be helping the seller and technically anyone who can complete a sale of home on a short sale no matter the price will be helping the seller as long as:

  1. The seller ends up not being liable for the deficiency
  2. The seller doesn’t have a greater tax liability for the lower amount sold

For most sellers the #2 (the tax liability) rarely becomes an issue (see my blog post on the 1099). However lately many mortgage lenders are requiring short sale deficiencies to be paid back on a completed short sale if a seller has substantial income or assets (sometimes even when they don’t have substantial income or assets).  Often time short sale letters come through and it is not even clear if they will for sure waive the deficiency.   As a negotiator it is our job to negotiate the short sale acceptance letter to the sellers best advantage but often times we simply don’t have the leverage.

However it isn’t hard to figure that that if an investor is low balling you on your home that it will mean more loss for the lender and if the lender does come back at you it will be a bigger loss to you.  That is one reason why it makes a lot of sense to have a real estate agent who is going to properly market your home to an end buyer.

Ultimately it is not necessarily illegal for an investor to resell a home quickly for a profit.  However most short sale acceptance letters (including the new treasury departments HAFA regulations) have stipulations that require a short sale home buyer not to resell in less than 90 days.  In fact many times the buyer, the seller and the real estate agents have to agree that they do not even know of a potential resale.  If the buyer later resells during this period it could potentially nullify the acceptance letter and addition to major title issues the seller that thought he or she was scott free may be more than liable.

Even more issues happen because in order for an investor to get a really cheap home they have to try and do things to get the banks own representative to value the home close to the below market offer they are making.  These techniques range from bordering on the unethical to being illegal.  However when working with a short sale specialist real estate agent that is not selling using a flipper / flopper the agent only has a much easier time justifying a full market offer.  This eliminates a likelihood that a banks own evaluation was improperly influenced and makes it easier to get an offer accepted and closed. Of course every seller wants a better chance at selling and a better chance at selling for more.

My conclusion here that is all sellers should in general avoid working directly with an investor on the sale of their home but instead work with a state licensed real estate agent who does short sales full time and is legally bound to working for the sellers best interest.

I first want to say that number one I have investor friends that would disagree strongly on many of the points I make in this article.   It might seem as if I am making investors out to be crooks but I am not.   And yes in general they (the investors I am friends with) are God fearing good people who to their knowledge always do the right thing.  However if you look around you the political climate is such that even if you follow the letter of the law a judge could still find you violating the intent of the law.

Andy Morris is an Ohio real estate broker with an expertise in selling homes on a short sale. If your Ohio home is heading towards foreclosure or you owe more than your property is worth, please call Andy at 888-4-STOP-IT to see if you qualify for a short sale with your lender.  Are you not in my area?  His foreclosure answer service is free to you as well!

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