When a short sale is listed, some sellers and agents are besieged by unorthodox requests from seemingly helpful real estate investors or other short sale opportunists. Of course many buyers look for a good deal, and it is the bank’s prerogative to allow a property to be sold for less than fair market value. However, some of these investors or opportunists may entangle the agent and seller in what amounts to mortgage fraud.
One fraudulent situation is the double-close-and-flip transaction. That occurs when an investor places the property under contract at a low price and offers to negotiate that offer with the bank. Meanwhile, the investor tells the listing agent to continue marketing the property so they can procure a much higher offer. The investor tells the bank that the low offer is the only one, while concealing the much higher offer from the bank. The investor’s intention is to engineer the transaction so they can collect the difference between the low offer and the higher offer while keeping the bank unaware. The listing agent, who has a fiduciary duty to the seller, ends up procuring a higher offer for the investor’s benefit and not the seller’s benefit. Furthermore, the short sale fraud department within many banks may sue all the parties if they discover that a double-close-and-flip transaction occurred.
For example, the investor may go under contract with the seller at a sale price of $100,000. The investor tells the listing agent that they will receive six percent commission, which is $6,000. The investor tells the seller’s lender that $100,000 is the only offer received. The investor may even have the seller sign the deed over to them, or the investor might file an option on the public records. The deed and the option each give the investor incredible control over the transaction, and it is hard to push the investor out of the deal later. So, while the investor is negotiating a $100,000 sale with the mortgage lender, the investor tells the listing agent to keep marketing the property. The agent procures an offer for $135,000. The investor instructs the buyer to give them $35,000 and says the buyer can take over their contract to buy the property for $100,000. Or the investor convinces the buyer to give them the $135,000, and the investor uses $100,000 of that money to buy the house and even pays the agent another commission on the $135,000 sale. Then the investor signs a deed immediately thereafter, transferring ownership to the end buyer while pocketing the difference. The fraud occurs in the misrepresentation to the bank, who may later claim that they were defrauded of out tens of thousands of dollars. That is the equivalent of walking into a bank branch and robbing the teller of tens of thousands of dollars. The agent and seller may be found to be complicit in the fraud, even if they were somewhat naïve to the investor’s intentions.
Another potentially fraudulent situation involves the investor placing an option on the property or inducing the seller to turn over the deed without paying off the mortgage. The investor creates a cloud on the title and then demands a payment from the ultimate buyer to release their option or transfer the deed.
The third type of fraudulent transaction involves a non-arms-length transaction or collusion in which the buyer allows the seller to remain in the property. Some sellers convince a family member, often with a different last name, to buy the house at a discount. Then the family member either rents or sells the house back to the former borrower. The bank is defrauded out of thousands of dollars.