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Archive for November, 2009

I recently attended the Instructor Development Workshop sponsored by the Utah Division of Real Estate.  During the presentations, Dee Johnson, Enforcement Director for the Division of Real Estate discussed the various types of complaints the Division receives.  While listing the various types of fraud that are being reported, Mr. Johnson spent most of his time reviewing the various types of fraud that are occurring with short sales.  Short sales have become an important segment of real estate transactions.  In a recent article Inman News reported that approximately 50% of current real estate transactions involve either REO or Short Sales.  With the large amount of foreclosures, and the number of properties that have debt in excess of their value, short sales will continue to be a major part of real estate sale transactions.

As with any type of successful transactions, there will be that element that will try to take advantage and which will result in fraud.  I don’t know of an escrow officer in Utah that has not questioned or been concerned with certain elements of a short sale transactions.  Especially when the short sale is also a split closing transactions, there is an open door for successful fraud to occur. As land title professionals, we need to understand the mechanism of a valid and clean short sale, together with those elements that can turn a clean transaction into a fraudulent transactions.

I have development a very extensive seminar on short sales and have been involved with many real estate professionals in reviewing questionable tactics that are occurring in short sales.  From this information and the information provided by the Dee Johnson, I would raise the following issues as red flags of a fraudulent short sale transactions.

First Red Flag: The use of a “facilitator” and the payment of “up-front” fees.  All of the steps necessary to create a successful short sale transaction can be completed by a licensed real estate agent and/or the property owner.  The use of a facilitator, who is not licensed and who has no regulatory controls on their actions, together with the payment of an up-front fee is not a normal or accepted step for a short sale.  In most cases, the payment of “up-front fees” burden an already stressful property owners and will do nothing to facilitate a successful transactions.  If an outside person is involved to help complete a short sale, then their fees should be paid when the transactions closes.

Second Red Flag: The use of a straw buyers or investor.  While it is hard to determine if a person is a straw buyer, an obvious clue is the structure of the transaction as a “flip” or a relatively quick turn around, using an all-inclusive trust deed.  With the decreasing value of real estate, and especially with a short sale, a simultaneous closing is rare, if not impossible.

Third Red Flag: The vacating of the property by the current owners, with the occupancy of a “tenant” and the possible use of a lease option.  Each of these situations is a problem.  A property owner should not be vacating the property until after a foreclosure has occurred, or until the short sale transaction has been completed.  Anyone who is advising the property owner to leave their property should be questioned as to their motives and the reason as to why the owner need to leave.  If a tenant is being placed in the property, then who are payments being made and why is someone will be move into a property that is in foreclosure?

Fourth Red Flag: The recording of additional liens on the property, including mechanic liens and/or new debt instruments.  If the value of the property is less than that owed, why are additional improvements being made.  Why is new debt being recorded when the person is already upside down?  Who would be willing to do that?  Most often, this occurs so that additional funds can be diverted from the first or second mortgage lender.

A short sale is a viable and important element of structuring a real estate transaction. However, care must be take to make sure the transaction is not fraudulent. As land title and escrow professionals, we are the last element to stop fraud from happening.

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          The last couple of years have been frustrating, exciting, and down right frightening. We have all seen our business decrease and have had to make major adjustments to our business operations.  One of the things I have learn over the last couple of years is the great variety in attitudes that title company owners and managers have.  Some are frustrated and have a negative attitude which is seen in their company and in their relationship with their clients.  Others just accept the situation, and try to make the best of it, and address problems as they arise.  Finally, there is a small group of individuals who are optimistic and are planning for better times and are make plans to adapt and grow as the market improves.

          Everything I have read says the hay-day of real estate is gone.  The fast growth and inflated real estate values together with the easy at which mortgage funds were available has evaporated, and will probably not be back.  The recovery from the Great Recession will be slow.  From what I have gathered, the real estate market is beginning to improve, but there are still problems which need to be cleared before we see any real growth and improvement.  There needs to be a settling or reduction in mortgage foreclosures and the large inventory of lender owned property needs to be reduced.  But, these event will come and we need to plan now for the future.

          The title and escrow industry has seen a change in business models and relationships with clients, customers and competitors.  First, the searching process has changed.  No longer does a searcher complete an extensive review of land records.  Large title insurance companies are sending their searches off-shore to control costs.  Many companies are completing a “short” search. These practices have been implements to reduce costs and to improve production time.  Second,  the closing process has changed.  Software has improved the production and accuracy of settlement statements and closing documents.   It has also improved the way information is delivered to our clients and customers.  The use of independent notaries has changed the way many lenders and title companies complete the closing process.  Laws and regulations have placed more restrictions and requirements on real estate closings.   Third, employment situations have changed.  Compensation has increase and in many cases has been a burden to many companies. The competition to keep employees and to avoid the pirating of staff has strained the financial ability of many title and escrow companies.  With the reduced number of closings, many of these high priced individuals are no longer affordable.   Fourth, real estate has changed.  In the past, stocks, bonds, and other securities have had problems with fraud.  Real estate was viewed as a stable and secure investment.  However, real estate is now plagued with fraud and questionable tactics.  Each title and escrow company has had to implement a better program to protect itself against these fraudulent transactions.  With the liability of title insurance claims and the fiduciary liability of escrows, there needs to be improved procedures and practices within the title and escrow company.

          Attitude will make a difference when addressing the problems and changes in real estate. Many companies have had minimal problems in the pass and feel that their past operational procedures will continue to provide protection against claims and financial problems in the future.  Some title companies have just increase their reserves to cover the increased claims problems.  No longer can a title company sit back and address problems as they arise.  There needs to be an aggressive plan of attack.  Each title and escrow professional must understand the types of problems associated with real estate transactions and closing today.  The competition for business is huge.  But we cannot let this competitive nature blind us to the problems that our industry is facing.   Let’s all become aware of the problems and do those things than will make the title and escrow industry the respected and professional industry we all know it is.

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