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Archive for the ‘Short Sales’ Category

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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