Short Sale Flipping isn’t Fraud…….right? WRONG!

I have argued, for several years now that in my opinion Short Sale Flipping Schemes that use Option Contracts without full disclosure to all parties involved, including the selling bank is fraud however, we still have many agents out there that just don’t get it.

Quote from John Doe Realtor # 1

“Jesse you have been ill informed and need to watch out what type of horrible , fear mongering advice you are putting out on a public board.

Quote from John Doe Realtor # 2

“Real Estate Day trading is not illegal. While you may wish to make it so, wishing and hoping won't change the law. Please cite some code somewhere that supports your statement”

Quote from John Doe Realtor # 3

“Jesse you are obviously an intelligent man but a bit misguided”

This is just a few examples of what has come my way however, it hasn’t changed my opinion and, now I have a recent ruling by a Magistrate in Connecticut to support my opinion. To read the entire article yourself, follow this link, http://nationalmortgageprofessional.com/news16047/connecticut-real-estate-agent-admits-defrauding-bank-short-sale-scheme

In a nut shell, like many short sale investor flips I have seen, the selling Realtor doesn’t disclose to the selling bank that they are planning on selling the property for a profit and the Selling Realtor doesn’t disclose that the offer they are sending into the bank isn’t the best offer they received on the property. This is Mortgage FRAUD and now I have precedent to agree with me.

Quote from the National Mortgage Professional.com article….

“According to court documents and statements made in court, McElaney worked with Sergio Natera, also a real estate agent, to defraud Regions Bank, which held two mortgages on a residential property in Bridgeport. On Dec. 5, 2007, McElaney, who was a listing agent for the property, received an offer to purchase the property for a price of $132,500. However, McElaney and Natera subsequently directed communications to Regions Bank that the highest offer to purchase the property was for $102,375 by BOS Asset Management LLC, an entity that Natera controlled. The bank agreed to a short sale of the property for the lower price, and released its mortgages on the property. On June 9, 2008, Natera, through BOS Asset Management, sold the property for $132,500 to the original bidder on the property, and Natera and McElaney retained the difference in the two sale prices.

McElaney is scheduled to be sentenced by United States District Judge Janet C. Hall on May 10, 2010, at which time she faces a maximum term of imprisonment of 30 years, a fine of up to $1 million, and an order of restitution. Natera pleaded guilty to one count of bank fraud on Feb. 11, 2010. He awaits sentencing”

If you are in a Short Sale Flip Transaction and you aren’t disclosing to the selling bank that you plan on re-selling this home for a profit, you are opening yourself to risk that could be argued as fraud and your insurance doesn’t protect against that

Yes, it is unfortunate that we have those type people in our business; this is morally wrong, illegal and violates the code of ethics as a realtor. This scenario could play out with REO and regular market sales as well if the two agents are working together to fraud the seller.

However, the precedent set here is one of “Mortgage Fraud” not short sale flipping in general. Flipping is very legal in our society and necessary and as long as they are arms length transactions by informed buyers and sellers and information true. If this were illegal there would be no investor groups, there would be no reason for anyone to buy a poor condition house with the intention of renovating and selling at a profit, there would be no TV shows such as “Flip this House” and if it were illegal in housing I guess it would be illegal for new car dealerships to take in a trade and resell, not to mention a trickle on down to consignment shops, used furniture stores and so on.

Flipping is just a cute name for a very short term investment and is a risk just like any other investment. This type of investment is actually a benefit in my area for the current market conditions. Our inventory levels are low and there are a lot of young families that are trying to take advantage of the tax credits and low prices. Now that the sub primes are gone they have to turn to the sources that will get them the least money out of pocket which basically means they have to go FHA, VA or USDA for rural properties. The guidelines on condition are very tough and many of the distressed properties simply won’t qualify for financing…….but a newly renovated flip will. Chances are this renovated property will still appraise out unlike the regular market pricing. Even if the guidelines were lax for financing the buyers don’t have the money to purchase and reno themselves.

Jesse, the two realtors in question did break the law and are getting what they deserve, my intention in my response is in no way to dispute the fraud, the one thing that grabbed me was the title of the Blog which appears to insinuate that short sale flipping as a whole is fraud, which it is not.

There are companies out there right now that are actually enticing realtors to partner with them because they will negotiate the short sale, then they state that they will buy the property ( at a low value of course) then turn it back over to the same realtor to sell at a higher price so the realtor will receive two commissions. Hmmm…..law suit written all over this.

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Comments

Tony Linton March 31, 2010 at 8:43am

Yeppers....that it did:-)
Jesus (Jesse) Gonzalez March 31, 2010 at 6:02am

Hi Tony,

The title is to grab the attention.....it did what it was supposed to do.
Tony Linton March 31, 2010 at 5:40am

Yes, it is unfortunate that we have those type people in our business; this is morally wrong, illegal and violates the code of ethics as a realtor. This scenario could play out with REO and regular market sales as well if the two agents are working together to fraud the seller.

However, the precedent set here is one of “Mortgage Fraud” not short sale flipping in general. Flipping is very legal in our society and necessary and as long as they are arms length transactions by informed buyers and sellers and information true. If this were illegal there would be no investor groups, there would be no reason for anyone to buy a poor condition house with the intention of renovating and selling at a profit, there would be no TV shows such as “Flip this House” and if it were illegal in housing I guess it would be illegal for new car dealerships to take in a trade and resell, not to mention a trickle on down to consignment shops, used furniture stores and so on.

Flipping is just a cute name for a very short term investment and is a risk just like any other investment. This type of investment is actually a benefit in my area for the current market conditions. Our inventory levels are low and there are a lot of young families that are trying to take advantage of the tax credits and low prices. Now that the sub primes are gone they have to turn to the sources that will get them the least money out of pocket which basically means they have to go FHA, VA or USDA for rural properties. The guidelines on condition are very tough and many of the distressed properties simply won’t qualify for financing…….but a newly renovated flip will. Chances are this renovated property will still appraise out unlike the regular market pricing. Even if the guidelines were lax for financing the buyers don’t have the money to purchase and reno themselves.

Jesse, the two realtors in question did break the law and are getting what they deserve, my intention in my response is in no way to dispute the fraud, the one thing that grabbed me was the title of the Blog which appears to insinuate that short sale flipping as a whole is fraud, which it is not.

There are companies out there right now that are actually enticing realtors to partner with them because they will negotiate the short sale, then they state that they will buy the property ( at a low value of course) then turn it back over to the same realtor to sell at a higher price so the realtor will receive two commissions. Hmmm…..law suit written all over this.
Megan Zavieh March 31, 2010 at 5:33am

That definitely smacks of fraud. I would argue, however, that simply buying a property for a lower price than you are shortly thereafter able to sell it would not be fraud. The critical facts are that they had already received a higher offer, failed to disclose the better offer to the bank, and took advantage of the exact same offer (same buyer) following the close of the transaction. If you are able to purchase a short sale and then profit from it by selling it at a higher price, that alone would not be fraudulent.
Steve Adkins March 31, 2010 at 5:09am

I have always laughed at the topics in LinkedIn from these "investors" that say "Agents, earn twice your normal commission!" or "get paid twice for selling the same house"! It just screams fraud, but the stipid agents are falling for it still!

Our brokerage warned us early last year as this was developing. And now we are seeing agents going to jail because they believed the fast talking con-men "investors".

LOL, a few months ago I got into an on-line discussion in a local community board with one of these "investors". As I started asking questions, he became wise to what I was doing and had all my comments removed. Some time later he was arrested by local & state officials for growing and selling pot! Go figure. The little league coach and local "business" man, as we found out after the arrest had a record of the same thing in another state. Along with his wife too.

There are no "get rich schemes" out there for real estate that are legal. Use a little common sense when approached with these types of deals....if you want to stay out of jail!
Cindy Billman, SRES ®, SFR®, CDPE March 31, 2010 at 1:54am

It never ceases to amaze me at the fraud and deception in this country but what can you expect when our politicians lead the way!
Carolyn Kruse March 30, 2010 at 11:40am

Well all I can say is if they wanna play with fire they will get burnt. One can never do or say this enough, disclose, disclose, disclose!
Tere Rice March 30, 2010 at 4:52am

If it walks like a duck..........

Right On Jessie!
Julie Baldino March 29, 2010 at 6:19pm

Good for you for consistently speaking out against this, regardless of the backlash received for it. IMO, without full disclosure, its no different than bank robbery! Not to mention the blatant disregard for fiduciary duty to the seller in cases where they may be obligated to pay the debt back. Thanks for posting :)

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