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
Comments
The key to what you say above is "without full disclosure."
I know you get it, but I think a lot of people are missing that very, very important distinction.
If everything is disclosed to all parties, and they all sign off on it, then G-d bless.
If any detail is not disclose, you have a clear cut case of fraud.
I don't see how there could be so much debate on the topic.
my point was that using the option contract the right way and diclosing everything is legal and not fraud,
even though most realtors do not take the time to understand the transaction, as i have found with my associates in pa,very few understand how it works
later i have to go work on bulk reo packages as the short sales i leave up to my negotiating team have a nice day
Did you have a particular fact that I didn't have straight?
for the sake of bad info short sale fliips with the option contract that i use and is prepared by real real estate attoneys are legal my conttracts disclose disclose and disclose every detail of transaction as in any industry there is fraud if you do not understand how the transaction is done i am probly not as experienced as you as i have only bought and sold over 100 property and still have another 30 or so propety i control or own out right
please try and keep your facts straight and havd a good year in real estate
I'm a little late to this thread, but here's my two cents. The article is a little short on details, but from what I see several things are apparent.
First, while this is technically a short sale, this kind of transaction is not typical and cannot be used as an example. In most, if not all jurisdictions, licensed agents are required by law or regulation to disclose if they are a principal in a transaction. Second, the fraud here is not the flip, but the way in which it was done. The listing agent violated her fiduciary responsibility by not disclosing the higher offer. Third, she colluded with another agent to defraud the lender.
None of this applies to a legitimate short sale flip, wherein the flipper is not a licensee, the agent does not hide a genuine offer and does not act in concert to defraud.
I agree that if you are a licensed agent you should disclose that fact, as a matter of course, and the fact that you are intending to proceed in one of a number of ways in order to make a profit. However, I don't agree that you have to be specific about your next step, indeed a legitimate short sale can have a number of successful outcomes for an investor besides a flip, all of which should he should be planning for if he is prudent. And the unlicensed investor has no obligation to disclose anything. The lender will most likely put him through the ringer.
In summary, the short sale,as well as the subsequent flip, like any other sale should be an arms length transaction. We should not be so ready to draw conclusions based on articles by reporters who may have a limited knowledge of the things they report, or no knowledge at all. Additionally, the actions of a handful of miscreants should not serve to vilify the majority of creative honest investors.
I don't recall anything in my article that said flipping was wrong. In fact, flipping is the capitalist way. The first sentence in my article is clear...,
"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"
If you are doing flips as I have outlined above, it's fraud. In fact, if you read through my article, it's clearly an article on disclosure more than flipping or even short sales. The last line of my article says...,
"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."
Using short sale flips as an example of how investors and Realtors are completely and utterly misinformed about their duties to disclose and what to disclose isn't an attack on flips or short sale flipping.
It's funny because so many people are so passionate about this topic that some just aren't clueing in that I am not attacking short sale flips so much that I am clearly pointing out that short sale flips with a lack of disclosure to all parties that the property will be re-sold for a profit is a fraud.
Now, I am sure someone is going to read this and say, "Jesse hates making money and believes profits are fraud".....no, that is not what I am saying and to understand the article that way is truly an attempt to derail the conversation from the true problem and that is, many Realtors, Investors and Sellers are short sale flipping with no disclosure to the selling bank that they are going to re-sell the property for a profit or even better, telling the selling bank that they are pocketing better offers with the intention of re-selling.
As determined by the case referenced, that is fraud.
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