First off, thanks to Steve Adkins for spuring me to provide more detail on this subject and providing insight on the details of how exactly this scam works! I recently wrote a blog titled, “Short Sale Scams Dupes Un-Suspecting Realtor…Are You One?” which created such a stir that now I am prompted to write this blog specifically concerning Short Sale Option Contracts. So, here is how this happens. You’re in the office making calls or whatever else you do and you get a call from a “investor” who sees you have that short sale listed on 666 Money Pitt Lane and, wants to know if you would write up his Option Offer with no terms or conditions. You’re all excited because by all intents and purposes this is a really good offer, no conditions, no terms, no contingencies…..right,……wrong! He has one condition and that is, he has the “option” to purchase the home at any time before the foreclosure sale date. He doesn’t outline any price or contingencies at this time but, who cares….your seller surely isn’t going to mind because they really don’t have any skin in the game because they aren’t getting any money in return for the sale anyways. Now, here is where it gets even more interesting. As a part of the investors “option” to buy he mandates that he negotiate the Short Sale with the bank. He makes it all sound great because he has a guy who is on hold with the bank right now just waiting to get this negotiated and sealed for you, because he wants to make you BIG money on the deal. In fact, he has such good relationships with this bank he promises you (the Realtor) don’t have to do anything, he can do it all for you! To make you more confident that this is good for you, he offers you a cooperative agreement for both the Listing Side Commission on your original listing and the Buyer’s Side Commission when he turns right around and re-sells it to his “firm”….DOUBLE COMMISSION…WOO HOO!! All he needs is your client to withdraw their listing from you, agree to have him (the investor) represent them, list the property with his firm and, sign a limited Power of Attorney saying that he (the investor) is representing them so he can negotiate with the bank. Once all this is done, the “investor” receives all the offers from the general public, negotiates all the offers and behind the scenes is negotiating a much lower sales price with the bank for the purchase of the property by his firm. In other words, all these offers from the general public are being held back…they aren’t being submitted to the bank. Instead, the “investor” is negotiating his own offer trying to get the price 20% or more less than his highest received bid from the public. So once the “investor” gets a high enough offer to satisfy his greed he then exercises his own option to buy the property. Keep in mind, he is purchasing the property at the bargain basement price he negotiated with the lender directly. Now he works the offer to close and, you get the commission for the listing side, your seller walks away from the home happy to be out from under the debt burden and what do you know, the investor has found a buyer who needs representation who wants to make a great offer and the investor wants you to be the selling agent, because you were so good to work with before. The offer “your” buyer wants to make is $35,000.00 more than what you just sold it for to the “investor”….wow, he is making out like a bandit! When in actuality he is involving you in mortgage fraud! Just to make this a bit more clear….watch the money. 1. You list the Short Sale for $50,000.00 2. Investor comes in, takes the property over and list it for $30,000.00 3. Investor negotiates with the bank and gets approval for $25,000.00 4. Investor receives an offer from general public for $55,000.00 5. Investor exercises his option to buy and closes for $25,000.00 6. Investor instantly sells the property to the general public offer for $55,000.00 making a profit of $30,000.00 off of an offer that should have gone to the bank. In other words, the investor made off with $30,000.00 of the banks money! You profited twice from the deal so, you are involved in a scam if you knew it or not! THIS IS MORTGAGE FRAUD AND THE FBI DOES INVESTIGATE.
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Comments

  • Well, for some reason it would not take my link, lets try again:

    http://www.inman.com/news/2009/05/20/fbi-gets-firepower-fight-mortg...
  • Just read this article in Inman News:


    FBI gets firepower to fight mortgage fraud
    Congress signs off on plan for 50 nationwide task forces
    By Inman News, Wednesday, May 20, 2009.


    Looks like the FBI and Congress believe this to be a major problem.
  • Regina, um, the investor is doing the same thing when making an offer on a REO. They are offering a much lower price then what the bank lent on it. When short saling, they saved the homeowner from foreclosure and extra expenses for the bank. Do you really think they are not going to low ball the REO price? And who says it is too difficult? Brain surgery is too difficult too, but I don't say brain surgeons shouldn't operate.
  • Regina, you have a very good point.
  • Jesse, in my opinion, these investors should wait until the property becomes an REO to negotiate a special deal directly with the bank. Short sales are too difficult as it is. And when it's an REO, the investor doesn't have to worry about "shorting" the bank, since they are dealing directly with the bank.
  • Robb, one thing that has not really been touched on yet, but in many states it is illegal to market a property for sale for another person (newspapers and the like are exempt) with the expectation of making money from it's sale, unless you are a licensed real estate professional. I do not know where you live or do business, but in my state of Georgia and Jesse's Tennessee, it's considered practicing real estate with out a license and could result in criminal charges. What you just described as your business model could get you arrested here.
  • Hi Robb Cash

    Once again, if you are not doing business as I outlined above then this blog has nothing to do with you. "If" you are disclosing all vital information to the bank, including higher and better offers even after the "approval" then you appear to be dealing above the bar and that is great.

    If, not then you are a thief and i am sure these moral concepts may be too complicated for you to understand. not to be rude.
  • I have already mentioned that there is full disclosure. There is a right and ethical way to do this. Also, it is not that higher offers are being "held back." There are no offers usually b/c buyers don't want nor understand short sales. The investor, after doing the work and spending the time negotiating the short sale, is now able to market the property at a lower price since he now has an approved price. And he/she is in a position to deal with a retail buyer with certainty. It's not as if the offers are rolling in prior to the short sale negotiation. It is the lower price, I repeat, lower price that attracts the buyer which the investor can now offer since he has the bank's approval. This is the system and the atmosphere. If you are so concerned with the banks then you should complain about the way they do business with these short sales. Most people(retail buyers) run away from short sales because they don't want to deal with the uncertainty of price and the length of time for the approval. So investors have filled a niche, and many ethically, but you want to find fault, and call investors "scammers." I guess capitalism is beneath you, not to be rude, of course.
  • By the way, what the bank may or may not realize isn't the question. The question is what exactly are you disclosing. It's 2 different things to say, the bank should know and what you aren't telling them. Not to be rude but, this is ethics 101.
  • Hi Robb:

    Please refer to the article as I wrote it.

    Quote, "all these offers from the general public are being held back…they aren’t being submitted to the bank."

    "IF" you are telling me that you are disclosing to the bank that you are fielding offers and NOT submitting the highest and best to them but, they are cool with that.....then this blog post has nothing to do with the way you are doing business.

    On the other hand, I can't imagine any bank, a financial institution, agreeing to accept a lesser offer on a SHORT SALE, when they know the investor has better offers, who does that?

    Not to mention, in this state, Tennessee, unless you are licensed to practice realestate then you have no business negotiating anything with the bank on behalf of a client / homeowner.

    See my blog, http://reopro.ning.com/profiles/blogs/short-sale-scam-dupes

    For reference you can see the Official Manual of the Tennessee Real Estate Commission 2008 edition, (latest edition) page 8, 62-13-103 where it outlines when a person is identified as a broker or affeliate broker.

    See article (b) of the same code for license requirements as well as the Acts 1973, ch. 181 / 4;T.C.A./ 62-1304; Acts 1989, ch. 89 2.

    Now I am not an Attorney and this is just my opinion and should not be considered legal advice. I don't practice in any state other than Tennessee so if you live in another state please consult a real estate Attorney licensed in your area of practice.
    Short Sale Scam Dupes Un-Suspecting Realtors...Are You One?
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