Short Sale Option Contracts are Fraud!

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.

This is a scam that had me screaming (figuratively) all last year. We had client after client who wanted to write offers on these places, and their offers never went anywhere. The company I saw doing this had a BIG billboard ad along I-80 in Auburn for nearly a year.

These folks had a deal where they made offers on short sale listings at a very low-ball price. Back a year ago, as we all remember, it was so hard to get a short sale closed that nobody was writing offers, so there was little competition for the first offer in to the bank. The agent did just as you said and negotiated that you--the list agent--had to take your listing off the market so the "new owner" could list the property with them, and they would only submit offers to the "new owner" for a HIGHER amount, so that the owner could then "flip" the house at the same time as he closed escrow on it. I tracked their deals, and NONE ever closed. They all went to foreclosure. And, we lost at least one frustrated buyer who was sure this was a great deal, and since it was on the market, we could not convince her otherwise. Sadly, the place that she wanted came back on as a foreclosure for a much lower price.

Luckilly, these folks seem to have gone away, though as we all know, there are more scammers tkaing their place out there. Beware!

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Comments

ROBB CASH May 15, 2009 at 8:41am

Again, this is only mortgage fraud if there is not full disclosure. If the lender with the loan that is being shorted sees the "Option" contract,, they will know the property will be resold. They also know it is cheaper to short than foreclose and carry inventory. The buyer's bank may require seasoning which eliminates the issue altogether and will be noted as an exception on the title policy. Also, I know many short sale investors who close with cash. Again, how is that a scam? And why the hate for the investors? Why call them scammers? Again, disclosure to lending institutions and if they sign off, it is fine.
Nikki Holmes May 15, 2009 at 7:42am

This is a scam that had me screaming (figuratively) all last year. We had client after client who wanted to write offers on these places, and their offers never went anywhere. The company I saw doing this had a BIG billboard ad along I-80 in Auburn for nearly a year.

These folks had a deal where they made offers on short sale listings at a very low-ball price. Back a year ago, as we all remember, it was so hard to get a short sale closed that nobody was writing offers, so there was little competition for the first offer in to the bank. The agent did just as you said and negotiated that you--the list agent--had to take your listing off the market so the "new owner" could list the property with them, and they would only submit offers to the "new owner" for a HIGHER amount, so that the owner could then "flip" the house at the same time as he closed escrow on it. I tracked their deals, and NONE ever closed. They all went to foreclosure. And, we lost at least one frustrated buyer who was sure this was a great deal, and since it was on the market, we could not convince her otherwise. Sadly, the place that she wanted came back on as a foreclosure for a much lower price.

Luckilly, these folks seem to have gone away, though as we all know, there are more scammers tkaing their place out there. Beware!
Jesus (Jesse) Gonzalez May 15, 2009 at 7:17am

I am not referring to any one particular program. I am only referring to the process as i have outlined in this blog.
Ronald Chin May 15, 2009 at 6:39am

is this system you are referring to the ShortSalesRiches program?
Jose Rivas (DGRA) CDPE, SFR May 14, 2009 at 11:14am

Also lets not forget that the lower the house sales the higher taxes implications for the seller. and after all when we sign the agency agreement we know we are representing the best interest for our client not our wallet.
Robin S. Reed May 14, 2009 at 8:48am

Jesse, what perfect timing. I was approached by a company just hours after your post appeared on REOPro. They were offering this short sale "service". I have seen many homeowners lose their homes because they think they have a "buyer". Remember, these companies are not making an "offer" to buy, they are simply paying a ridiculously small fee ($100 in the case of this company) for the "option" to buy your clients home.
Steve Adkins May 13, 2009 at 1:10pm

:) Thanks for the plug Jesse!

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