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Short Sale Fraud Warnings

Updated on October 15, 2011

According to a CNN Money investigation, the latest scam homeowners and mortgage lenders need to avoid is short sale fraud, which has become a major issue in the United States housing market.

A short sale occurs when a borrower owes more on a mortgage loan than the home’s current value. In the wake of the recent real estate woes (and the drop in home prices), no money down homes and short sales have become a fixture on the real estate scene as underwater borrowers try to get banks to agree to selling the home for less than the amount owed on the original mortgage. The scam works by a conman—typically a real estate agent—securing a legitimate bid for an investor on a home that is considered a short sale. The agent arranges the lowest bid possible. Since the bid is coming from an agent, the lender assumes this is the highest bid they’ll receive. The lender doesn’t know that the investor plans to resell.

What Happens in A Short Sale?

After buying the home at the lower price and asking the lender to forgive the remaining balance, the real estate agent has made his commission, and the investor immediately sells there new home for up to $50,000 more to a true home buyer.

Currently, 13 percent of all existing home purchases are short sales. According to the National Association of Realtors, half of all real estate fraud investigations relate to short sales. They have become so wide spread that it’s difficult for legitimate short sale transactions to be processed. As a result, many homeowner end up in foreclosure, which negatively impacts the overall housing market.

There are red flags to look for when trying to avoid this scam. Upfront fees; fees required to be paid outside of escrow; an un-licensed negotiator; payments made outside of escrow or off the settlement; double escrows; an LLC or a fictitious entity buyer, or someone purchasing under a power of attorney; and a purchase agreement that gives the buyer the option to resell property.

April 2011 Housing Market Update REBGV

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