When a homeowner is having difficulty paying of their mortgage, they may consider a short sale of the home. A short sale occurs when property is sold to satisfy the mortgage on the property, but the profit from a property sale is less than the debt owed. However, homeowners considering a short sale must be aware of the danger of short sale fraud. Short sale fraud can be conducted by either the homeowner, the lending institution, or an outside third party. Generally, short sale fraud involves using false or misleading information (or withholding information) to either induce a homeowner to conduct a short sale or to defraud the lender of money owed under the mortgage.
Short sale fraud can come in many different forms. For example, the property owner and various lenders can all be involved in a short sale. Some examples of short sale fraud schemes include:
- Undisclosed Payments: When there are multiple loans attached to one property, a short sale cannot occur without all creditors agreeing to the sale. Moreover, the proceeds of the sale are paid to creditors according to priority. Aa a result, the junior creditors are likely to get little or nothing from the sale. So, to get the agreement of the junior creditors, the primary lender may arrange some extra compensation for the junior creditors. However, any extra disbursement must be disclosed to all creditors. The primary lender cannot use undisclosed or “off the record” payments to induce a junior creditor to agree to the short sale. In such a case, the primary lender would be guilty of criminal fraud.
- Flopping: This occurs when a short sale is induced by a misrepresentation of the value of the mortgage property. The homeowner and lender are convinced by a third party (usually the buyer) that the property is worth far less than fair market value. The buyer then purchases the property for the lower value and immediately resells the property for its actual market value.
- Predatory Short Sale Fraud: In predatory short sale fraud schemes, there is usually an individual who is offering their services as a “short sale negotiator”. The negotiator will offer to sell the property for the owner and request a flat fee for a percentage of the sale price. Then the negotiator collects the fee upfront and disappears without rendering any services.
- Non-Arm’s Length Transactions: Sometimes homeowners will attempt to short sell their property to a friend or relative and then buy the house back for much less than the mortgage. Usually, this is done when the homeowners are convinced that their property value will recover. However, such an action would constitute fraud unless all the facts of the transaction are disclosed with the lender.
Part of the difficulty with many short sale fraud schemes is that the fraudster will disappear after the fraud is accomplished. Thus, be sure that you check for credentials, licenses, and that you verify the person’s contact information. Be wary of any persons who are from out of state or who don’t have any working contact information.
Short sale fraud is a crime and can be punishable by fines, suspension of professional licenses, and possibly even jail time. In addition, short sale fraud could lead to civil lawsuits to recover the defrauded funds. The target of a short sale fraud scheme may also be considered guilty of fraud if they cooperated with the fraudster.
If you have any questions or concerns regarding short sale fraud schemes, you may wish to speak with a lawyer immediately. A skilled mortgage attorney can help you avoid falling prey to short sale schemes. If you feel that you have been a victim of a short sale fraud, consult an attorney about recovering your damages.