According to real estate laws, a short sale is a specific type of property transfer which occurs when a home is sold at a lower amount than what the homeowner owes on the mortgage. Short sales are usually sales that are used as a foreclosure alternative. As such, in many cases, the seller is in default with their mortgage loan.

These sales can be favorable for borrowers due to the fact that they can help them avoid various fees associated with foreclosure. However, it is important to note that the borrower could be left with a negative credit report.

The unpaid balance which is owed to the lenders is referred to as a “deficiency.” Some states allow the lender to recover these unpaid amounts through a deficiency judgment, while other states have anti-deficiency laws in place to prevent a lender from collecting more than what was offered as security for the home.

Because the lender holds an interest in the sale of the home, they are generally heavily involved in the sales process. The lender will most likely be especially involved in pricing the home for sale. Most lenders will use a broker price opinion (“BPO”), or best price offer analysis, when determining how the home should be priced for short sale. This analysis is conducted by the lender with the intention to learn some specific facts about the home.

Some examples of this information could include, but is not limited to:

  • The age and location of the home that is being sold;
  • Whether any renovations have been done to the home;
  • Previous offers made on the home; and
  • Fair market values, as well as going rates for similar homes in the area.

One of the larger issues with a BPO is that it is conducted entirely on the lender’s terms, using their own forms as well as their own calculation process. This process differs from an appraisal, which is conducted by a professional appraiser who must conform to various state and local real estate standards. This could make them more impartial and unbiased.

What Is Short Sale Fraud? What Are Some Examples of Short Sale Fraud?

Homeowners who are considering a short sale must be aware of the dangers associated specifically with short sale fraud. Short sale fraud can be committed by either the homeowner, the lending institution, or an outside third party.

Generally speaking, short sale fraud involves using false or misleading information to induce a homeowner to conduct a short sale, or to defraud the lender of money owed under the mortgage. Short sale fraud also includes intentionally withholding information for the same purposes.

Some examples of the more common short sale fraud schemes include:

  • Undisclosed Payments: A short sale cannot occur without all creditors first agreeing to the sale when there are multiple loans attached to one piece of property. Additionally, the proceeds of the sale are paid to creditors according to priority. Because of this, the latest or junior creditors will most likely get little or nothing from the sale. In order to obtain the agreement of the junior creditors, the primary lender may arrange for extra compensation for the junior creditors.
    • However, any extra disbursement must be disclosed to all creditors, not simply the two creditors involved in making the arrangement. What this means is that the primary lender cannot use undisclosed or “off the record” payments in order to induce a junior creditor to agree to the short sale. The primary lender would be guilty of criminal fraud if they did so;
  • Flopping: Flopping occurs when a short sale is induced by an intentional misrepresentation of the value of the mortgage property. The homeowner and lender are convinced by a third party that the property is worth considerably less than fair market value; this third party is generally the buyer, who then purchases the property for the lower value. They would immediately resell the property at its actual market value in order to make a profit;
  • Predatory Short Sale Fraud: These schemes generally involve a person offering their services as a “short sale negotiator.” The “negotiator” will offer to sell the property for the owner while requesting a flat fee for a percentage of the sale price. The “negotiator” then collects the fee upfront, and disappears without rendering any services to any of the parties involved; and
  • Non-Arm’s Length Transactions: Homeowners may attempt to short sell their property to a friend or relative in order to then buy the house back for far less than the mortgage. This is generally done when the homeowners are convinced that their property value will recover. However, such an action would still constitute fraud, unless all of the facts of the transaction are disclosed with the lender and all other parties involved.

Many short sale fraud schemes are difficult because the party committing the fraud will disappear once the fraud has been accomplished. As such, it is imperative that you check for credentials and licenses, and that you verify the person’s contact information. You should be wary of anyone from out of state, or who doesn’t have any working contact information.

Are There Any Legal Consequences For Short Sale Fraud Schemes?

Short sale fraud schemes are generally treated similarly to criminal fraud. Criminal fraud refers to a crime that involves a scheme to cheat or deceive another person or entity, in order to obtain a financial or similar type of gain. According to criminal fraud law, any action that is intended to deceive another through false representation of fact, and that results in legal detriment to the individual who relied on the information to make their decision, can be considered an act of criminal fraud.

To simplify, if a person knowingly lies about an important or key fact in a transaction or relationship, and someone relies on that misrepresentation of fact and suffers harm, fraud has occurred. Fraud does not occur when an individual provides a fact that they believe to be true, even if they are mistaken.

In order for an individual to be convicted of committing criminal fraud, the prosecution must prove:

  • That there was an intentional misrepresentation of a material fact;
  • By an individual who knew that the material fact was false;
  • And intended to defraud;
  • A person or entity who, justifiably, relied on the misrepresentation of fact when making a decision; and
  • They suffered actual injury or quantifiable damages as a result of their reliance on that false fact.

A conviction of criminal fraud may include penalties such as:

  • Jail or prison time;
  • Probation or parole;
  • Fines; and/or
  • Restitution.

There are different factors that a court will consider when determining sentencing for a criminal fraud conviction. Some of these facts include:

  • The severity of the fraud committed;
  • Whether the defendant has any prior convictions, or is currently on probation or parole;
  • The amount of money or property that was stolen from the victim; and
  • The person or entity that was the targeted victim of the fraud scheme.

If the fraud’s victim is the Federal Government, charges may be brought under federal law instead of state law, and could result in harsher penalties.

Short sale fraud, specifically, can be punishable by:

  • Fines;
  • Suspension of professional licenses;
  • Jail time; and
  • Civil lawsuits intended to recover the defrauded funds.

It is important to note that the target of a short sale fraud scheme may also be considered guilty of fraud if they cooperated with the scheme.

Do I Need An Attorney For Assistance With Short Sale Fraud Schemes?

If you are selling your home through a short sale and suspect you may have encountered a short sale fraud scheme, you should consult with an experienced and local mortgage attorney. State laws regarding short sale and fraud vary, and a local lawyer will be best suited to helping you understand your state’s laws regarding the matter.

An experienced attorney can also help you avoid short sale fraud schemes by providing you with legal advice every step of the way, as well as represent you in court, as needed.