On the radio yesterday I heard that “the officials” were saying that cybercrime and identity theft are up dramatically. They blame it on the weak economy. I guess criminals are getting laid off and taking pay cuts like the rest of us and are therefore putting in some extra hours to make ends meet!
The following is my explanation of sale that I was involved in. I was only made aware of the design of this sale at the closing table and really pieced it together after reading about similar scams in following weeks. This scam did not affect me or my buyer, but as you will read, probably affected the seller and bank. While I am not implying these next people are criminals, their techniques sure don’t smell on the straight and narrow. I have heard the Department of Commerce is looking into it. You can decide for yourself.
Buyer/Investor watches the pre-foreclosure lists. He contacts a homeowner on the list (who may or may not be selling his house) to buy their property. Buyer/Investor writes the offer contingent upon the bank approval for a short sale on the house. The homeowner signs docs and/or gives the buyer/investor personal information linked to the loan to negotiate with the bank on the homeowner’s behalf. Sometimes this will be in the form of a power of attorney. Occasionally, the document will not allow the homeowner to even know the details of the short sale.
The buyer/investor will begin negotiating with the bank on the short sale. Typically he does not disclose to the bank that he is also the buyer of the property! In my sale/example, it turns out he was telling the bank that he could get them no more than $75,000 for the property even though the seller had paid $180,000 only 2 years previously. At the same time, other properties in the neighborhood (of the exact same layout, age, and condition were selling for $115,000).
Concurrently, the buyer/investor puts the home on the market looking for a “replacement buyer”. This could be you; it could be one of my customers. In this scenario, they were selling the property through a real estate agent on the MLS for $113,000. They were set at the correct price for that property. The buyer/investor is betting on being able to sell the property to the replacement buyer prior to the short sale falling apart on him. The investor/buyer often has no liability or responsibility to execute on his purchase. He will have lots of contingent fine print that gets him out of the deal if he can’t get the bank to take the short sale or more importantly if he can find the replacement buyer.
On the surface, you may be thinking, why is this bad? This buyer/investor is just good at pulling all the pieces together and making money being the middleman. Let’s examine who can/will get hurt:
- Homeowner gets hurt if they waste time with this buyer/investor while the clock is ticking during the redemption period. If the buyer/investor walks, they get nothing but closer to losing their house.
- Homeowner gets hurt as often these buyer/investors are not negotiating in favor of the homeowner with the bank. They can possibly leave the homeowner with a large unsatisfied debt (of the difference between the mortgage and the sale price)-most legit short sale real estate agents will insist that the bank waives any deficiency judgment.
- The selling bank gets hurt as it only receives $75,000 for the property in the short sale when the retail buyer (you or my customer) actually would have paid $113,000 for the property.
- Although the buyer of the property is usually oblivious to this scheme, they can be hurt if the buyer/investor does a double close and leaves chain of title issues These can happen as these buyer/investors will often use a land trust or other legal instrument to hide their identity/liability.
These type of schemes are hard to spot on the buyer’s side of the transaction. All we ever see is paperwork back and forth with names we don’t recognize and situations we are not aware of. As a seller, though, you need to keep your eyes open in this market as new schemes or “creative programs” are popping up all the time.