Buyers, Beware of Short Sale Fraud
Upside down sellers are finding creative, but not necessarily legal, ways to get cash out of properties in which they have negative equity. Don’t be an unwitting accessory.
Palm Coast, FL – September 23, 2011 – Unfortunately, real estate fraud is quite common. Much of it is not obvious to an unwary buyer or seller. Buyers particularly should be aware because some upside down sellers are finding creative, but not necessarily legal, ways to get cash out of properties in which they have negative equity.
Here’s an example of one variation of equity stripping. A Palm Coast Realtor® related the story to me the other day.The numbers have been altered to disguise the specific transaction.
Apparently, one of the agents in his office had shown his buyer a short sale home. The "pre-approved" listing price was in the low $500s. The listing agent informed the buyer’s agent that in order to be able to purchase the house for the listed price, the buyer must consent to a side agreement to purchase the furniture in the house for $70,000. Most of the furniture had already been removed. What remained was of little value.
The side deal was an obvious sham. The seller’s agent had apparently understated the house’s value to the bank. By getting the bank to agree to a lower than market price, the agent created phantom equity for the seller. The furniture was used simply as a device to allow the buyer to rationalize the transaction. But such a transaction is fraud. Short sales are supposed to be clean arms length transactions; no side deals.
The buyer really liked the house thouugh; enough to pay the additional $70,000, but his agent correctly advised him against the side deal. Instead, an offer for $600,000 (for the house only) was submitted. The offer received no response. Why not? Because the lender would get the entire $600,000 sale price, there would have been no cutout for the seller.
The house in question later went under contract to another buyer. The transaction hasn’t closed yet. It will be interesting to see at what price the transaction is recorded. I won’t be surprised if the sale price is recorded in the low $500s. If a subsequent investigation reveals an undisclosed side deal, fraud charges might result. The buyer would be culpable. Don’t put yourself into such a position.
In another example of equity stripping, owners of condominium units with rights to Limited Common Elements, such as detached garages or boat slips, "sell" the rights to use them to another unit owner. Limited common elements are owned by the association to which the right to use is restricted to the owners of a specified condominium.
Such transfers are often permitted in the condominium documents, but the proper procedures are not always followed. If you are contemplating buying a garage, storage unit, or boat slip from a condominium owner, be sure you contact the condominium association to make sure the correct procedure is followed. Make sure that the owner’s lender agrees to the transfer too. You don’t want to find out later that the lender’s mortgage had language like the following:
From the Condominium Rider to an actual Mortgage:
"If the owners association….holds title to property for the beneficial use of its members or shareholders, the Property also includes Borrowers interest in the Owners Association and the uses, proceeds and benefits of Borrower’s interest."
And
"Borrow shall not, except after notice to Lender and with Lender’s prior written consent, either partition or subdivide the Property or……"
This means that the exclusive right of use to the garage, boat slip, or storage unit is considered a part of the unit subject to the mortgage. Selling or transferring them without the lender’s permission violates the terms of the mortgage. And if the association rules for transfer are not followed, a subsequent owner of the seller’s condominium unit could make a claim to the improperly transferred right of use.
If you’re contemplating becoming a party to such a deal, I suggest you seek advice from an attorney that specializes in real estate matters. [Disclaimer: I am a licensed real estate practitioner, not an attorney.]
Real estate fraud hurts everyone. Don’t be an unwitting participant.
"Short Sale"
I’m a little confused with short-sales. For example if a homeowner is underwater and the bank agrees to a short-sale, does that relieve the oriqional owner from any outstanding costs? If the origional owner stopped paying the mortgage, real estate taxes, and HOA fees, can the bank try legallly, to collect this unpaid money, after a short-sale? Thank you.
Why is selling the furniture separate illegal?
Why is selling the furniture separate from the house illegal? The equity is in the house not the furniture. The Bank took the mortgage out on the value of the house, not what was in it. I’m confused. If the seller sold all the furniture at a yard sale and sold the house unfurnished, that is legal, why isn’t selling the furniture to the buyer as a separate transaction legal?
Reply to David
In short, the owner is obligated for any outstanding balance plus accrued interest, penalties, taxes, HOA fees, and legal costs that are incurred by the lender after default. However, lenders often work out a settlement agreement with the seller which can include waiving some or all of these costs. There may be tax consequences if the owner did not reside in the home.
A short sale seller would be wise to engage an attorney with experience negotiating settlements with the banks. And talk to your accountant too.
Reply to DFB
You are right. Selling the furniture separately is not illegal but this case was not so simple. First, the furniture was worth only a small fraction of the price demanded. Second, the purchase of the house at the lower price was contingent upon buying the furniture on a side deal at an inflated price. The bank would never have agreed to the short sale contract being contingent. Short sale buyers and sellers must sign an arms length transaction form. They would be lying.
form template
Thoughtful commentary ! I loved the specifics , Does anyone know where my assistant could possibly acquire a fillable 2001 Fannie Mae 3140 copy to fill out ?