"Profiteers are able to identify vulnerable homeowners by paying real estate agents for referrals," Coop wrote in Secondary Marketing Executive Magazine. Then the profiteer "works to persuade the homeowner that a short sale is the best solution."
Coop is president of Interthinx, a company that offers fraud detection solutions for lenders and investors. His comments about short-sale swindlers are particularly timely because Bank of America and Wells Fargo are taking draconian steps to stop real estate agents from conspiring with fraudster to skim millions of dollars from lenders by fraudulently "flopping" properties.
Flipping real estate contracts was in vogue when quickly escalating prices allowed risk-takers to make quick profits during the real estate boom. But with declining prices, scammers are using short sales to make a fast buck by purchasing properties at below-market prices and immediately flopping them to new buyers. And lenders want real estate agents to do more due diligence to prevent fraud.
Bank of America and Wells Fargo are requiring realty agents involved in short sales to sign an affidavit attesting that the sale is bona fide and that the property will not be resold within the next few months. It requires them to do more due diligence and know more about the buyer and seller in each transaction.
Defaulting homeowners sell by short sale to avoid foreclosure. But neither bankers nor real estate agents are publicly admitting that distrust is pervasive because a few dishonest realty agents are in cahoots with scammers. Instead the banks hope that signing the affidavit will dissuade all realty agents from participating or looking the other way when fraud is occurring.
There are several ways that realty agents commit short sale fraud, Coop says. "If the real estate agent is actively participating in the fraud," he says, "the property's neighborhood code may be misrepresented in order to give the appearance that the property is in an area with much lower values."
Thus anyone reading the multiple listings will think the property is overpriced and avoids making an offer. Consequently the property languishes on the market and the lender is more apt to accept less.
"The agent may not list the property at all and convince the lender to agree to a lower price," Coop says. "Or the agent may simply withhold higher offers from legitimate buyers."
After the lender substantially lowers the price, the real estate agent sends the lender a lowball offer from the scammer. Meanwhile, an undisclosed third party waits in the background to buy at full value.
The scammer buys low, hikes the price to a third party, pockets the difference, and the realty agent gets paid.
"In extreme cases," Coop says, "a few days before the short sale is due to close," the agent tells the lender that original buyer "is either unable or unwilling to complete the purchase."
Coop says that the original buyer was fictitious to begin with and the agent produces an all cash offer from the scammer. "But in order to close the sale, the price must be reduced by $10,000 or more," the agent tells the lender.
Even though lenders are losing millions of dollars to scams, requiring all realty agents involved in short sale transactions to sign the affidavit harasses honest agents in too wide of a net being cast. In turn, they may not want to sell properties for which Bank of America, Wells Fargo or other lenders requiring similar affidavits are involved.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin