Go to jail

Rona: Is there a resource where people can report suspected short sale fraud? As a home buyer/Realtor I know of one instance where a home was UAG in 0 days as a short sale, and the remark says "no showings until further notice." The property's anticipated sale date is 10/30/2009. I am almost 100% sure that this particular home is being sold to a family member of the occupants. The home was listed for 399k and the owners paid 599k back in 2006. I am pretty sure that the home would sell for over 399k on the open market. The next door home, similar size and condition sold for 581k. Not to sound ignorant, but this particular situation falls into the "tight knit ethnic group" category.

Where's the incentive for an honest agent in all of this? It seems like it's a lot of work for the agent, and he still won't get a commission. If the lender thinks the borrower is crooked, there will be a Fraud Alert flag on that file forever, making reasonable offers nearly impossible to approve.

Sure, it's the right thing to do, but it takes a lot of time, effort, and money (lawyers ain't cheap), and it doesn't get your client any closer to buying the house. Good community service (if you can get the bank to listen to you), but it won't pay the bills.

"it’s a nice jail (Devons or Danbury), but it is still jail"

Too funny! Rona, your posts are always a pleasure to read.

yes!!! finally... this is getting reported on. south boston's finest re agents are pulling this bs move. i would love to out names. we had the one agent on the phone basically admit the scam to us!!!!! and here's a hint, if in mls a property is active with a "little red note" next to it, the scam is alive!! there are maybe like 6 in south boston alone.

>John Dough: The "little red note" next to an mls listing is not an indication of a scam! It is an indication that Back Up Offers are be entertained pending some event, such as signing of the P&S, Loan Commitment, Subject to Lender Approval. Sure there are likely to be some issues or scams, but as a Listing agent I know all to well of the problems dealing with the lenders. A seller can only accept and act on one offer at a time. When working with buyers I ensure that if my buyers offer is accepted by the seller I get it in writing "Subject to Lender Approval". In short, the process is no different with the exception of the 3rd party approval. Anyone that thinks differently does not have a clue what they are doing. Why would the Red Flag appear, well if the lender rejects the offer, or throws out a counter offer, the seller does not want to be put in a position where they have to start all over again if the buyer walk. After all, it can take weeks if not months just to get to this point. The buyer would and should be given first opportunity to act on the lenders response before presenting this to competing offers. When I read posts like this from so called "Buyer Agents" I can only assume that they too do not know how this all works. Myself, when an offer is received, the file is turned over to a qualified Short Sale attorney. My recommendation to buyers is if you are interested in a property that is listed as a short sale is to get in with your offer first. But keep in mind, just because it is a SS, does not give you a license to low ball. You will only be wasting every bodies time

John Dough,
It's certainly not just Southie. If you peruse the Advice section of national RE sites, you will actually see brokers recommending this to cash strapped owners. I assume the brokers are prospecting for clients there.
I'm guessing this is widespread nationally. In a few years the politicians will be shocked and open an expensive investigation that nabs a few small players. Just like they did with subprime scams.

Rona, you seem like an ethical person. I'm not saying ethical people are naive babes in the woods. But they do tend to somewhat overestimate the amount of justice available in these United States. This is especially true today, when standards of behavior and enforcement have changed so radically since we were children.

I have yet to read a single story of an agent being prosecuted for short-sale fraud. I doubt many will be. During the boom, many MLS listings had mortgage fraud written all over them. Since then, there have been a few high-publicity prosecutions of big-time fraudsters, but most small fry seem to have gotten away scot free. I expect the same to happen with short sale fraud.

Why don't you pull out the I-write-a-blog-for-the-Globe card, and call up a couple of Loss Mit departments or the AG's office, and see if you can scrounge up any scoop? Or just get an expert opinion on how to blow the whistle on suspicious listings?

jbf-
i know it doesnt always mean its a scam, but if you look at the ones in south boston right now, the majority of them are by two particular agents/firms and if you dig a little deeper the properties are all owned by the same person. and furthermore, if you look at the market history you'll see that some of the properties were on the market and then were flagged a day later. dont be fooled. its a scam.

I agree with much of what was said, bur there is also much that was clearly wrong.

YES, transactions must be arms length -- if a property is being sold to a "straw-man" buyer for the benefit of the distressed property owner this is bank fraud.

HOWEVER, with respect to the requirement of presenting offers, the comments above clearly come from someone who does not know the difference between a SHORT SALE and an REO/Bank Owned property.

The law works like this. ALL offers must be presented to the OWNER of the property. The OWNER decides which offer to accept, or reject, based on the OWNER'S personal criteria, which may, or may not be price (e.g.: A fast sale may be more important to the owner than a top dollar sale. Likewise, a cash offer may be perceived by the owner to be a better bet than a higher priced offer that has to go through financing approval).

Next, you need to understand that a listing real estate agent has a fiduciary relationship (duty of care, confidentiality, obedience, accountability, loyalty, and disclosure) to a property OWNER.

Okay, now that you understand the basics ask yourself this:
1) Who owns the property?
2) Who does the agent owe a duty of loyalty and obedience to?
3) Who do all offers have to be presented to?
4) Who DECIDES what offer to accept, or reject?

If the bank OWNS the property as a result of a foreclosure, then:
1) The agent owes the duties of loyalty and obedience to the LENDER (which is the OWNER).
2) The agent must present all offers to the LENDER.
3) The LENDER decides what offer to accept, or reject.

If it is a SHORT SALE:
1) The agent owes a duty of loyalty and obedience to the BORROWER, NOT THE BANK. The agent has a duty to do what is best for THEIR CLIENT -- NOT THE BANK.
2) The agent must present all offers to the BORROWER, but NOT to the bank.
3) The BORROWER decides which offer to accept, which offers to reject, and which offers to forward to the lender for THIRD PARTY approval.

The commenters above clearly don't understand the law. THERE IS ABSOLUTELY NO OBLIGATION TO PRESENT ALL OFFERS TO THE BANK IN A SHORT SALE AND IF YOU'VE BEEN TOLD OTHERWISE YOU ARE FLAT WRONG.

The OWNER, which in the case of a short sale is the borrower, decides what offer to accept, and just like any real estate contract, once an offer is accepted by the seller that seller stops accepting offers.

An OWNER of a property has NO OBLIGATION to present an endless string of offers to their lender, who in a business sense is their enemy, and who is trying to do what is in the BANK'S BEST INTEREST, not what is in their own best interest. Likewise, it would be malpractice for an agent to act in the lender's best interest at the expense of their own client's.

An agent owes the lender in a short sale transaction honesty and fair dealing, but NOT the obligation to go against their own client. The lender get's to accept, or reject the BORROWER'S DECISION. If they don't like the offer the owner accepts then they can reject it and move on to foreclosure, but it is a COMPLETE MISTAKE to confuse yourself into believing that the lender decides what offer to accept, or reject -- that privilege belongs solely to the OWNER of the property. While the lender may pass judgment on the owner's decision, whether to present an offer to the lender is solely and exclusively the borrower's decision.

I hope you understand the way things really work now, and I hope you apologize for the misinformation and disparaging remarks made in the article.

Marcus,
I am not an investigative reporter and I don't play one on this blog. I am a working agent, emphasis on working...

I sent this idea over to the editors to get a real investigative reporter on it. it is a story that needs to be told in more depth than I can provide.

John Michailidis draws the distinction well between a REO and a short sale. However, since Massachusetts is a recourse state, meaning a bank can come after a seller for unpaid mortgage debt, it defies reason to think a seller would send a low offer to his mortgaging bank, and sit on a significantly higher offer (understanding that an all-cash offer is more attractive and there may be some issues with closing times) unless he had a compelling reason to do so, such as some kind of inside deal with a friendly buyer.

I find the problem especially acute with multi-family units; I have had some I simply cannot get buyers into. The agent just doesn't return calls. And the need for a seller of a multi-family to get the highest price is especially acute, since not only can the bank come after him for unpaid mortgage debt, he will owe tax on the amount of unpaid mortgage debt that is for the investment percentage of his multi-family. In other words, if the mortgage shortfall is $100,000, and the owner lives in half of a two family, he will need to pay taxes on $50,000.

So yes, the owner does decide which offers to send to the bank, but it makes no sense for the owner not to send in the highest, best offer.

Mary:

Recourse vs non-recourse state doesn't come into play with a short sale. If the borrower needs the lender's approval for a sale, that's because he's asking the lender to forgive the balance on his loan.

John Michailidis may be right about the obligations of the agent, and as long as in the process of requesting short sale approval doesn't involve telling the bank, "this is the highest offer I've received," there may be no obligation to inform the bank of the best offer.

This means the buyer needs to ask himself, "what will make my highest offer also the best offer for the seller to accept?" Clearly, if the bank is going to approve the sale, and forgive the balance, regardless of the offer, the seller is best off selling to his brother for $1. The bank, of course, would never accept this offer, because there is clearly a better offer out there from someone else.

So, from the buyer's perspective, you should make it clear to the bank that your offer is out there. And you should make it clear to the seller that you're making your offer known to the lender.

And from a public-information perspective, as many people as possible should know that this scam is going on. (Just because it's technically not illegal to pass on a less-than-arms-length offer instead of the highest offer, doesn't mean it's not a scam.)

Scams are going on, i am an honest realtor with 7 plus years of experience in the southshore and have seen plenty of shady transactions over the last 6 months. On short sales and foreclosures. I heard many stories of short sales being sold to relatives and friends. Or of offers not being presented because the listing agent wants both sides of the transaction and would be willing to short change the bank several thousand more.
But foreclosures being sold to investor by different REO offices is more of a problem than you think.
In one case that just happen 3 months ago the house was a foreclosure being sold by BOA, in this case the house is given to the agent to be placed the house on MLS, but BOA as their own site to list their foreclosures. They listed their house on their site about 4 days prior to what it took the selling agent out of Avon,Mass to place the house on MLS usually they should be both listed within 24 hrs, by the time it was on MLS BOA accepted an offer! No chance for a serious first time home buyer to try an make an offer!
But here is the kicker the selling agent who had the listing sold the house to another agent/investor from another office acting as a Buyer. So in other word the listing agent got both sides of the commission, the buyer got the house cheap before being posted to MLS.
Another thing on foreclosures homes, it normally takes about 24 to 48 hrs for a bank to response to an offer, i seen a good priced house put on MLS midday, and have it underagreement within hours!! Isn't the listing agent suppose to get the seller the best price possible at all times?

As someone who recently purchased a Short Sale (Feb 2008), you are right that the owner does not have to present all offers to the bank. But, when I went thru the purchase, the bank required the seller to sign two documents, and the realtor one document.

The Seller needed to state that it was an arms length transaction, and there were no better offers.

The realtor needed to sign something stating that they believe this was the best offer they would receive and that all offers have been presented to the lender.

Mary,
Forgiveness of debt is indeed taxable, but I'll gladly pay the tax on any debt forgiven me. Most people in MA would only pay 20% or so federal and MA ordinary income.