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Short Sale Fraud - Freddie Mac Drops A Huge Bomb On Real Estate Investors

Short Sale Fraud - The newest problem in real estate is not yet a law or an official policy, but it is definitely going to create issues in the market. The latest opinion released from Freddie Mac on short sales presents legal and practical issues for short sale investors.

Last Friday, April 16, 2010, Freddie Mac posted a new article entitled :Emerging Fraud Trends: Short Payoff Fraud.” Essentially, the article stated that a short payoff or a short sale can be considered fraudulent if the lender agrees to a short sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. This could mean problems for investors who have been short sale flipping, or negotiating short sales with banks and then selling the properties at a profit.

The Freddie Mac poster went on to describe scenarios and red flags for short payoff fraud. The scenario revolved around a short sale facilitator who set up a deal with a lender to purchase a home worth 80K for 70K while the lender took a 30K loss. The facilitator does not disclose that he already has an outstanding offer for $95,000 from a second end-buyer. When both transactions close and the facilitator pockets his profit, Freddie Mac considers him to have committed fraud since Freddie Mac has now taken a “larger than necessary” loss on the sale.

The writer encourages everyone involved in short payoffs to look out for short payoff flags. Flags include sudden default without explanation, borrowers current on other debts and buying entities. The article also tells readers to keep an eye out for resale options in their purchase agreement.

Finally, sellers, buyers and lenders are all encouraged to report this short payoff fraud if they are aware of a second purchase contract for a higher price. It may not be considered breaking the law, but it certainly looks like Freddie Mac wants to make short sales as difficult as possible for real estate investors.