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

Short Sale Fraud – It’s not a law; nor is it an official policy, but it’s definitely going to be a problem regardless. The news from Freddie Mac on short sales could cause serious legal and practical issues for real estate investors.

On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” The article described a new trend in short sale fraud that happens when a short sale buyer flips a newly acquired property to another buyer and “pockets the difference.” 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 article described scenarios and red flags for short sale 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. In the scenario, the facilitator fails to notify the bank he has a higher offer, 95,000, on the house. The second the facilitator puts his profits in his pocket, Freddie Mac considers him guilty of fraud because his negotiations caused Freddie Mac to ultimately take a “larger than necessary” loss on the sale of the property.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. Flags include sudden default without explanation, borrowers current on other debts and buying entities. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.

Everyone involved in a short payoff is encouraged by Freddie Mac to report potential short payoff fraud the second they become 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.

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