With so many real solutions available to distressed property owners, it’s sad that many fall victim to scams. In one type of scam the “solution specialist” states that they have investment buyers for distressed property. The investment buyers state that they will allow the distressed homeowner to continue living in the subject property and even repurchase it in the future. The homeowner enters into a short sale of the property with the investment buyer, but with an agreement allowing the homeowner to rent with a right to repurchase. That is a classic “short sale fraud” situation. While there may not be a state or federal law disallowing the homeowner to rent or buy from the investment buyer, it would almost certainly be a violation of the short-sale agreement. Nearly every lender agreeing to be cut by a short sale requires an affidavit known as an “Arm’s Length Affidavit” or “Good Faith Affidavit” in which both buyer and seller agree to such terms as: the sale was negotiated between a buyer and seller unrelated and previously unknown to each other, the sales price was the best price received for the property or that all offers received were disclosed to the distressed homeowner’s mortgage lender prior to the short sale, that after the sale the homeowner will have no legal or beneficial ownership in the subject property, that after the sale the homeowner will not be reacquiring any legal or beneficial ownership in the property for at least two years, as well as many other terms.
Another type of short sale fraud is the flop-flip. Usually, the flop-flip involves an unscrupulous real estate agent who convinces the short sale seller that a low ball offer is the best or even the only offer received for the property. The fraud may involve manufactured low ball comparables and an unscrupulous appraiser suggested by the agent. Higher offers for the property are withheld from disclosure to the seller, and consequently from the seller’s mortgage lender whose repayment gets cut short at sale. Thereafter the property is sold to the low ball buyer who is actually a straw buyer. The sale is a “flop.” Actually, seller’s real estate agent either has some ownership interest in the buying entity or receives an illegal commission from the scam buyer. Soon after the property is purchased, or as soon as possible thereafter, the property is “flipped” for a much higher price, possibly to one of the same entities that had made a higher offer than the scam buyer’s offer.
Homeowners with equity facing foreclosure may be subjected to a different scam. They are easily targeted because readily available public record information will disclose that they are in foreclosure proceedings, and that they have equity in their property. The “solution specialist” in this situation might also state that they have investors available who will allow the homeowner to stay in the property after sale. But, instead the fraudulent scheme does nothing more than result in the equity in the home being skimmed off. Sometimes, the underlying mortgage is not even satisfied and the pending foreclosure action proceeds along.
Yet another type of fraud involves entering into a complex trust agreement. The “solution specialist” in this type of scheme convinces the property owner to transfer title in the property to a trust carrying a very prestigious sounding name. In return, the trust makes the property owner the beneficiary of the trust and simultaneously agrees to use its lawyers, accountants, appraisers, analysts and experts to fight with the mortgage lender to lower the principal balance and payment terms. This is meant to attract property owners who see the trust transfer as a way of separating themselves from the resolution process thereby avoiding the frustration, time and effort that go with resolution. Often very boisterous claims are made that the trust is then able to void or cancel the outstanding mortgage. These trust instruments are often missing some important terms, like who receives rents from the property, who decides whether to sell the property, when to sell, how much to sell the property for, what to charge for rent, who pays for insurance, who pays for taxes, what the tax consequence is to the transferor (the prior title owner), who the trustee is, and how the trustee is compensated. As you might have guessed, the terms are missing because the trust then controls the property, receives the rents, and so forth. When such terms are stated, it is no different. Making it more outrageous is that many times the trust receives a payment in advance from the transferring property owner, and does nothing in return because the trust agreement never says that the trustee necessarily needs to do anything.
There are so many types of fraud committed against distressed property owners and so many variations of those types of fraud that an entire book could be written about the topic. Crooks who commit fraud are also fond of using lofty names like “short sale specialist,” “distressed property specialist,” “underwater property expert,” and at least another twenty like names. While even those with a law license, real estate license, or mortgage broker’s license sadly also involve themselves with such scams (rarely though), many times the “solution specialist” refers to no such license nor to any recognized certification. That should be a big red flag warning.
My use of the term “solution specialist” is both facetious and general. The wolf wears many styles of clothes, uses many different names, and is seen in the most unusual places. Don’t be a sheep. Ask lots of questions. It is possible to be both polite and firm while being suspicious, especially when it seems too good to be true. When it seems too good to be true, it’s almost certainly not real. “Get real!” If you or someone you know has the slightest doubt at any time before, during or even after a transaction, do not hesitate to call for a consultation.
Author - Rex Russo
Over 35 years experience with Appeals, Real Estate Litigation, and Bankruptcy Actions and Adversary Defense.