Tough times? Scammers always seem to make a buck

Crooks always look for a new wrinkle and short-sale scams are quickly moving to the top of the fraud world.

According to a new study just released by CoreLogic, short-sale fraud is expected to rise 25 percent in 2011 with lenders and servers incurring losses in excess of $375 million. The primary states of concern are California, Arizona, Colorado and Florida.

However, short-sale fraud is also popping up in other states. Deb Bortner, director of consumer services for the Washington State Department of Financial Institutions, was one of many state officials to say there was anecdotal evidence that short-sale fraud is on the rise.

A short sale is a real estate transaction in which the borrower, being unable to pay the mortgage on the property, is permitted by the lender to sell the property “short of” – or less than – the total amount due. Hence, the lender accepts a loss.

One of the more glaring results of the CoreLogic study was that short sales resold on the same day had an average of a 34 percent gain ($56,947) between the sale prices.

How is this possible?

According to CoreLogic, the same day turnaround of a short sale can be achieved by what is known as a ‘back-to-back’ closing. In such, the investor has two separate contracts; a purchase contract with the short-sale lender as well as a sale contract with a third party. The transactions are choreographed and presented to a title company on the same day. The purchase transaction is first executed, followed immediately by the sale contract.

“Reasonably, an investor may buy a short-sale property, perform verifiable improvements to the home over a period of time, and resell the property for a legitimate financial gain,” the CoreLogic authors wrote. “Nearly one in six (16 percent) ‘suspicious’ short sales is resold on the same day, making legitimate increases in value doubtful.”

One method investors use to obtain profits without improvements or repairs is to list a property they do not have authority to list at a price less than a lender is willing to accept via a short sale. This is done in the hopes of generating a bidder war from multiple interested buyers. The investor would then choose the highest price, negotiate the lowest sales price possible with the lender and execute the back-to-back closings on the same day.

This also has occurred to homeowners (typically elderly) who own their homes free-and-clear but are forced to sell to move in to a nursing facility. The scammers list the property at a low price, take the highest offer, negotiate a deal with the senior and stage a simultaneous closing. The investor pockets the difference.

According to the study, “suspicious” transactions are short sales that may have caused the lender to incur unnecessary losses. “Suspicious” short sales are defined as:

• A new transaction less than one month after the short sale where the new sale price is at least 10 percent higher than the short-sale price
• A new transaction less than three months after the short-sale where the new sale price is at least 20 percent higher than the short-sale price.
• A new transaction less than six months after the short sale where the new sale price is at least 40 percent higher than the short-sale price.

The study examined over 450,000 single-family residence short-sale transactions in the past three years. It noted that some legitimate property rehabilitation and “flips” – where repairs and improvements were made – have occurred within the “suspicious” timeframe.

Neither the lender, nor the homeowner, wants to go through the foreclosure process. It is time consuming and expensive for both and the credit damage a foreclosure can do is significant. While both sides also lose in a short sale, it is viewed as the lesser of two evils.

And, where there is anxiety and loss, there always seems to be someone there to make things worse.

Tom Kelly’s new E-book “Bargains Beyond the Border: Get Past the Blood and Drugs: Mexico’s Lower Cost of Living Can Avert a Tearful Retirement” is available online at Apple’s iBookstore, Amazon.com, Sony’s Reader Store, Barnes & Noble, Kobo, Borders Books, Diesel eBook Store, and Google Editions.