Freddie Mac Releases New Opinions On Short Sale Investing

http://www.youtube.com/watch?v=nIWJcb3tkWQ&feature=youtube_gdata

Short Sale Flip Fraud – It’s not a law; nor is it an official policy, but it’s definitely going to be a problem regardless. Freddie Mac’s new short sale opinion – for lack of a better word – could create serious legal and practical issues for real estate 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 spell trouble for investors who have been short-sale flipping, which means negotiating a short sale with the bank, then selling the property immediately to another buyer for a profit of a few thousand to tens of thousands of dollars.

The rest of the article detailed scenarios and red flags for “short payoff” fraud. The scenario was set up around a short sale negotiator or facilitator that engineered a short sale of an 80,000 dollar home with outstanding debt of 100,000 for 70,000 dollars. The facilitator does not disclose that he already has an outstanding offer for $95,000 from a second end-buyer. When the transactions close – in this case on the same day – and the facilitator pockets the difference, according to Freddie Mac he has just committed fraud because he withheld information about a higher offer and causes Freddie Mac to take a “larger than necessary” loss on the sale.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the property being an entity rather than a person. 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.