Homeowner's Beware of Unethical Practices
California Attorney General’s Office News Release Attorney General Edmund G. Brown Jr. on June 17, 2010 joined the California Department of Real Estate and the State Bar of California to warn homeowners about an alarming rise in short sale fraud across California in a field "rife with scam artists". A short sale is an arrangement in which a homeowner sells his or her home for less than the outstanding mortgage, with the consent of the lender. "While short sales can provide homeowners with a last-ditch alternative to foreclosure, this market is rife with scam artists," Brown said. "Homeowners and buyers, agents, and lenders should beware of short sale negotiators who operate without licenses, use straw buyers or charge illegal fees." With so many homeowners now considering short sales, an entire industry of so-called short sale negotiators has emerged. These individuals solicit homeowners by promising to expedite the process and help coax lenders into taking part in the transaction. The Department of Real Estate is investigating more than 40 complaints of short sale fraud, up from "virtually zero" cases only three months ago, a spokesman said. In April, the Obama administration launched a new initiative called the Home Affordable Foreclosure Alternatives Program, which encourages homeowners in financial distress -- especially those who have failed to complete a trial modification or qualify for a loan modification -- to consider a short sale as an alternative to foreclosure. Before working with -- or paying -- any short sale negotiator, homeowners should consider the following red flags: No license Up-front fees Surcharges Straw buyers and house flipping Short sale negotiators and agents use a number of titles including debt negotiator, debt resolution expert, loss mitigation practitioner, foreclosure rescue negotiator, short sale processor, short sale coordinator and short sale expeditor. If you are a homeowner who has been scammed, contact Brown's office at 1-800-952-5225 or file a complaint online at: www.ag.ca.gov/consumers/general.php. Homeowners can also learn more about avoiding mortgage and real estate fraud by visiting the Department of Real Estate website at: http://www.dre.ca.gov/cons_alerts.html. A complaint form can be accessed online at: http://www.dre.ca.gov/frm_consumer.html. "Short sale fraud appears to be the fraud of the moment, and it is proliferating statewide," according to Real Estate Commissioner Jeff Davi. "Consumers, licensees and lenders must all arm themselves with the tools necessary to avoid such scams." Homeowners can file a complaint against a lawyer, a legal specialist or a company purporting to operate as a law firm with the State Bar by calling 1-800-843-9053 or visiting: www.calbar.ca.gov. Homeowners can learn more about the federal government's Home Affordable Foreclosure Alternatives Program by visiting: http://makinghomeaffordable.gov/hafa.html. Non-profit housing counselors certified by the U.S. Department of Housing and Urban Development are also available to provide free help to homeowners. To find a counselor in your area, call 1-800-569-4287. For more information on Brown's work against loan-modification fraud visit: http://ag.ca.gov/loanmod.
With limited exceptions, only licensed real estate agents or attorneys can engage in short sale negotiations with a homeowner's lender.
Licensed real estate agents wishing to collect up-front fees from homeowners for short sale transactions must first submit an advance fee contract to the Department of Real Estate and receive a no-objection letter.
With many distressed properties listed well below market value, negotiators and agents are charging potential buyers thousands of dollars in surcharges and hidden fees just to place an offer on a home. These illegal fees are frequently not disclosed and are paid outside escrow.
In this scheme, short sale negotiators misrepresent the market value of a property to a homeowner's lender by only submitting offers on the property from an affiliated straw buyer. After the home is purchased below market value, the fraudsters immediately flip it and pocket the difference.
CA Department of Real Estate News Release--The California Real Estate Commissioner, Jeff Davi, announced the issuance of a Consumer Alert by the California Department of Real Estate (DRE) warning consumers and real estate agents about the perils and potential pitfalls of short sales. The alert has been posted on DRE’s Web site at: http://www.dre.ca.gov/pdf_docs/ca/ConsumerAlert_ShortSales.pdf 
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“The number of short sales is on the rise and many consumers do not understand the consequences of such a transaction,” DRE Commissioner Jeff Davi said. “Moreover, the Consumer Alert educates consumers and real estate agents to recognize the elements of a fraudulent or questionable deal.”
To put it simply, a short sale transaction involves the sale of a property wherein a seller receives an offer from a buyer that is less than the amount of the mortgage loan(s) on the property. In order to complete the sale, the seller requests the lender to accept less than what is owed in order to allow the transaction to close. While short sales are a popular alternative to foreclosure, like all real estate transactions, they are complicated and sellers need to lookout for the pitfalls.
For example, in some instances a seller may be required to pay taxes on the forgiven debt. In addition, a seller may be an unwitting participant in a fraudulent transaction wherein an unscrupulous agent or a short sale negotiator working with a straw buyer will make a lowball offer to the seller and in turn misrepresent the true market value of the property to the lender. If the lender accepts the offer, the straw buyer immediately re-sells it at the true market value, with the profits split among the conspirators. Had the property been sold for the most amount of money that the market will bear, the potential tax consequence to the seller is diminished and the lender would have received fair market value.
A few of the key elements a homeowner should look out for are the following:
. Short sale negotiators must be licensed real estate brokers (or a licensed real estate salesperson where that person is working under the supervision of his or her broker).
. Any and all payments must be fully disclosed and made part of the escrow documents. If there are any fees to be paid “outside” of escrow, this may be the red flag that the payment is illegal.
. If your agent explains that the buyer is a fictitious person or entity, or your buyer is purchasing the property under a power-of-attorney or is a limited liability company (LLC), this may be a red flag that fraud is involved in your transaction.
. If you are told that an unlicensed processor, negotiator or facilitator is handling your short sale, this is a red flag that unlicensed activity is taking place. Only real estate licensees, California lawyers acting as lawyers and investors acting on their own behalf can engage in short sale negotiations.
For additional information about short sale scams and short sale facilitators, please see the DRE Spring 2010 Real Estate Bulletin.
