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Thinking of Short Sale Flipping.....Think Again?

Thinking of Short Sale Flipping?….Think Again.

In an Article in the Los Angeles Times Business paper, written by E. Scott Reckard published on-line 10/16/2013 @ 6:15am cst, he reports that a former Bank of America Corp. employee Kevin Lauricella was arrested on federal charges for accepting bribes in the amount of $1 million to allow homes to be sold far below their market value.

Based on the report, it appears that Kevin is indicted on 18 properties where he allegedly allowed them to be sold far below the price the bank would have accepted. These alleged transactions took place in 2010 and early 2011. To get the sales through the BofA system, Kevin is accused of falsifying bank records.

The buyers who bought these ridiculously low priced homes would then turn around and sell them for market value or even refinance them at market value, pocketing the profits. To better understand the allegations, see an example of a possible scheme below, not related to the specific allegations of Kevin’s.

Homeowner owes ………………………………………………………………. $100,000.00

Based on Sold comparables, his home is worth……………………… $75,000.00

Which means homeowners is upside down…………………………....$25,000.00

Buyer / Investor makes a low ball offer of……………………………….$50,000.00

BofA completes an appraisal and the home is worth……………..$75,000.00

Now, here is where it get’s fishy. Instead of BofA countering the buyer’s $50,000.00 offer with a counter of $75,000.00, someone at the bank has to do something to allow the $50,000.00 offer to be approved, even though it’s $25,000 less than what the bank could get on the open market. So, to more the story along, the bank approves the fraudulent $50,000.00 offer and the buyer / investor closes the deal on Monday. They then turn around and close the 2nd deal….that’s right, the deal they had in their back pocket from a buyer who was willing to pay $75,000.00 for the property on Tuesday morning, making $25,000.00 in profit in less than 24 hours.

Now, the really sad part of this, the opportunity for fraud is rampant. It doesn’t take a cooperative bank representative to pull this off. In fact, I have seen this strategy myself, in play, here in my local market with corrupt appraisers. I have even been pressured myself, by buyers / investors to tell them when the appraiser is scheduled to be at the property so they can meet with them and give them their comparable analysis. These buyer / investors make it sound so reasonable, they say things like, “well, we want to write up the offer” or “we want to negotiate our offer with the bank direct” or “we can meet with the appraiser so he can see our comps”, etc…  however, it’s fraud!

In fact, this is happening so rampantly in my own market place, I was contacted by such a buyer / investor’s Realtor back on Sat 9/21/2013 @ 10:06pm cst through my email. That’s right, these fraudulent buyer / investors are enlisting Realtors to now do the dirty work for them, offering them “double commissions” or higher splits, playing on the agents greed. Sadly, the agent that contacted me is working with a well known Principal Broker in a very well known firm however, the firm is one of those 100% firms and they offer very little to no mandatory training and chances are, after drilling this agent via email about his actions, he may actually believe what he is doing is “the American way” of buying low and selling high.

This topic always seems to get a lot of response and most of the time, I am demonized and vilified saying that I have no business being in Realestate or, I have no clue what I am talking about however, you don’t have to take my word for it. If you really believe what you are doing is above board, legal….and some investors package you bought for $999.99 gives you a indemnity clause or a release of liability statement that says you can do what you’re doing, then I have one thing to say to you. Take your package you bought, take your forms you use and call my friends over at the HUD’s office of the OIG and ask to speak with the Lisa Gore, Assistant Special Agent in Charge or Harvey Wayne Martin, Special Agent. I know they would love to talk with you and answer all your questions.

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Comment by Jesus (Jesse) Gonzalez on November 4, 2013 at 10:00am

OMG! I actually had a member of this network solicit me to engage in what I think may actually be short sale flipping. I was shocked when I saw the email and responded back asking if his bank negotiators were licensed as agents in the State of Tennessee and now, he either is so busy he has forgotten to answer my question or he is avoiding me. I looked over his website and I have to say, I am really concerned. So, I will wait to hear his response and update everyone.....it may be a good learning exercise, if nothing else.

Comment by Ray P Burgess on October 28, 2013 at 5:20pm

Thanks Jesse for the response.  I know that this is not from my own reasoning as I am known to go by the book.  I sit next to and am very good friends with a veteran Realtor of 35+ years, serves on the grievance committee for the area.  He has been my mentor and most of what I know, comes from him.  I can honestly say that I don't know of many people as honest and straight forward as he is.  I know that this topic has be brought up in several of our office meetings and that's where discussion and reasoning take place.  I want to make this topic a learn experience for myself so that I can built on my knowledge and that I don't give out information that is false.  I will revisit this issue and will get back with the forum to deliver my findings, whether or not I'm wrong.  I can see your point with regards to pressuring, or even bribing the appraiser...which is totally crossing the line.

Comment by Jesus (Jesse) Gonzalez on October 28, 2013 at 3:54pm

Hey Ray,

I have done my fair share of BPOs and I can truly understand and relate to how aggravating and stressful it is when the bank tells you your comps aren't good enough however, going out, meeting with an appraiser and providing them your comparable analysis, is at best, walking a very fine line. In fact, so fine that I would never allow this to happen in my brokerage and if I had heard that it did happen, I would most likely invite the agent to find another brokerage to work with.

Sometimes, we as agent get caught up in the fact that we believe we are truly working for our clients best interest and I would never question an agent who said that was what they were doing. The reality is that sometimes, our actions, in pursuit of working for our client's best interest can be interpreted as nefarious at best by others. I have seen many agents do things that can arguably be considered doing what is right by their client however, are flagrantly breaking the law or at least, arguably so.

It only takes one appraiser to interpret your actions as something less honorable and before you know it, he has filed a complaint with HUD and a couple days later, you are getting a nice visit from a nice gentlemen, in a suit, with a badge, gun and cuffs that want to ask you some questions.

The bigger point I am failing miserably at making is, what benefit do you have when you open yourself to that potential liability? Is that benefit worth the risk? Could your actions be misinterpreted? In this culture of guilty before proven innocent, are you comfortable with the potential outcome?

Just know, from what I have learned in my experience, the practice of meeting an appraisal and providing your comparable analysis is a HUGE red flag that fraud investigators look for. It's a practice that appraisers are taught to report, if they fill harassed or pressured. What's worse is, when trying to defend your actions and why you did that, it was told to me, "it's indefensible"

 

Comment by Ray P Burgess on October 28, 2013 at 3:29pm

I have seen examples of this in MANY of the past BPOs I have been doing for years. It always angered me when I know without a doubt that this is what was happening.  I would also look for higher comps for the BPOs and make notes on the reports that there were other lower comps but "in my opinion, they were priced too low for the market."  To make matters even worse, the listing agent that would sell the properties for the distressed sellers, would represent the buyers/investors, AND then have the property given back to them from the investors to re-list the property....sometimes even representing the second buyers.  3-4 transactions from one property for the price of committing fraud.  I will say that the # of incidents that I have seen and heard of, have decreased, but it is still occurring in our current market.

With regards to providing comps to appraisers, I am "guilty as charged."  But I have had appraisers thank me for the comparables when I was trying to maximize the amount of return for the seller, even when I was representing the buyers.  If my buyers really wanted the property, gave me the amount that they were willing to pay even if it was over asking, I felt it was my job to make sure the transaction had every chance of closing.  If you have ever complete a BPO, you know just how much time and effort goes into each and every one of them. If you have ever been asked why you missed a few important comps AND/OR asked to redo/replace them, you know how aggrevating this can be as it will take a lot more of your time for no extra pay.   If the appraiser has ALL the comps and information he needs prior to writing up his report, it's a lot easier for him to change comps before than after.

Comment by Jesus (Jesse) Gonzalez on October 21, 2013 at 11:04am

Hey Chris Oliver,

You hit the nail on the head, it sounds good. In fact, just Google "Short Sale Flip" and you will find all kinds of flashy websites, gurus or "national speakers" who are out there telling people that the system they use is proven, legally reviewed and is the "right" way to do a short sale flip. The speak about how they have helped homeowners stem off foreclosure and allow the investor to make a "little" pocket money for his generosity and concern for his community. It's all reasonable and sound amazing however, it's illegal. It's truly sad but, with our industry requiring so little minimum educational standards nationwide, we end up with well meaning, poorly informed and well.....barely educated "professionals" convincing homeowners, they are the "Top Producer" or "#1 Agent" or "fill in the blank", when in reality, the claim is far from the reality. I guess it's going to take some "top producers" getting caught with their hand in the cookie jar enough times to ring true to our industry.

 

Comment by Jimmy Payne on October 21, 2013 at 11:01am

No sign, no lock box and only listed in 1 of 2 MLSs in Atlanta, the least used one of course. Under contract the day it was listed with no highest and best deadline.  This way they don't get replicated to the aggregators like realtor.com or trulia.  it is obvious it was not available to the open market.

Comment by Frank Popeleski on October 21, 2013 at 10:57am

Thanks for starting this thread Jesse. The old saying holds true today - there are two ways to do things, the RIGHT WAY and WRONG WAY - the difference being in the doing things the right way you need not look over your shoulder all the time! Doing it the wrong way will get you bit. In Tampa Bay in past years with REO there were brokers and agents who KEPT contracts from the AM's. This partly was the reason that Fannie moved to have all contracts put on line. I used to get calls from agents all the time asking me if I had a BUYER for this property that they would be bidding againist!  Since I do exclusive sellers representation I did NOT! That put many at ease. Folks would chanel their listings to their favored investors and this appears to be rampant when REO wes numerous. It now seems that folks are doing a similiar game with Short Sales. I for one think that the Cash restrictions put into many deeds where they cannot convey during for a number of months after sale is a good thing. Keeps some at bay. But with GREED in our society we will continue to see this behavior. It is best that we in the industry step up to the plate here and clean this up amongst outselves or this may well be the new fraud avenue for those looking to make a quick buck. That said let me ask this: Is it common in your markets to have Short Sales either Under Contract or Pending where there is no SIGN in the yard? I price a fair amount of them, and it now seems that 75%+ of the homes I look at have NO for sale sign in the yard? This always worries me as I get more interest in my REO's from the sign in the yard than from agents at times. Just wonder if what is going on in other parts of the county. I always wonder when I see a pending short that is 0-2 days on market then taken off Active status and has no for sale sign. I wonder how much real exsposure these homes get.

Comment by Isaac Genosar on October 21, 2013 at 10:56am
For that exact reason of being exposed to such schemes, our company refused to be involved in short sales since 2010 even though we were very successful with straight forward short sales since 2007.
Comment by Jimmy Payne on October 21, 2013 at 10:38am

One day the banks will realize the loss in short sales and will start to assign them out like REOs.  Kind of surprised it hasn't happened yet.

Comment by CJ Oliver on October 21, 2013 at 10:36am

What many don't realize is how reasonable the flippers' make it sound. They have plenty of programs/web sites to 'teach' agents how to do these short flips & completely shy away from language that would indicate how dicey it really is. BUT seems to me that if you are dealing with someone who refuses to put a sign or lock box on the property, only allows an appraiser or bpo agent to visit the property while accompanied by their agent and in general tries to make sure that no one else will make an offer then something is very wrong. That kind of wrong can get you busted too.

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