Freddie Mac Takes On The Short Sale Transaction

Short Sale Fraud – Freddie Mac Drops A Huge Bomb On Real Estate Investors

Short Sale Fraud – While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. The news from Freddie Mac on short sales could cause serious legal and practical issues for real estate investors.

On Friday, April 16, 2010, the organization posted an educational article titled “Emerging Fraud Trends: Short Payoff Fraud.” The article stated, in short, that short sales could be fraudulent if the lender does not have information about a pre-arranged flip of the property after the short sale to another buyer. 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 Freddie Mac poster went on to describe scenarios and red flags for short payoff fraud. The scenario involved a facilitator, whose description matched that of a real estate short sale investor, who negotiated a deal with a lender to short sale a home worth $80,000 with a debt of $100,000 for $70,000. The facilitator does not let the bank know that he already has a buyer ready to pay 95,000 for the property. The second the facilitator puts his profits in his pocket, Freddie Mac considers him guilty of fraud because his negotiations caused Freddie Mac to ultimately take a “larger than necessary” loss on the sale of the property.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. Freddie Mac considers entities buying property, borrowers who are suddenly in default and borrowers who have not reneged on all of their loans to be red flags for short payoff fraud. The article also tells readers to keep an eye out for resale options in their purchase agreement.

Finally, sellers, buyers and lenders are all encouraged to report this short payoff fraud if they are 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.