Short-sale scam means losses for lenders

Since the homebuyer tax credit expired earlier this year, short sales have been one of the only tactics enticing people to buy a home in an otherwise grim market. And with any good thing in real estate, investors are looking to take advantage of it.

CoreLogic, a California-based real-estate data company, released data yesterday that showed a trend in real estate professionals buying up short sale properties – properties sold for less than what’s owed on them to avoid foreclosure – and flipping them for market level prices.

The company found that 4 percent of the 250,000 short sales they investigated were sold by the purchasing party for profit within 18 months.

While nothing is wrong with this strategy, the report shows that agents and real estate investors have created a scam out of it.

When an agent is signed on to sell a short-sale property for a bank, the agent will find a buyer but not tell the bank about the buyer. The agent will then find a real estate investor and have him make a slightly smaller offer than the potential buyer. The agent then reports that offer to the bank and makes the deal. The real estate investor then sells the property to the first potential buyer for the price he or she was willing to pay, making a profit for both the investor and the agent.

The study found that one in every 53 short sales used this scam. Lenders are losing an estimated $310 million a year due to this scam in short-sale transactions, according to the report.

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One Response to “Short-sale scam means losses for lenders”

1. ID Shawn Says:
   August 31st, 2010 at 3:15 pm

   Or maybe an investor camer along, had the patience to go through the six months or more process of completing a short sale, made some improvements to the home after the being foreclosed owners moved out and trashed it, and then turned around and sold it for a higher price (not necassarily a profit). Sounds like a risk reward situation to me. Only 4% of transactions sold for more within 18 months? Not really a huge amount and at least it is clearing out the baclklog of homes on the market. This article is painting the situation with a pretty broad brush.