As the number of homeowners considering short sales increase, so does the number of incidents of SHORT SALE FRAUD. As an agent, if you regularly take “pocket listings” or if you facilitate acceptance of a preferred offer too quickly, you may be unknowingly engaged in short sale fraud which can harm your SELLER and expose you to liability.
While it’s true that short sale deficiencies are generally forgiven in California under Civil Code 580, there is a “fraud exception”. If you knowingly or unknowingly engage in a form of short sale fraud, it may result in your Seller owing the full deficiency and thereafter suing you. Of course, even if a loan servicer forgives a seller for the deficiency, the seller may owe taxes on the amount of debt that is forgiven notwithstanding the Mortgage Forgiveness Act. DO NOT ASSUME OR REPRESENT THERE IS NO TAX LIABILITY ARISING FROM A SHORT SALE. Contact this firm for a legal opinion and protect yourself from potential liability arising from the unauthorized practice of law.
Short sale fraud schemes come in different guises, but a few are more common than others. Short sale Seller’s and agents should be on the lookout for the three scams discussed in-depth here.
Scam #1: “Undisclosed Payments”
Red Flags: Payments made “outside of escrow” or “off the settlement statement.”
Perpetrators: Sellers, junior lien holders, real estate agents, short sale negotiators.
Victims: Sellers, buyers, lenders.
Example of the scam: Loan Servicers approve short sales to avoid foreclosure and minimize their investors’ losses. As a condition of approval, Servicers often do one or more of the following:
Reduce commissions to real estate brokers and agents.
Require that sellers receive no or a limited financial benefit from the sale.
Reduce or even disapprove payments to other parties involved in the short sale (e.g., short sale negotiators, attorneys, etc.).