A repost from Jeff Davi (CA.DRE Commissioner) Short Sale Fraud Warning
Note from Brad Pearson: In response to this warning and our own conservative belief systems. Our firm has decided to make it our company policy that our agents cannot impose short sale negotiator fees on buyers interested in our listings. We will not allow our agents to pay anyone who is not licensed a SS Neg fee as well. We feel that a short sale negotiator is simply a service that benefits the listing agent ONLY therefore should be a cost of the listing agent and no one else.
_________UNEDITED____ COPIED DIRECTLY FROM DRE WARNING_________
STATE OF CALIFORNIA — BUSINESS, TRANSPORTATION AND HOUSING AGENCY ARNOLD SCHWARZENEGGER, Governor
DEPARTMENT OF REAL ESTATE
OFFICE OF THE REAL ESTATE COMMISSIONER
P.O. Box 187000
Sacramento, CA 95818-7000
September 13, 2010
Subject: Short Sale Fraud Warning For Lenders, Servicers, GSEs, and
Other Mortgage Owners and Investors (referred to collectively as “Lenders”
and individually as “Lender”)
A Time for Collaboration and Cooperation
With the rise of short sale fraud in California, the Department of Real Estate (“DRE” or
the “Department”) is reaching out to lenders in an effort to discuss and identify short sale fraud
issues, common problems, share information, and ultimately help lenders prevent these types of
schemes from being perpetuated. Over the last several months, our Department has received a
number of complaints involving short sale transactions where lenders have seemingly been
defrauded by real estate licensees and unlicensed companies and persons alike. While
investigating these complaints, patterns of activities that are occurring and commonalities
among the cases have come to our attention. It is our hope that, by sharing this information
with you, a collaborative relationship will be forged to collectively fight against fraudulent
schemes targeting lenders and consumers and reign in the yet unknown resulting financial
Despite the nuances of the various short sale fraud ploys, our investigators have noticed
some common threads that comprise potentially fraudulent short sale transactions that I would
like to share with you.
1. One of the major and recurring schemes is short sale flipping, where real estate agents
and brokers have defrauded a short sale lender with respect to the value of a property
and purchase offers received, and then, in turn, resold the property for a much higher
price. These types of scenarios usually involve a false appraisal or broker price opinion
(BPO) that was provided by the listing broker to the short sale lender with the intent of
under pricing and falsely stating the value of property. Sometimes, the listing broker
will withhold offers from the short sale lender and will only submit one offer from a
buyer, or straw buyer, that they have personally secured for the purchase of the
property at an artificially low price. Without the knowledge of the short sale lender,
the listing broker will then resell the property for a profit, sometimes immediately
Short Sale Fraud Warning
September 13, 2010
after the close of the first transaction as the listing broker already has a buyer lined up
at a higher price.
2. Another popular maneuver to defraud the lenders takes the form of undisclosed
addenda. In some cases there is an addendum to a purchase agreement that contains
conditions of the sale and agreements made between the buyer and seller that are not
submitted to short sale lenders with the original purchase contract. One type of
addendum that has recently surfaced is one wherein the buyer agrees to pay for the
alleged service of a short sale negotiator. The purported service provided by these
negotiators is to negotiate with short sale lenders on behalf of sellers which arguably
should be the job of the listing broker. Even more disturbing, we have found that many
short sale negotiators are, in fact, unlicensed, thereby unlawfully performing real
estate services in the State of California. Furthermore, these same negotiators may be
affiliated with or confederates of the listing broker, and additional compensation is
being paid to the listing broker vis-a-vis the short sale negotiator all without the short
sale lender’s knowledge. These payments to short sale negotiators are being withheld
from short sale lenders altogether and, if financing is obtained, to the buyer’s new
lender as well.
3. Another variation on the theme of short sale negotiator payments is seen in
agreements wherein sellers are crediting buyers with so-called non-recurring closing
costs. This credit is then used by the buyer to pay a fee to the short sale negotiator.
Whereas the closing cost credit to the buyer is or may be eventually disclosed and
approved by the short sale lender, the ultimate payment of that credit to a third party
is not. These payments to short sale negotiators often are not divulged on the HUD-1
statement until after the short sale lender has approved all of the terms and the
transaction has funded and closed.
4. It should be pointed out that non-recurring closing cost agreements made between
buyers and sellers regarding short sale negotiators are also now becoming a reflection
of how property are being marketed. DRE is investigating transactions where listing
brokers are indicating in their advertisements that only offers where buyers request a
non-recurring closing cost credit from the seller to pay for the short sale negotiator fee
will be submitted to the short sale lender.
5. The Department has also learned of several occurrences in which buyers and/or sellers
are receiving undisclosed monies and credits outside of escrow. These types of
Short Sale Fraud Warning
September 13, 2010
disbursements might also be made possible and facilitated by the escrow company
handling the transaction.
All of these incidences of fraud in short sale transactions (which are illustrative and not
exhaustive) share the same theme – they revolve around and arise from the knowing failure to
disclose material information to the short sale lender. As a result, lenders are approving of sales
based on false or omitted information. Our main concern is how can this be stopped?
Consumer complaints and fraud detection have a direct correlation to the market
conditions. During these times, consumer complaints about issues involving foreclosures, short
sales, and “creative” marketing techniques rise, as do t reports of real estate licensee misconduct.
Furthermore, real estate activities by unlicensed persons/companies are extremely damaging to
the consumer, the industry, and now the lending community. In order for DRE to actively seek
the maximum administrative penalties against licensees engaged in short sale fraud and also
reduce the risk of financial losses in short sale transactions, we need open channels of
communication with lenders to share and report suspicious, unlawful, and/or fraudulent activity.
We also need increased cooperation with regard to specific short sale fraud investigations so that
DRE can gather, as we are required to do, clear and convincing evidence to a reasonable
certainty that a violation of the Real Estate Law has occurred. The way that business is
conducted may need to change in order to dry up the flow of short sale schemes.
In closing, let me say that we welcome your feedback, insight, concerns, and reports of
possible violations of law at any time. We remain strongly committed to creating a dialogue
between our Department and the lenders so that we can combat short sale fraud issues more
efficiently and effectively. With multiple avenues of communication and the exchange of
information, we aspire to get ahead of the problems and aggressive combat the fraud.
California Real Estate Commissioner