BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Short Sale Flipping Warning
The following article was forwarded to Bill Jansen from Wayne Bell, Chief General Counsel for the California Department of Real Estate.
Short sale fraud to cost banks $375 million in 2011 by Jon Prior on the HousingWire website.
http://www.housingwire.com/2011/05/25/short-sale-fraud-to-cost-banks-375-million-in-2011
In that article the author makes the following points:
1. Size of the Problem: Sales of properties on the verge of foreclosure tripled over the last two years and will increase another 25% this year.
Analysts found one in every 52 short sales conducted in the first half of 2010 were “suspicious,” meaning the lender may have incurred unnecessary losses from fraud. Over the first six months of 2010, banks showed $150 million in losses from these suspicious transactions. By the end of 2011, banks could face $375 million in losses from short sale fraud. Short sale “flipping” is the biggest culprit.
2. Investor Buyers Have a Much Higher Rate of Suspicious Transactions: But, most of the suspicious transactions occurred on properties that were sold to investment companies, comprising 28% of such sales, as compared to 1.9% for all short sales.
3. Factors Indicating “Suspicious” Short Sales: Some factors that may trigger a suspicious short sale inquiry is if the buyer flips the property for a 10% profit less than one month after the short sale; or if the property is flipped less than three months after the transaction for at least a 20% profit, or if buyer flips the property for 40% more than the short sale price within 6 months.
4. Flipped the Same Day: Nearly one in six suspicious short sales are re-sold on the same day, and on average, showed a 34% profit over the short sale price. These are accomplished by a “double escrow” where the property is re-sold to an ultimate, usually innocent, buyer while waiting for the current owner’s/seller’s lender to approve the short sale.
5. Suspicious Transactions are Largely in California: 34% of the suspicious short sales found in the first half of 2010 occurred in California, followed by 17% in Florida and almost 10% in Arizona. The rest of the country accounted for about 38% of all suspicious short sales.
6. Mitigating the Risk: As a result, expect lenders to more carefully review all short sale documentation, including any disclosures to re-sell the property at a higher price. Lenders may also be more diligent in requiring short sale buyers to declare that they are not aware of any other parties involved with the transaction, and to validate a claim that significant renovation was actually completed before the property was resold.
PRACTICE TIPS:
1. Selling short sale properties in California to an investor buyer who is intent on immediately re-selling the property at a higher price with little or no improvements being made, is just asking for trouble. The lenders and enforcement agencies are on the alert and will punish offenders.
2. The DRE is watching short sale flipping activity as evidenced by the top DRE attorney forwarding the above article.
3. Review and follow the guidelines regarding dealing with short sale flippers in the Broker Risk Management “Short Sale White Paper” which has been forwarded to your manager or broker. In addition, know and follow your company’s policies regarding these types of transactions.
4. Be wary of investor-buyers on short sale transactions, and any representations made by them that “it’s all legal” or “our attorneys have approved this type of transaction” or “everybody does it, we have done it many times.”
5. Also look out for a short sale investor-buyers who insist on having their own short sale negotiator negotiate with seller’s lender. Do not work with these people as a buyer’s agent; and warn your sellers likewise to avoid dealing with these buyers, who do not have your seller’s best interests at heart.
DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2011 5/27/11