Short sale fraud turns up in down housing market

Short sale fraud turns up in down housing market

In this distressed real estate market, homeowners behind on their mortgage payments may see a short sale as a boon. But these sales — in which banks agree to accept less money than what is owed on the property to get it sold and avoid foreclosure — are now prime territory for fraud.

Two Connecticut real estate agents are scheduled for sentencing this month after pleading guilty to a short sale fraud called flopping — the first prosecution for this type of scheme. Sergio Natera and Anna McElaney convinced lenders to sell a home for less than the balance owed, without telling the bank there was a better offer, according to the criminal indictment. The realtors then sold the home six months later at a higher price for a $30,000 profit. They face up to 30 years in prison and $1 million in restitution.

"Anxious sellers may not realize this scam can hurt them," says National Association of Realtors spokeswoman Michelle Lind. "They could be liable for any illegal tactics after the sale."

While Angie's List Magazine couldn't find any cases of homeowners penalized to date, those victimized have sought legal representation to protect themselves from the potential ramifications of flopping, such as monetary penalties. Lind says the realtor scam is likely to be more prevalent in areas where the rise and fall of the real estate market is evident.

"The home value has to be enough that it's going to make sense for the scammer," she says. "I suspect you're looking at mid- to higher-priced homes."

Mortgage fraud such as this continues to increase nationwide.

"It ruins lives, destroys families and devastates whole communities," says U.S. Attorney General Eric Holder.

The FBI is pursuing more than 3,000 cases of mortgage fraud, which is almost double the number from 2009, according to an FBI report. The California Department of Real Estate and mortgage finance company Freddie Mac also issued warnings about the increasing popularity of such schemes.

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Photo courtesy of the Deguara family | Joachim Deguara says his real estate agent helped him navigate the difficulties of a short   sale.
Photo courtesy of the Deguara family | Joachim Deguara says his real estate agent helped him navigate the difficulties of a short sale.

Purchasing foreclosures or homes offered as short sales may not always live up to expectations.

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A couple of years ago, I planned to put my house up for sale. The houses in my neighborhood had sold for between $170,000 to $180,000 and my house was a similar size. The realtor told me my home was a starter home which needed updating and she wanted to list it for $70,000, what I paid for it 30 years ago. My wife is disabled, my mortgage has been paid off for several years, and I am well off financially. I could not believe the real estate agent thought I was that stupid. You just cannot trust or believe anyone anymore. The real estate agent must have thought I was another stupid sucker like others sucked into the housing bubble. I checked out the agent: she paid $600,000 for a house about ten years ago, and still owes nearly $500,000 for the mortgage. The house probably is now worth less than the mortgage. Obviously, the agent needs to cheat some people.



Freddie Mac is the biggest scammer of all.

Wisconsin Lawman


The fraudulent aspect of the process arranged by Natera and McElaney (the realtors in this case) is their failure to separate the roles and thus the obligations of the parties. The realtors cannot represent that this is the best offer or even the only offer if they are retaining the actual best offer. The analysis is similar to a situation where a realtor presents an offer to a seller of a free and clear property, in the amount of $100,000.00. The realtor presses the seller to accept and indicates this is the only offer or the best offer. In fact, the realtor has received an offer for $200,000.00 from another buyer. Knowing this, the realtor approaches her friend and tells him to buy the property for $100,000.00 and that she can guarrantee a sale later for the difference. The realtor has just defrauded the seller.

Had the realtors in this case simply separated their roles and built walls around the information (how much was Mr. A willing to pay, how much Mr. B was willing to pay, etc...) they would be less efficient, but they would also not be criminally liable. Setting up this type of process requires a skilled attorney and likely cannot be done by a lay person. I wouldn't try to drill my own tooth. Please avoid trying to practice law without a license.



this does not seem like a scam, the shortseller could have easily spent time/money renovating and improving the home which entitles them to earn a profit. It is a foreclosure and likely in rough condition.



Your comment does not make much sense to me. Perhaps you are not that familiar with short sales? This scam absolutely not only hurts the homeowner, but the neighborhood. Realtors are responsible for providing the FMV to the lenders and proving the FMV is far below the loan payoff. You also have to prove some sort of hardship. Short sales are not easy and it takes a deliberate effort on the realtor to help homeowners through these. They could purposely low ball the FMV knowing a house is worth more because they have another buyer lined up. The house short sells, then the realtor turns around and sells it to the other buyer for a higher amount, making more of a profit. To understand this, you have to know you are required to have a contract in hand to apply for a short sale. So those realtors did not provide the bank ALL contracts. They most likely had friends, family, or themselves buy these homes at a reduced price that they developed through a concocted FMV. Then they relisted the home again after the short sale and sold to the higher offer, making more of a profit. This is absolutely a scam, and if you don’t see it that way, you know nothing about short sales. Unless there is a specific waiver in the bank’s agreement that they waive deferred judgment, surprisingly, banks have sued former short sale homeowners for the amount of the debt forgiven. So in this scam, the realtor is increasing the amount the bank forgives. If you get sued by the bank later for the amount of the debt forgiven, that will be a higher amount thanks to the fraudulent FMV. Not to even mention all of this drives down property value.

Vegas Guy


Since when is it illegal to buy something and sell it later at a profit. Once the transaction is closed, it is the right of the new owner to sell again at any price they choose. You could argue that if a better offer comes in after acceptance of a lower price that it must be brought to the attention of the lender, but it could also be argued that the real estate agent works for the homeowner; not the Bank. Finally,there is no fraud to the homeowner because they are prohibited from making ANY profit in a short sale and to try to portray a lender as a victim is the height of ridiculousness; they pull their own appraisals and only sell if they decide it's a good deal!

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