Short Sales: Pros, Cons and Fraud
Lenders may offer distressed homeowners the option of a short sale. A short sale is selling a home for less than what is owed on the loan. There are many reasons a seller will choose a short sale as an option; a transfer of employment, divorce, death of a spouse, retirees who want to move or the property is underwater.
There are also reasons not to take a short sale. A short sale can have a negative impact on your credit history and score and not allow you to purchase any real estate for a minimum of two years. Financially, the lender may still go after you for the deficiency balance after the sale. If you owe $200,000, you short sale the home for $150,000, the deficiency would be $50,000. Colorado is a ‘recourse’ state allowing the lender to pursue the deficiency from the homeowner. Also, the IRS may come after you for the income taxes on that $50,000 deficiency.
A short sale, usually takes a long time to complete. The bank or lender holding the loan has to approve a short sale “package” presented to them. The seller has to submit their finances for the lender to review including the seller’s debts, assets, credit scores and contract. After all, why would a lender approve a short sale if they find out the seller has money in retirement savings or cash in a bank? The lender wants as much money as they can get. The short sale “package” is usually hundreds of pages, and requires many signatures. One missed signature will toss out the entire package. After the “package” is received, many of the documents become outdated quickly and have to be resubmitted. Short sales are even more complicated when the homeowner also has a second mortgage.
When the seller is behind in their mortgage payments, and there’s a short sale offer sitting on the table, the foreclosure process may kick in. Foreclosure trumps a short sale, the home belongs to the bank - not the seller and the short sale option is gone.
The inevitable short sale fraud and scams are bound to happen. Payments made ‘outside of escrow’ or ‘off the settlement statement’ is one such scam. If there’s a second loan on the property, that second loan has to be released. Sometimes the first lender will allow some payment to the second. A motivated seller or buyer may request payment outside of escrow or off the settlement statement. All payments that are part of a short sale should be disclosed. When they’re not, you could be part of a mortgage fraud or scam.
“Flopping” is another scam. This scheme involves double escrows or the buyer is an LLC or fictitious entity. Flopping occurs after a short sale is approved. The fraudster is the buyer (in some cases the buyer is the real estate agent) who presents a low offer along with an artificially low valuation of the property. The fraudster takes the short sale low offer and markets to someone else at the real market value.
There are also predatory short sale negotiators and unfortunately, real estate agents. They may call themselves short sale processors, short sale coordinators, short sale expeditors, debt negotiators, debt resolution experts, loss mitigation practitioners or foreclosure rescue negotiators. Vulnerable sellers believe these con artists who guarantee results for a flat fee or upfront price. More often, a flat fee is taken and the scammer is gone without doing anything. A good short sale negotiator or real estate agent will never require an upfront fee when negotiating a short sale.
Before hiring a short sale negotiator - do your due diligence. Read the contract carefully, hire and seek the advice of a real estate or foreclosure defense attorney. There are other options a qualified attorney will advise. Lastly, ‘if it’s too good to be true, it probably is’.
Short sales remain great oppportunities to buy or sell a property, if done correctly. If you are considering buying a short sale property, or selling your home for less than what is owed, your best option is to hire a real estate attorney, who can work with your realtor. Gantenbein Law Firm can help with your short sale: contact our Denver attorneys at 303-618-2122.
Gantenbein Law Firm also practices real estate law, business law, foreclosure defense, tax law and estate planning. Gantenbein Law Firm is located in Denver and serves clients in Denver, the Denver metro area, and throughout all of Colorado. For more information, visit Gantenbein Law Firm's website.
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