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Avoiding Short Sale Fraud

July 21, 2011 in Articles | MARTIN WREN, P.C. | LEAVE A COMMENT

An article on CNNMoney suggests a new twist on an old problem in residential real estate. In the years leading up to the recent collapse of the residential real estate market, “flipping” real estate—reselling property quickly to take advantage of rapidly rising prices—was a popular investment strategy and was perfectly legal, albeit risky.

Fraudulent real estate flipping occurred, though, when a con man bought property from an owner for a lower price and then immediately “flipped” it for a substantially higher price to a third party who financed the purchase at the higher price with a loan that third party couldn’t (and oftentimes did not intend to) repay. The con man typically used the money from the third party’s financing to fund the initial purchase and pocketed the difference, leaving the lender with a loan to someone who never repaid it, usually based on an inflated appraisal.

The cunning real estate flippers apparently are taking advantage of falling prices, too. As the article discusses, fraudulent short sales are now occurring when financial institutions and mortgage loan servicers agree to accept short payoffs based on purchase prices well below what properties are worth and the “purchasers” actually have other purchasers lined up for higher prices.

Most short sale agreements with which we are familiar prohibit resale of properties within specific time periods. We understand most applications for acceptance of short payoffs require parties to give some assurances the properties are being sold for the best prices reasonably possible in the current market. Obviously, these short sale property flips violate such prohibitions, assurances, or both.

Sellers who are desperate to sell their properties nonetheless need to be careful not to mislead their lenders to get approval of short payoffs. Purchasers and their settlement agents need to be sure they take title directly from the initial seller without any intervening owner who only holds title for a short time. The consequences of being accused of participating in a fraudulent scheme, even if found not guilty, could be quite serious and very costly.

MartinWren, P.C. attorney Lewis A. Martin, III  practices real property law and estate administration law in the firm’s Charlottesville office.  For more information regarding property foreclosures and other real estate issues, please call Lewis at 434-817-3100 or email him at martin@martinwrenlaw.com.  With offices in Charlottesville and Harrisonburg, Virginia, MartinWren, P.C. is a dynamic law firm offering legal services to individuals and small and large businesses across the Commonwealth.  MartinWren, P.C. represents clients in diverse practice areas: Business, Corporate & Tax LawEstate Planning & AdministrationPersonal InjuryIntellectual Property and Technology Law; Healthcare Law; Commercial & Residential Real EstateCivil and Commercial Litigation; Startups and Emerging Companies; Family Law & Adoption; and Nonprofit Organization Law.  To learn more about MartinWren, please visit www.martinwrenlaw.com.

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