As we explained in our July post, Avoiding Short Sale Fraud, short sale fraud can be a serious problem.  In addition to the issues raised by quick resales of property for higher prices as we discussed previously, we have seen another trend in short sale transactions that we consider to be a problem—the trend toward using multiple settlement statements or otherwise not disclosing all the financial details of transactions in approved short sale settlement statements.

This troubling practice arises when a party secured by a mortgage or deed of trust that will be released for less than the amount owed (the “short sale lender”) or someone else involved in the transaction informs the settlement agent or attorney that a particular cost or expense cannot appear on the settlement statement.  One response would be for the parties to eliminate that cost or expense altogether, but that’s not what usually happens. Instead, the settlement agent or attorney is told to just not show the cost or expense on the approved settlement statement.  Some “side deal” or separate settlement statement then is used to account for the forbidden cost or expense.

Our concern is that the settlement agent or attorney and the parties typically sign the approved settlement statement and it at least implies, if it does not explicitly state, that all the financial details of the transaction are shown.  Especially if what is not being disclosed would materially affect the short sale lender’s decision to release the property from its mortgage or deed of trust, the failure to disclose the full details on the approved settlement statement could be a problem.  Even if the short sale lender “knew” about the undisclosed cost or expense, its knowledge could be difficult or impossible to prove if it contradicted the signed, written settlement statement, especially if the parties certify that statement actually did disclose all the financial terms and conditions of the transaction.

In some ways, this problem with short sale transactions is just a new twist on an old problem.  Indeed, the failure to document the actual terms and conditions of transactions accurately was one of the problems that contributed to the collapse of the residential mortgage financial system in the last few years.  You don’t want to become the poster child for what causes any further distress in that system just because “everyone else does it.” Make sure your settlement statement accurately and completely shows all the financial terms and conditions of your short sale deal.

Ronald D. Wiley, Jr., the author of this post, is an experienced Virginia Property Law Attorney who practices Commercial and Residential Real Estate throughout the Commonwealth of Virginia with MartinWren, P.C.  To reach Ron, please call him at (434) 817-3100 or send him an email at wiley@martinwrenlaw.com.