Short Sale Fraud - Freddie Mac Drops A Huge Bomb On Real Estate Investors

Short Sale Flip Fraud - While not yet a law or an official policy, problems loom on the horizon thanks to a new take on short sales. Freddie Mac’s new short sale opinion – for lack of a better word – could create serious legal and practical issues for real estate investors.

The organization posted a new educational article on April 16, 2010 titled “Emerging Fraud Trends: Short Payoff Fraud.” The article described a new trend in short sale fraud that happens when a short sale buyer flips a newly acquired property to another buyer and “pockets the difference.” This is a serious yellow flag for short sale investors who make their living negotiating good short sale deals with banks, then selling their new properties to other buyers for a profit.

The Freddie Mac poster went on to describe scenarios and red flags for short payoff fraud. The scenario was set up around a short sale negotiator or facilitator that engineered a short sale of an 80,000 dollar home with outstanding debt of 100,000 for 70,000 dollars. In the scenario, the facilitator fails to notify the bank he has a higher offer, 95,000, on the house. When both transactions close and the facilitator pockets his profit, Freddie Mac considers him to have committed fraud since Freddie Mac has now taken a “larger than necessary” loss on the sale.

The posting encourages buyers, sellers and lenders to look out for short sale fraud red flags. Freddie Mac considers entities buying property, borrowers who are suddenly in default and borrowers who have not reneged on all of their loans to be red flags for short payoff fraud. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.

Everyone involved in a short payoff is encouraged by Freddie Mac to report potential short payoff fraud the second they become aware of a second purchase contract for a higher price. This may not yet be a law, but the signs are not good when Freddie Mac has posted such a direct attack on short sale investors.

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