When an Arizona real estate agent helped his parents purchase a distressed property from a motivated seller in 2012, he probably wasn’t thinking about bank fraud. In all likelihood, his main focus was on getting his parents a good deal on the property, which they bought for $580,000 in a short sale transaction. The agent had the listing on the property and, as a result, was able to prevent the two banks involved in the short sale from discovering that there had been other, higher offers – one for $870,000. After the agent’s parents purchased the property, they listed it with their son a few days later and sold, two months later, for $1.05 million in cash. They made an incredible return on their investment, but the end result was jail time for the son. He now faces three to 12 years in prison for defrauding the banks involved in the original short sale.
According to the office of the Arizona state attorney general, the agent did several specific things that are, by definition, fraud:
- Made false statements to banks
- Made false statements to potential buyers
- Made false statements to other real estate agents
- Discouraged buyers and devalued the home during the short sale
- Misrepresented the number of bedrooms and bathrooms in the home
- Faked a code violation
- Removed high-end, custom appliances from the home
The Short on Short Sales
In real estate, a short sale is a home sale where the proceeds amount to less than is owed on the property, but the lender and borrowers agree that selling the property is preferable to having the borrower default on the loan. It mitigates the damage to a borrower’s credit score and to a bank’s bottom line, in some cases. Banks do not always agree to short sales, and they also generally require that the seller does not make any money on the transaction since any proceeds should go toward the lien on the property. In some instances, a bank may permit the borrower to take some small amount of “moving money” to assist with relocation, but this is not standard.
When real estate investors get involved in short sale deals, they usually do so as the buyer on the property. In some cases, an investor can get a good deal on a property because it needs lots of repairs or otherwise represents a problem to the lender that makes it more attractive to take a loss on the loan than repossess the property. Because it is in the investor-buyer’s best interest for the property to appear as negatively as possible to the lender making the decision on the short sale; new short sale investors sometimes make the mistake of actively trying to make a property look even worse than it really is, which constitutes the same type of fraud the agent was accused and convicted of.
In this specific case, the issue is even clearer because the agent had a responsibility to disclose all offers, which he did not, and because he was clearly working to the benefit of his parents rather than of the seller or the lender and told lies to that end. However, any real estate investor who transacts short sales must be very aware of the laws and regulations governing the process in each state and abide by them in order to avoid such accusations and expensive legal battles down the road.
Bank fraud is not just an issue of reading the fine print; it’s also a top priority for powerful businesses (banks) and their prosecutors. Make sure your transactions meet all legal requirements every time.