Lender “Red Flags” for Fraud in Short Sale Investing

According to a report recently released by CoreLogic, lenders will take $310 million in unnecessary losses by the end of 2010 due to short sale fraud. Additionally, the report states that 1 in every 53 short sale transactions is fraudulent. This is disturbing in itself, but the way that the analytic firm came up with these numbers is even more disturbing. As a short sale investor, you need to know what lenders and analysts are viewing – and promoting – as red flags for fraud so that you can adjust your behavior and the structure of your deals accordingly.

1. Fast turnaround
Even though seasoning requirements in many areas have been lifted, lenders still see a fast flip as a sign that you mislead them about the value of a property. As a result, you must be very careful that your profit margins fall within an acceptable range – generally less than 20% better than what you gave the lender for the property – if you want to avoid sending up a red flag.

2. Vast profits
There is, unfortunately, no real way around this. If you make a big profit on the sale, then there is a chance that the lender will cry “foul.” Consider trying to extend the time between the original short sale and the second sale, if possible, if you have an aggressive lender, and work with your attorney to protect yourself if you plan on making big money with your short sale.

3. Realtor involvement
Many lenders are blaming real estate agents along with investors for their losses. They believe that real estate agents are trying to get “double duty” out of properties by assisting with a short sale and then a flip. Make sure that your real estate agent, if you are working with one, has met all transparency requirements on a property so that the lender cannot argue that all offers were not presented.

This may make short sales sound like a perilous transaction for investors, but in reality more than 98% are still going off smoothly for everyone involved. In order to avoid being part of that target 2%, however, you must scrutinize your actions to be sure that you are not throwing up red flags to lenders that you do not mean to.

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