Short Sale Flip Fraud - The newest problem in real estate is not yet a law or an official policy, but it is definitely going to create issues in the market. The latest opinion released from Freddie Mac on short sales presents legal and practical issues for short sale investors.

On Friday, April 16, 2010, the organization posted an educational article 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 revolved around a short sale facilitator who set up a deal with a lender to purchase a home worth 80K for 70K while the lender took a 30K loss. The facilitator does not disclose that he already has an outstanding offer for $95,000 from a second end-buyer. The second the facilitator puts his profits in his pocket, Freddie Mac considers him guilty of fraud because his negotiations caused Freddie Mac to ultimately take a “larger than necessary” loss on the sale of the property.

The article urges buyers, sellers and lenders to be on the lookout for short payoff fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the property being an entity rather than a person. Additionally, they encourage people to look for an option clause in their purchase contracts that allow the buyer to resell the property.

Buyers, sellers and lenders all are encouraged to report short sale fraud the second they become aware of or suspect a second purchase contract for a higher price. It may not be considered breaking the law, but it certainly looks like Freddie Mac wants to make short sales as difficult as possible for real estate investors.