As short sales of distressed homes rise, fraudsters are starting to game the process.

In a short sale, a home is sold for less than the mortgage balance and the lender accepts a discounted payoff. This is often considered less costly to the lender than foreclosing.

But in one deceptive practice that appears often, a property investor, working with the listing agent, will dupe the lender into accepting a lowball offer by having the agent withhold other, higher bids.

"The agents on the streets talk about the difficulties in getting through the short sale process to the lender and getting an offer accepted," Brad Froelich, the chief appraiser at US Real Estate Services Inc., said at the Five Star Default Servicing conference and expo in Forth Worth last month. But "there are agents out there who are collecting higher offers and they are already in cahoots with an investor who is obviously trying to purchase the property at a discount."

The investor in the scheme typically resells the property soon afterward at a higher price.

"The perp locates a second buyer, who may not be at arm's length, to purchase the home for a higher price simultaneous with the short sale or in rapid success, concealing the second transaction from the lender approving the short sale," said Froelich, whose Lake Forest, Calif., company provides property valuations and manages repossessed collateral for lenders. "The second transaction may involve a new loan based on the completed appraisal."

Froelich was quick to point out that not all investors are "bad people."

He said he often meets investors who say that just because they purchase property with the intent to immediately sell it at a profit, that does not make them fraudsters.

"I'm careful to use the 'f' word. Not all transactions sold to investors that purchase homes with the intentions of flipping them are necessarily illegal," he said. An investor can plausibly say, "'Listen, I'm like any other buyer in the neighborhood. I'm offering so much to purchase this home with the intent of selling at a later date.' "

At US Real Estate, Froelich oversees the detection of valuations-related discrepancies. One of the first red flags his company picks up is when a buyer's estimates of deferred maintenance items — what it will cost to replace broken windows, for instance — are not supported by contractor estimates. The buyer's estimates turn out to be overstated.

"We see it all the time," Froelich said. "Anyone who has spent time at a Lowes or Home Depot knows that a 900-square-foot home should not have $34,000 worth of carpet, but you would be surprised how frequently we see it."

Most of these flipping schemes can be stopped, either by the original lender on the property or the one financing the second transaction, Froelich said.

Lenders should ask, "How much sales activity is being presented on this property?" and review the marketing efforts, such as the listing in the Multiple Listing Service, he said. "This is an important step," Froelich said. "Has the property been canceled? Was it expired? What are the extensive, aggregate days on the market for the property? How many price reductions were there?"

Chrissi Rhea, the president and chief executive of Mortgage Investors Group, a Knoxville, Tenn., lender, said prolific fraud teams operating around the country threaten to prevent an industry recovery.

"As Realtors, you need to be aware of the property. Was it overlisted? For instance, there was one example of a property that was listed at $550,000. That was probably way too much. The real value was probably $425,000. This consultant talked the servicer into reducing the mortgage amount to $200,000," Rhea said.

"If you are asked to do a BPO" — a broker price opinion — "I truly believe the responsibility is on your shoulders to save the nation. You need to clearly give a true opinion of value, whether you are working through an independent company or for a third party that you are approved to do a BPO for.

"Accurate values in this day and time are absolutely essential," she said.

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