A short sale is an alternative to a foreclosure, which is a more time-consuming and costly process for the lender and the homeowner. In it the lender allows the homeowner to sell the property for less than what is owed on the existing mortgage and agrees to forgive some or all of the debt. The scam occurs when the agent or short-sale negotiator, who was hired by the homeowner, receives several bids but submits only the lowest. Unaware of higher bids, the homeowner and the lender accept that bid. This has the following effects. The lender loses the difference between the lowest and highest bid. The homeowner has a greater tax liability because he or she will be taxed on the difference between the debt and the sales price. And the crooked agent or short-sale negotiator, who is also working with the lowest bidder, sells the property to the highest bidder and makes a sale profit in additional to his commission.
Because of the possibilities of fraud, tax liabilities, and suits by the lenders to recover the forgiven debt, before you decide to sell through a short sale you should get: (1) a licensed and qualified real estate agent to represent you, (2) the advice of an accountant, and (3) the advice of an attorney. And then you need to look out for the following:
- Any short-sale negotiator must be a licensed real estate broker or a licensed real estate salesperson working under the supervision of a broker.
- Real estate licensees wishing to collect an advance fee must first submit an advance fee contract to the California Department of Real Estate and receive a no-objection letter for that contract. Then any advance fees paid must be placed in a trust account and handled as client trust funds.
- All payments must be fully disclosed and made a part of the escrow documents. Any fees paid outside of escrow are illegal.
- The buyer is a fictitious person or entity, or the buyer is purchasing the property under a power-of-attorney or limited liability company. This may indicate fraud.
- An unlicensed negotiator is handling the sale. This is illegal.