Do short sales and REOs present a new wave of real estate fraud?

That’s strong language. Unfortunately, many real estate agents and their buyers, after being shut out of numerous purchases of homes, are concluding just that.

In a conventional sale of a residential property (but this applies to commercial and industrial too), the buyer’s agent, also known as the “selling agent”, presents a written offer to purchase to the listing agent. The listing agent then presents that offer to the seller(s), who can accept the offer, make a counter-offer, or reject the offer outright.

Conventional sales are a rare beast these days, replaced in disproprtionate quantities by short sales and REOs, both of which present opportunities for less-than-ethical behavior by some listing agents, along with their sellers. In some neighborhoods in the San Fernando Valley, I’ve calculated that 93% of the properties currently listed, are foreclosure properties, either short sales, or REOs.

In contrast to the above description of a conventional sale, both the short sale and REO (Real Estate Owned, bank-owned properties) involve negotiation with a bank, lender or servicing firm that represents an investment bank, e.g., Deutsche Bank. Under such circumstances, neither the buyer nor his/her agent has the ability to meet the seller/bank. They therefore have no assurance that their offer was actually transmitted to the lending institution for consideration.

Why, do you ask, wouldn’t the listing agent transmit all offers - especially when there is multiple bidding for a property - to the seller/bank? There is only one reason: the listing agent has his/her own buyer and wants to “double pop”, or collect both commissions. If the listing agent’s own buyer does not have the highest offer, s/he moves their buyer to the top of the pile by not transmitting all the offers. The bank doesn’t know, and the other buyers and their agents don’t know either. They’re just told their own offer was rejectd. Only after escrow closes, when they see that the selling (buyer’s) agent was also the listing agent, and the sale price was lower, do they realize what happened.

What next? What can buyers who have been defrauded out of a purchase do? Very little, for the most part. Most banks hide their asset management (REO) and short sale departments because they don’t want contact with the public. Even their fraud departments show little interest in following up on complaints by jilted buyers or their agents. And the listing agent, who was the doorkeeper to the entire transaction, certainly won’t confess to his/her tactic.

For another story on buyer frustration with short sales, see this article in the San Bernardino County Sun (below) There is a brief paragraph with me at the end of the article. The newspapers’ editors apparently didn’t want to touch the topic of real estate fraud as it affects the sale of distressed properties.