Short sale fraud is possible when a seller decides to sell his home with the intent to keep it for himself by using a quitclaim deed.
Q: My brother is in foreclosure on his house. He is trying to get someone to buy it through a short sale and then quitclaim the home back to him. I think this is illegal but he’s been told the process is not being checked out very thoroughly.
My problem is that I agreed to finance his purchase of a new home and he’s planning to use my funding in this short sale situation. What is my liability if he goes through with this?
I am seeking information that will help him see the danger, if any, to him and me in pursuing this.
A: You are right to be cautious. A valid short sale is when a third party comes to a homeowner and agrees to buy the home from that owner for a price that is insufficient to cover the costs of the sale and the payment to the lender.
The lender will not want to allow the short sale to go forward if the lender knows that the homeowner will use the short sale to his or her advantage to remain in the home. Most lenders will require the homeowner to sign various documents through the short sale process and some of these documents address what your brother is trying to do. He would have to lie to the lender to get the short sale completed under these circumstances.
Whether lenders are “checking” these situations our or not shouldn’t be the question. Currently, the short sale process is one that allows a seller to get rid of his home and move on.
It could be a wise thing for banks to consider a new option that would allow existing homeowners to remain in their homes at reduced payments either because these borrowers become tenants of these properties or because the loans are modified to allow borrowers to remain in their homes.
However, in your brother’s situation, he’s better off selling the home, making sure the lender waives any deficiency judgment against him and renting a home nearby to give him a home to live in.
But you shouldn’t become involved in a situation where you know that a fraud or wrong is being committed and you are funding that transaction. If you provide the funding for the purchase and it becomes a mess, you might not like where you end up. You could lose all of your money – or worse, if you are accused of perpetrating a fraud.
If you decide to proceed, make sure you do so with the aid of a real estate attorney.
And just because you are told that Uncle Sam isn’t looking, doesn’t make the process right, safe or a good thing to do.