WatchI was talking to a friend yesterday who told me that is normal for underwater owners to block offers that don't give themselves a large illegal kickback.
Say an owner borrows $300K to buy a house for $400K. Then reality hits and the current market price of the house falls to only $250K. The owner is then underwater, meaning his loan ($300K) is larger than the current market price of the house ($250K).
So the owner has zero equity, and is stuck, right?
Nope, all he has to do is convince the bank to take an offer of $200K. Then he can sell the house for the current market price of $250K to any buyer willing to split the payment into $200K for the bank, and $50K illegally under the table in a suitcase to the buyer personally.
So the seller blocks good offers and gives a bad price to the bank, in order to walk away from an underwater house with $50K in his pocket, instead of the $0 that he is supposed to get.
It's just bribery, but it is normal now, and if you're a buyer who won't also break the law along with the seller, your offer will be rejected no one is going to tell you why.
This is another reason why there should be a law that all offers on real estate should be publicly listed for everyone to see.
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In many Asian economies, this is the norm. In some countries, the "underground" economy is as big, if not bigger than the "declared" economy. Although with a lot of the illegals and other small business, there is a significant underground economy in some states. If this practice becomes the norm, we will have a huge underground economy.
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lostand confused says
It was that way in this country before Clinton forgave all of the underground tax cheats, as long as they filed beginning that year. I suspect Obamacare is going to create an even bigger underground economy than that one Clinton fixed.
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CaptainShuddup says
It's all President Obama's fault. It only took two posts to get there.
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In your scenario, why would the buyer be willing to split the payment unless they are getting a discount?
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I have been involved in quite a few short sales, all with no buyers agent, which I would think would open up my chances for seeing this type of behavior more, and I have yet to hear of this. I doubt its as prevalent as your friend makes it out to be.
Additionally, with today's short supply, which by law have to be presented to the bank, so you'd have to have multiple buyers colluding to pull this off now. Or if they overprice the property to keep buyers away, then it would never get past the BPO.
A lot of things would have to happen exactly right in order for this scheme to work.
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zzyzzx says
What Patrick was suggesting (I think) is that the buyer would be willing to split the payment because otherwise the seller would block the offer.
I have to say I find this whole thing hard to believe. I mean, sure, I can believe that it has happens and does happen on occasion...but to be the norm to the point that you can't buy a house unless you are willing to commit fraud? Maybe it's that bad, but holy shit...California must suck.
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Patrick says
I wrote about my personal experience with this years ago. The victim of course is the bank, and they don't give a crap.
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Most of the short sales fraud is probably related to related seller and buyer that wants to deceive the bank. I doubt an unrelated buyer is willing to pass 50K under the table.
The victim is the bank but with current market, even the banks are pretty selective at getting market rates and doing their own diligence. Some cases were passed to the FBI. I know it is not likely to be detected but for the unrelated buyer, it is not worth going to jail over.
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Patrick says
Why do you hate innovation?
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This is what big gov does.
Its like welfare fraud - mostly its minor like selling food stamps at half off for cash to buy drugs, lying about live in boyfriend etc.
Do we really want the feds wiretapping everyone in the country to make sure the buyer isnt banging the listing agent or the seller? I say no.
Also remember the banks approve these low offers - like they care if fannie eats 100k loss its a joke! You want no fraud then get the feds out of mortgage biz (impossible!) you can either play the game or pay retail in a bidding war beacause 'eliminating fraud' is like eliminating cussing in the navy.
Patrick needs to accept the corrupt lying world as is - only then will he find happiness in RE. Its open to everyone no matter race , creed, religion, etc . It took 5000 years to get here but people want 'lying' eliminated too? Lol
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iwog says
Fixed that for ya. ;p
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zzyzzx says
Well you can lower property taxes, sales taxes and a whole bunch of other taxes, plus convert undeclared income, if you are trying to make your money "legal".
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Stupid buyers?
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swebb says
Yes, that's exactly it.
Offers are blocked unless kickback is paid. The bank just never hears about those offers.
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bmwman91 says
Ultimately yes, however too big to fail banks have created a catch 22 where the tax payer will be punished more by not keeping the bank alive than by letting it fail.
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I like Patrick's proposed solution, that offers on real estate should be public information. That would address many realtor scams. Real estate ownership and liens are already public, and bona fide offers should be likewise.
Regarding this particular scam, it's usually possible to look up the mortgage creditors on the deed and contact them directly. So, if underwater sellers are withholding offers from the creditor, it's a symptom of the "robo-signing" (actually forgery on a massive scale by humans and not involving robots at all) mess, where creditors sold and re-sold mortgages without following existing law. I get a bit peeved when TV news and others trivialize "technicalities" involving secured transactions, because trillions of dollars depend on being able to find out who owns what and who has a lien against it etc.
BTW, if bona fide offers were public, it could create an opportunity for discount brokers to do something useful in real estate as in stock markets. If you offer to buy shares in AAPL, chances are you use a discount broker and the offer is made publicly in the broker's name. The broker certifies the offer, and protects your privacy, in exchange for a very small fee. You can buy $100k of AAPL and the total fee (commission+spread) might be less than 0.1%.
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I have purchased a dozen short sales, and never once paid a penny to a buyer; To act like this is common is patently false;
The buyer is at liberty to take whatever offer they want, and frequently will take the all cash/quick close offer that is lower just to make it simple. But, the bank does its own estimate of value, and will come back at a higher price. It would take a particularly stupid bank (which there definitely are some of) to leave as much money on the table as the example suggests. Far more commonly, the bank would approve the short sale at around 90% or more of the current value of the home.
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Patrick says
Digital video recorder. Then let the "seller" know that you are going to the police. Don't ask for a much lower offer, the seller will be offering you the kickback.
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I cant prove it but i bet this is way more common in Ca than Az.
Reason: dollar amt at stake is 10 fold higher and ca is overun with smarty pants ferners who do biz like in china.
Also in az no agent will do dirt for a 5k maybe bonus but in ca that is a 50k bonus or split or watev. Hell the whole home is 50k im az! Lol
The proposal that all offers are public is a nightmare. Its been done and is a failure see ebay for cars/Re. (Those high offers seldom close, creates huge wasted time) ive sold 2 cars on ebay it sux man!
Anyway its private property! Get your nose otta muh bidness!
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Dan8267 says
haha funny. Good way to get dead on a russian mafia listing in LA.
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underwaterman says
You'd report $50K in a suitcase to the IRS?
I have to admit that a suitcase with $50K would tempt even someone of such impeccable moral character as myself to "forget" about that money.
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underwaterman says
Wrong conclusion. No one will report 50K cash under the table to the IRS. Cash that does not have a filed copy of some 1099 sent to the IRS.
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elliemae says
No that's not what I said at all. It will be the fault of rushed crammed through legislation that nobody took the time to read, but the lady at H&R block. And she didn't even sound to happy about having to wade though 9,000 pages, boy let me tell ya.
Listen I WAS part of that underground economy pre Clinton. I know exactly where I'm coming from. Everyone in the trade industry worked "under the table" south Florida, from the guys the poured the slab, to the guys to hung the curtains just minutes before open house. It's NOT a far stretch of the imagination to see this happening again.
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I've been a part of dozens and dozens of short sales since 2006 and never seen this happen. I'm sure that it does from time to time, just like other kinds of real estate fraud happens sometimes.
Two things to note... First, the seller's bank will have multiple appraisals done along the way to ensure the price is at, or close to market value. Second, all parties - the buyer, the seller, and the agents/brokerages involved have to sign affidavits legally swearing that there are no kickbacks and no funny business happening.
Lenders do follow up sometimes and I hopefully pursuing legal action in cases of fraud.
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underwaterman says
Wouldn't the homeowner have to sign off on this? If they sign paperwork knowing the information was false, aren't part of the scam?
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Patrick says
I wonder how they go about hinting to the buyer that I'll only approve your offer if there's something in it for me.
Well obviously the seller "forgets" to report the income to the IRS. But the buyer could report it to the IRS. After all you basically screwed me out of 50k, I'm one to hold a grudge. And I could get 10% of any money recovered, although I think it's 10% of tax amount in 50k, so for investment income, that's $7,500, I would end up with a $750 kick back from the IRS.
I'm not sure of the legality here. The seller is the one blackmailing the buyer, I would think the seller is the one legally liable here. The buyer is no more guilty then someone paying a ransom to a kidnapper.
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TechGromit says
total bullshit, both parties and both agents sign documents swearing that NOTHING is being paid out of escrow as part of the short sale. Any and all could be sued or go to jail for loan fraud for this.
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36 male
San Francisco, CA
My agent, who is also the listing (seller's) agent, and a friend of the seller, tells me he has submitted my offer to the bank (how would I know). He wants me, and insists that I inspect the house now before bank has accepted my offer. The reason, seller may run out of time and the house goes into foreclosure. Does that make sense? If my offer is rejected by the bank, I am out of the inspection expense. Should I do that?
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AlexMir says
Do you have any money tied up on escrow on the house?
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36 male
San Francisco, CA
No, we haven't gone into Escrow yet.
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robertoaribas says
Why do you even post here?
Everything about your market is so different than what the majority here sees in the SFBA. You're not wrong, but people here don't misunderstand you anymore than you misunderstand them.
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varmint, RESPA laws are the same everywhere.
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I'm sure there are plenty of pretend short sales. Banks aren't stupid, they know.