Buyers: Watch out for this short sale scam!

When in contract on a short sale property, it's important to understand all the legal and tax ramifications of proceeding with the transaction.  Your real estate agent, tax consultant, and attorney can advise you on these issues. 

Here are two scams that you can watch out for during the process of purchasing a short sale:

     Last minute Seller debts.
     You, the buyer, are in escrow on a great property at a great price.  Then the listing agent, or seller, announces that there is a seller debt that must be paid by the buyer outside of escrow.  The debt may be to a recently formed LLC who has a judgement against the seller, or there is a new mechanic's lien which will be filed against the property which will stop the sale, unless the payment is made by the buyer right away.

     In most cases, the lenders don't approve these kinds of payments outside of escrow.  Ask for more information about the debt, and ask your real estate agent to speak with the short sale negotiator about the judgement or lien.

     The second lienholder wants to be paid outside of escrow.
     In some cases, a short sale property has two or more lienholders.  The second and subsequent liens are usually underwater with little chance of being paid back 100%.  Often, the lienholders will refuse to approve a short sale unless they can recoup a certain percentage.  To keep the negotiations moving, some agents, short sale negotiators or escrow officers will suggest paying the junior leins more than the senior lienholder has approved - outside of escrow.  They reason that if the payment is identified in a HUD-1 which the first lender sees prior to the close of escrow, then that is sufficient notice to the first lender of extra payments.  Always get approval of payments in writing.

     There are quite a few reasons why this is not allowed, but the most important is that it can result in civil damages in favor of the lender.  The first lender is usually a bank with deep pockets and dedicated attorneys who will recover money they feel entitled to.

     Creative solutions to buying real estate can be an important piece in accumulating wealth, but trust your instincts when agreeing to something that can't be identified in the escrow documents.