RealEstateEconomyWatch.com Insight and Intelligence on Residential Real Estate
Banks using real estate brokers and agents to value short sales are increasingly becoming the victims of fraudulent schemes that have occurred in more than 1 percent of short sales this year and have already cost lenders at least $50 million in lost revenue, according to CoreLogic.
In a short sale, the seller arranges with their mortgage lender to accept a price that’s less than the amount they owe on the property. Under pressure to move distressed properties off the books quickly and cheaply, lenders are increasingly using valuations from real estate brokers, called “broker price opinions,” which cost hundreds of dollars less than an appraisal and can be completed quickly.
BPOs are considered more accurate than automatic valuation models like those on Web sites. They provide a baseline for the lender to use to determine if a short sale offer is acceptable. However, brokers are not licensed appraisers and often assumptions are made regarding upgrades, location, valid comps, and whether or not the fact that the property is distressed reduces the value of the property.
Unknown to many lenders, unscrupulous investors and home buyers are hiring brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit.
The Federal Bureau of Investigation, the California Department of Real Estate and Freddie Mac have warned that such schemes may be spreading.
In Connecticut last week, a real estate agent pled guilty to supplying fraudulent price opinions and faces a maximum of 30 years in jail and a fine of up to $1 million.
Suspected property-valuation fraud almost doubled from the end of 2007 through the first quarter of this year, according to a June 8 report by Interthinx Inc., an Agoura Hills, California- based company that sells mortgage fraud detection software. Interthinx found that the five top markets for property valuation fraud risk are Modesto, Vallejo-Fairfield, Stockton, Riverside-San Bernardino-Ontario, and Phoenix-Mesa-Scottsdale.
The Appraisal Institute recently announced that appraisals are the only acceptable model for short sales. However the Treasury allows BPOs for short sales under the Home Affordable Foreclosure Alternatives program, claiming it has put reasonable protections in place to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days.
Neil Barofsky, special inspector general for the Troubled Asset Relief Program, said recently, “It appears that the (HAFA) program may lack necessary antifraud protections.”
Investors make no secret of their intent to “influence” BPOs to get the property valued as low as possible. In fact a mini-industry of investment consultants sell books and videos telling them how to do it. In “4 Tips to Influencing the BPO (Broker Price Opinion) on Your Short Sale,” the Web site biggerpockets.com advises investors to work directly with brokers or agents as they inspect the property.
“You want the house to accurately reflect the condition it is in. This isn’t an open house…If there is damage, point it out… When the broker finishes their walk through, you should compare your notes. Ask them if they have an initial ballpark estimate. Many BPO agents will give high values – if these aren’t reasonable, now is the time to speak up.” biggerpockets.com advises.
Another site, MagicBulletsinRealEstae.com, advises: “Make sure if the house is occupied that the homeowner is not present during the BPO. You do not want the agent asking the homeowner any questions about the property or offering any unwanted information. All communication must be between you and the agent.”
‘The Broker’s Price Opinion (BPO) is the single most important aspects (sic) of the short sale process and one you must understand and appreciate because the BPO will determine the difference between a $10K profit or a $50K profit,” concludes BPOCashGeneratorBlog.
Let’s get the facts straight before we declare any attempt to buy a short sale below market as some kind of fraud. First, short sales are in fact worth less than market value by a fairly substantial amount since banks are absolutely incompetent in responding to offers. As a result, most buyers do not want to wait 2-4 months for an answer to their offer unless the deal is good. Second, the BPO agents are paid only about $50-$75 for each BPO which usually takes 1.5-2 hours of work. What successful Realtor would want to do them? The answer is not many. Therefore, the BPO agents are frequently novices or not very skilled. As a result, they do typically over value the homes since they do not understand the distressed nature of a short sale and the impact on value. Also, they do not typically know how to deduct for condition issues. Even appraisers get it wrong when it comes to distressed properties (short sales and foreclosures). Case in point, HUD foreclosures use appraisals. In one very new townhouse condo neighborhood HUD appraised one of its foreclosures in that neighborhood at $106,000. It sold in 37 days for $87,000ia their online auction format. That’s right the appraisal over valued the property by nearly 22%.
Instead of bashing investors for trying to buy properties and resell them
for a profit, why not go after the real problem: the banks. They are routinely rejecting short sale offers that should be accepted and then foreclosing and getting tens of thousands less. I have seen it in the last 2 weeks on a property that the bank lost $75K because they would not approve a short sale offer in a reasonable time frame. Go after the banks because they over value their assets to cook their books and pretend to be solvent when they are not. Go after the banks because they are making a bad mess 10x worse. Go after the banks because they are needlessly wrecking peoples’ credit and financial futures because they are absolutely stone cold incompetent. Whatever you do please stop whining like the banks are victims – thy aren’t.
Every time I read an article about an investor making a profit on a short sale the article automatically assumes that something devious is going on. I can say that most investors doing this are disclosing that they are reselling the property for a profit. Making a profit should make sense – the investor is buying a distressed asset and reselling it. What the heck is wrong with that? Isn’t that what happened when JPMorgan purchased Bear Stearns? Isn’t that what happened when OneWest bought IndyMac? Why is it OK when the profits are hundreds of millions, but not tens of thousands? Why where the bankers “brilliant” when they made all that money on those complex debt securities, but absolutely hapless victims of fraud when someone makes money at their expense?