Short sale buyer beware

If you're a buyer out there who's looking to purchase a short sale, here's a little story for you. And it's not a pleasant one.

Some clients contacted me last Friday about seeing short sale property that had just come on the market. The house is at 401 N. Brighton, Burbank, and the mls is S559692. The house is a 3+2, 1446 square feet, and is in a nice neighborhood. I was a little suspicious because the house was only listed at $420,000 and is not a fixer. That's really low, even in this market, for a house that size. I can't see a lender ever approving anything that low -- the comps are much higher. And, as we all know, the lender has to sign off before a sale can be concluded. Was the agent courting a bidding war?

I spoke with the agent late Friday afternoon. She confirmed the house was available.

I went over on Saturday afternoon. The key was missing from the lockbox. Being the breaking-and-entering Realtor that I am, I entered through the side garage door. The house isn't bad. It needs decorating, but it's workable. There were several other Realtors trying to show the house to clients while I was there -- no surprise, with a price that (artificially) low. I called the Realtor, told her the key was missing, and asked if it could be replaced by Sunday at noon. She said she'd try.

I met my clients there on Sunday. Alas, now the entire lockbox was missing, and the house was shut up tight as a drum. The listing agent's voicemail was full.

This morning, the house appeared on the mls as pending. As in under contract, not taking back up offers, in escrow, la la la.

Uh-unh. Most lenders won't approve a short sale until the house has been on the market for thirty days. This has been on for five days. Most lenders will not approve a sale unless the price is at least somewhat in line with the comparables. And lenders don't work on legal holidays (today is Martin Luther King day), let alone weekends. It would be almost impossible to get a written approval that quickly. And no escrow companies are open today, either.

So what's up? How can a house that's impossible to show get sold this quickly? Does the agent not want it shown because she has her own offer? Are the sellers and agent in league with each other to try to sell it to somebody they know for that low price? Or does the listing broker just not know the short sale process? Am I jumping the gun here with these suppositions? I don't think so, and most banks are getting wise to these schemes. Personally, I'm irritated to have wasted my and my buyers' time on this.

Short sale scam

Maybe I'm naive, but I just heard about this short-sale scam yesterday. Apparently, here's how it works. A seller lists his home for a short sale price. The buyer is a relative with a different last name -- so as far as the bank knows, it is certainly an arms-length transaction. The seller goes on living in the property after close of escrow, making much lower payments, through the relative on title, on the same house. The lender is none the wiser.

There is also subtle discouragement of other buyers and showings in order to further the scam. For example, the property is listed on the wrong mls, it is never available for showings, a potential buyer is told that there are so many offers in that the seller and bank will not look at any more, etc.

The vast majority of short sales are legit. But if a buyer you know encounters a difficult-to-see-buy short sale home, this kind of scam may be going on.

No wonder so many lenders are just not responding to short sales and just going ahead and foreclosing.