Foreclosure Scams and Short Sales – What You Need To Know

Posted on Jan 20, 2012

Naples foreclosures for sale have been a factor in the market over the last few of years, and there has also been an increase in foreclosure scams as a result. Some companies have profited from the crisis while taking advantage of unaware home buyers. Buyers also looking to profit themselves and purchase a first home or vacation home inadvertently helped increase the number of scams. The unfortunate reality is that many people fell victim to these scam tactics because they simply did not understand some important facts about foreclosure sales.

Home buyers should engage a Realtor before attempting to find foreclosures on the web. The first and most frequent scam tactic, and a definite “red-flag” for home buyers, is a payment is required to receive a list of foreclosure properties. The fact is that many companies promote these foreclosure lists on the web and other media for a fee. The simple truth is that a Realtor sees foreclosures first through the MLS.

Another concern of home buyers recently is the worry that a foreclosed home they purchase can be taken back if the former owner wins a lawsuit against the former lender. This is absolutely not true. Providing the new lender and new owner have title insurance, the former owner cannot get the home back. The new owner will keep the home regardless of legal outcome, and the displaced former owner will be awarded damages at best.

Another important point is to be aware that a “short sale” is not the same as a foreclosure. There are three parties involved in a short sale transaction, Seller, Buyer and Bank. A short sale usually occurs because a home owner defaults on their existing mortgage and hoping to be released of their loan obligation before their home is foreclosed upon by the lender. In order to sell the home, the seller solicits a Realtor to list the property at a discounted rate, usually below market value. Sounds like a good buying opportunity? No it is not.

Most often, short sale real estate listings will have prices posted that seem discounted. Problem is, the discounted price has not been approved by the lender. In most cases, the bank approved selling price is usually much greater and the listing price will be re-listed in the MLS. The newer list price will not be close to what was originally listed in the MLS to draw in the buyer. So, deal gone; and after months of waiting. Even if the first lien holder gives an approval and can agree with the seller on a short sale price, there are often times when a second lien holder will not. When more than one lien holder is involved, it becomes three times more unlikely that a short sale will close.

We counsel our home buyer clients to stay away from short sale transactions (pre-foreclosure), and the lengthy process is only one reason. Buyers negotiation leverage is reduced in these transactions and we would rather see our clients stay with foreclosed bank-owned homes (post-foreclosure).