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.