Is this a scam?

Question

I recently made a full offer on a short sale. After the contract was submitted, my agent told me that he was informed by the listing agent that the owner recently sold an "option to buy" on this property to another investor for $9700 in premium. And this investor would not release the option unless the full premium is refunded. The seller wants the buyer (me) to pay up this investor.  This sounds very shady to me because it appears to be a plot to siphon money between the bank and the buyer. Can this be legal?  I am sure that the bank does not know the existence of this option.  How can I verify if the option is legitimate and exercisable? It is not recorded with the county that I could find. TIA.

Aaron Mazzrillo · Answer

If it isn't recorded, it is not your problem. The seller will have to deal with the so called optionee. If it gets recorded (I doubt it will), the lender will have to know about it because they will have to approve it being paid. I wouldn't worry about it. Sounds like someone is attempting to shake you down for some outside of escrow cash. Tell your agent that the option is between the seller, their lender, and the optionee and you expect him to uphold his fiduciary responsibility to represent you fairly.

Joel Owens · Answer

Jason lots of fraud and criminals out there trying to make a quick buck.

You could be sucked in and chosen "guilty by association" in the deal.

We have a saying in the business.This deal has "too much hair on it" and you need to walk away.

Many of these techniques with short sales squeaked by 3 or 4 years ago before bank guidelines were in place.Now with systems you cannot get away with anything if you wanted to.Before there were shades of grey that were closed out.

I would see buyers write up a bill of sale and pay the seller 4,000 for JUNK for personal property.At the time certain things didn't have to be disclosed.Short sales made up only about 1 percent of loans when the market just started turning.

So anyone looking at short sale techniques make sure they work TODAY and not from years ago.You will pay dearly for using old techniques that can get you in trouble that are not allowed today.You have to adapt and structure deals to stay in compliance with the ever changing laws.

Ken Latchers · Answer

Why aren't you running away from this?

Account Closed · Answer

Jason:  putting the short sale aside, a properly executed option contract is binding and cause a title defect.  If it's recorded, it's something the title company will look at and may refuse to insure until it's released.  The title company would assess the option and determine if it's something than can be ignored or not.  With an unrecorded option, the seller is bound by the terms of the option.  If the seller sells the property to someone else, the optionee would have to go after the seller to be made whole.  That's usually lawsuit territory.

Since there are people here saying this kind of option when combined with a short sale is known scam, and that agents might not know or understand what they are presenting to their client, I'd say stick with your original offer and see what happens.

Chris Calabrese · Answer

This is the problem with this type of deal.  The bank is taking a bigger hit so that an investor can skim some money off of the deal.  The ones I've seen here, the option holder is a 3rd party, not the seller, and they create an option with the price TBD.  Then they negotiate with the bank and find a buyer at a higher price and pocket the difference as an "option release fee" or negotiation fee.  If it wasn't a short sale, it would be fine (lots of real estate is sold via options), but in a short sale they are skimming money from the bank.  It's just bank robbery without a mask and a gun.

Don Konipol · Answer

The option actually has no value, as the writer of the option, the seller, can not perform on the option unless another party (the lien holder) agrees, or the seller is willing to bring money to the closing table to pay off the loan in full.

Since the option has no value, any money received for the option is money that is being received by the seller because the lending institution is selling the property below market price.  This is in fact as well as in intention a violation of the short sale agreement with the lien holder.  The "option" money should be going to the lien holder as an increase in sale price.

Bill Gulley · Answer

It could be legit, the seller may have tried to sell and let an option, with the right to seek other buyers, time passing you come in. The deal could have been more of a first right of refusal with an option price paidand yes it may be that if another offer is accepted the option price is refunded (good it doesn't cost more to release).

SO is it possible, yes. The bank needs no knowledge of this so far as it was prior to appication of a short, but should have been mentioned in that application when made. I'd say, produce the option contract or let's talk about fraud.

As mentioned above, it's not your problem, make your offer, it's the seller's responsibility to provide good title at the contract price. Sounds to me like it's a ploy for more money and as mentioned, you don't give anything to the seller, except as allowable and approved by the bank in a short sale.

If someone is doing this in any area, I'd be brining it to someone's attention.

Chris Calabrese · Answer

This is actually a pretty common scheme (or strategy), and there's a guy around here doing a ton of these.  I backed out of a deal with him because, as stated above, I determined it was either mortgage fraud or a gray area at best.  There are several successful prosecutions nationwide on people doing this exact same thing.  Google search "short sale option scam" and you'll see.

A lot of the list agents get sucked into it unknowingly, and they accept them because the option-holder/investor offers to market the property for them and negotiate all offers with the bank, resulting in less work.

Tell the agent that you can only do it if it's disclosed to the bank upfront and again on the HUD at closing.  They will probably refuse, but that's the only way it could be legal.

Mark H. · Answer

Wow, it would take some pretty tortured logic to claim its legal, I suppose you could argue murder is legal if you don't get caught, but I wouldn't touch a deal like that , ever.  If this seller can justify holding you up for $10k just to accept your offer, who's to say they won't try to shake you down for a few grand more for the cabinets they "sold" to some guy, who just hasn't picked them up yet?

The "option" would be worthless to an investor, because every short-sale I've seen requires a disclosure statement from all parties involved that the seller gets $0 at close, and there's no other side-deals going on.

The "investor" could never exercise that option without lying to the bank.  "misleading a federally-insured lending institution" is a fairly common term in indictments that send people to club "fed" for a few years.

I can't believe your agent even presented this to you as an option - he should be reporting this other agent to the FBI' s mortgage-fraud task force and your states board of real estate.

Run forest, run!

Account Closed · Answer

I don't know how I missed that the offer is on a short sale, it's in the first line of the original post.  Sorry about that.  Run!  No money can go to the seller, in or out of escrow.  I'm curious why your buyer's agent would have even presented this idea to you?

Is this a scam?

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