Callahan & Blaine

The state of California issued several formal accusations of fraud and a “desist and refrain” order in August against San Ramon-based IQ Smarter Investments Inc. The company is exploiting Short Sale Real Estate deals in California and ripping off people who are desperate to sell their houses.

A short sale occurs when a mortgage holder agrees to accept less money for a home sale than the mortgage is worth. In today’s real estate market where houses are worth significantly less than what homeowners paid for them, short sales have become common.

One area of common illegal activity occurs when the agent negotiating the short sale demands an upfront payment, but then fails to provide the promised service. Upfront payments are illegal unless the state of California has approved the fee. If the state approves such a payment, it must be held in escrow until services are provided and the agent provides an account of how the money was spent. In short, the agent should not be paid until the home seller has a short sale agreement in place.

Other agents involved in short sales are collecting fees and then not telling lenders about the fee. This is also an illegal and unethical practice.

Short Sale “flipping” is harder to detect and is much more serious for the mortgage company being defrauded. It also represents another burden for the American taxpayers, who are shouldering the mortgage bailout. In “flipping,” a short sale agent will tell a lender that a property is worth much less than it really is, but the lender accepts the sale because it thinks the low price is the best it can do. After the lender agrees to the low price and the house is sold, the property is placed right back on the market, listed at its true (and higher) value. The perpetrator takes home the difference. In this case the people engaging in fraud can be real estate brokers, agents, or appraisers.

The California Department of Real Estate has noticed what it calls an “alarming escalation” of short sale real estate fraud. The Department says it will engage in education and enforcement efforts to curtail the fraud.

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