Business PPT

Small Sale Fraud – It’s not a law; nor is it an official policy, but it’s certainly going to be a problem regardless. The latest opinion released from Freddie Mac on small sales presents legal and practical issues for small sale investors.

On Friday, April 16, 2010, the establishment posted an educational article titled “Emerging Fraud Trends: Small Payoff Fraud.” Essentially, the article stated that a small payoff or a small sale can be considered fraudulent if the lender agrees to a small sale that already has a third-party buyer in place that is paying a higher amount than the agreed-upon loan payoff amount. This could spell distress for investors who have been small-sale flipping, which means negotiating a small sale with the bank, then selling the material goods immediately to another buyer for a profit of a few thousand to tens of thousands of dollars.

The article described scenarios and red flags for small sale payoff fraud. The scenario involved a facilitator, whose description matched that of a real estate small sale investor, who negotiated a deal with a lender to small sale a home worth $80,000 with a debt of $100,000 for $70,000. The facilitator does not tell that he already has an outstanding offer for $95,000 from a second end-buyer. When both transactions close and the facilitator pockets his profit, Freddie Mac considers him to have committed fraud in view of the fact that Freddie Mac has now taken a “larger than necessary” loss on the sale.

The article urges buyers, sellers and lenders to be on the lookout for small payoff fraud red flags. These flags include sudden borrower default, a borrower who is current on other obligations and the buyer of the material goods being an entity rather than a person. Additionally, they encourage people to look for an option clause in their buy contracts that allocate the buyer to resell the material goods.

Everyone involved in a small payoff is encouraged by Freddie Mac to report potential small payoff fraud the second they become aware of a second buy contract for a higher fee. This may not yet be a law, but the signs are not excellent when Freddie Mac has posted such a preside over attack on small sale investors.