Is the FBI Really Investigating Short Sale Negotiators Who Don't Submit All Offers to the Lender?

The Long Island Board of Realtors says yes!

Nash Law Firm, PLLC

By: Stephen J. Nash

Just what we need, another short sale issue.  Worse yet, it is an issue that could land you in jail.  Not something that you want to mess with.

Some, like the Long Island Board of Realtors say that the FBI is focusing on real estate brokers to see if all offers have been submitted and, if not, the broker could be charged with being involved in fraud.  Others, say that it is not true or that if it is true that the FBI does not know what they are talking about.

This article will explore the two sides of the issue.

Does the FBI Really Consider Not Submitting All Offers as an Act Of Fraud?

I have found nothing posted by the FBI or any other governmental unit stating that not submitting all offers to a lender in a short sale situation is, by itself, an act of fraud.  In the FBI's 2009 report on fraud, this was not one of the scenarios described; however, that does not mean that in 2011, that the FBI has not added it to their list.  Unfortunatately, there has not been a formal reposrt issued since 2009.  

I have looked at their news releases and other information posted by the FBI and have found nothing on this issue.  If this truly is an issue that the FBI is exploring they don't appear to have publisized their efforts or views.

Does Not Submitting All Offers By Itself Constitute Fraud?

The ones who argue against this point of view, rely on the duties owed to a client versus a third party lender.  Those who see possible merit in the position, point to duties owed to non-clients with respect to representations of facts relied upon by the third party lender.

- The Argument Against -

The Listing Broker Owes a Fiduciary Duty to the Seller, Not to the Lender"

This argument asserts that the primary duty is owed to the seller.  All offers are submitted to the seller, the seller then determines which offer is best form his or her point of view.  The lender does not own the property so they cannot control the sale.

It is also true that a seller does not have to submit any offer to the lender.  The seller must volutarly agree to sell the property as a short sale.  Therefore, it is argued, if the seller does not have to submit any offer to the lender hwo could they possibly be required to submit all offers to the lender.

Since the real estate broker owes a fiduciary duty to the seller, not the lender, and the lender does not control the sale, it is asserted that the real estate broker must honor the wishes of the seller even if the seller does not want all offers submitted.

- Argument For -  

"While the Listing Broker Does Not Owe the Lender any Fiduciary Duty, They Are Liable for MIsrepresentations"

This argument asserts that the focus on the fiduciary duties owed to the seller is erroneous.  The real focus should be on the duties owed to the lender.  A real estate broker cannot represent to the buyer that the home is mold free when, in fact, the broker knows that it is not mold free - even if the seller does not want this information disclosed.  The real estate broker cannot paint over the water stains to hide the evidence of the water problem even though the seller feels that this is the best course of action.  

In a short sale the first you have to ask is ,"Does the lender require a representation that all offers be submitted no matter when recieved?"  If they do, to not submit them all would constitue a misrepresentation.  

A more difficult and murky scenario would be where no specific representation is made that all offers have been submitted or that the offer submitted is the highest, best offer but does not mere fact that you are arguing that the offer presented is the fair market value of the property is a misrepresentation when, in fact, you have an offer for a high price.  

Some would argue that the answer is easy, the lender protects themselves with a BPO.  Legally, that argument most likely is going to fail.  Just because a buyer hired a property inspection does not mean that the seller can lie about the condition of the property.  Likewise, just because the lender obtains a BPO does not allow the seller or the sellers' broker to lie about the value of the property.

On the other hand, a argument could be made that the value of the property is not determined by the offers submitted but, instead, is determine what other like properties have been sold for.  As a result, the lender should have little reliance on the offers submitted when determining the fair market value of the property.

Who Wins the Argument?

Like any good lawyer, the answer is not clear-cut.  It seems to me that it is unlikley that the FBI would really be focused on this issue when there are plenty of clear cut frauds being commited every day. On the other hand, I don't agree with those that argue that a court could not find fraud and, more importantly, if the government thinks it is fraud do you want to be the one who goes to court to prove otherwise?

If you are the buyer on the short sale and the short sale negotiator I believe that you will have a tough time arguing that fraud was not committed if you submit a low ball offer, especially, if another higher offer comes in.  If you aren't the buyer and are negotiating for the seller, the issue becomes much less clear.  The safest course of action is to stop marketing the property or submit all offers (even if the lender says they don't want multimple offers).  

If you continue to market the property and obtain a higher offer without disclosing the existence of the higher offer, you had better look very carefully at the documents being signed by you and/or the seller and all statements made by you to make sure there are no representations that state or imply that all offers have been submitted or that the offer submitted is the highest price that you can obtain for the property.

If the lenders truly feel that this is a problem you can be sure that they will clear up the issue by adding specific representations for both the seller and the real estate agent to sign expressly stating that all offers, signed or unsigned, have been submitted and that they are not aware of any higher offers.