Reverse Staging: A new trick in short sale fraud
Staging a home for sale has become big business. Real estate agents know that presenting the home to appeal to the most buyers possible makes a huge difference in how quickly it will sell and can directly result in a higher sales price.
There are professional "stagers" who offer a range of services from simply rearranging what you already have to bringing in entirely new pieces of furniture and accessories so buyers feel more at home.
And most experts say it's worth it. One website says "staged" homes sell in half the time, and for 17 percent more money.
But a new trend in staging has emerged with an entirely different goal.
Reverse staging is designed to make a house look less valuable than it actually is. The goal is to accentuate the negative features of a home in order to change the perceived value of the property.
It involves a short sale where a Broker Price Opinion (BPO) is all that is required to determine the value of a property. It is often done by real estate agents or investors who are in collusion with a buyer who plans to then flip the house for a much higher price, said Ann Fulmer, Vice President of Industry Relations at Interthinx. Fulmer, an attorney, has represented lenders in mortgage fraud cases and prosecuted mortgage fraud as an assistant district attorney during her career.
It can involve anything from simply not fixing broken windows, or not taking care of the grass, to actually breaking things, or punching holes in the walls. She says there are real estate "gurus" all over the Internet who offer advice on how to do this.
"The worst case I've heard about is someone who went out and bought possum urine and spread it all over the house and turned on the heat and let it marinate for a few days," Fulmer said.
"It looked like a Hazmat situation it was so foul," she said. "Certainly, if you walk in there and it smells like that, it's going to have a negative effect on your opinion of value."
Short sales occur when lenders allow homeowners to sell their properties for less than what they owe the bank. It is often done to avoid foreclosure which can cost both the lender and the homeowner additional fees. A BPO is ordered by the lender in a short sale to determine how much they should expect to recoup from the sale of the property.
"That's part of the problem," Fulmer said. "With BPOs it can literally be a drive by, or even just looking at MLS listings. One of the problems with a BPO is you don't have USPAP and you'd don't have appraisers who have been trained in how to develop a market opinion. It's just their best guess for a fire sale price. The BPOs pay so little. It's supposed to be a Broker's opinion, but a lot of times that's not what is happening because it just doesn't pay."
Is reverse staging illegal? "I don't know that by itself it's illegal, but it could be," Fulmer said. "These are criminal entrepeneurs. They take advantage of whatever is in the market and right now, short sales are one way to make money," she said.
The days of flipping a house in the boom market are over, so the only way to make easy money flipping is to convince the bank the house isn't worth that much. The cheaper you can buy the house, the more money you can make on flipping, she said.
According to a recent article in REALTOR Magazine, Fannie Mae is aware of reverse staging and wants to know about suspicious cases.
"We're seeing efforts to drive the price down on the short sale by using reverse staging," said Kim Ellison, Fannie Mae senior industry relations manager. "We're seeing photographs on broker price opinions that actually show cupboard doors missing, appliances pulled out, and graffiti or trash on the counter-tops. There are actually website where you can get repair bids, so you can submit false repair bids for the work that needs to be done. But we might have photos that were taken months or weeks earlier that show the kitchen in perfectly fine condition."
How does Fannie Mae identify fraud?
"We conduct post-closing reviews and do proactive database searches looking for patterns and trends by pulling in MLS data and public records and looking at listing information compared to what we've been told. But the majority of the information comes from tips. We have a tip line - (800) 7FANNIE and email - firstname.lastname@example.org.
Are real estate agents getting caught up in this scheme without knowing it?
“On reverse staging, most times the agent’s been in the property multiple times and they can see that something’s amiss when they go in,” Ellison said. “If they do, they can always pick up the phone and ask the services whether they have any information in their records about the property condition. The servicer might be able to go back to a previous valuation and say 'No, our valuations show this and we have pictures that show the property’s fine.' The servicer’s going to have the most information."
"We acknowledge that real estate agents are in a difficult position, because a lot of times good agents have to do some creative things to get the transaction to closing," Ellison added. "There’s a point though, where a line might be crossed, where something’s concealed or intentionally omitted. If an agent suspects something’s going on, they can always use their local association as a sounding board…or if they have a strong hunch something’s going on they can contact us or the lender, because the lenders have been trained as well.”