Fraud: Are Your Clients Using Reverse Staging?

By Robert Freedman, Senior Editor, REALTOR® Magazine

If you’re thinking about working with a financially distressed seller and the house he wants to sell is trashed, take the extra time to be sure he didn’t trash it himself. One of the types of short sale fraud that Fannie Mae is seeing these days is “reverse staged” houses. In these cases, owners trash their house to knock down the property value. A buyer with whom the owner is colluding then comes in with a low-ball offer, buys it and fixes it back up, then flips it for its real market value. That seems like a brazen scheme, but mortgage fraud by its nature is a brazen activity.


Kim Ellison

To learn more about this and other types of short-sale fraud, we spoke with Kim Ellison, Fannie Mae senior industry relations manager for the mortgage fraud program.

REALTOR® Magazine: What kinds of short-sale fraud are you seeing?

Kim Ellison: Illegal flipping and non-arm’s-length transactions. The non-arm’s-length space is a smaller percentage, roughly 9 percent. Usually the delinquent home owner is selling the property to a family member or a business partner without disclosing the relationship. It’s really an effort for the owner to stay in the home. Instead of making payments to the mortgage company they’re making payments to the family member, as rent. They’re hoping to clean up their credit and reapply for a mortgage down the road.

RM: Selling to a related party in and of itself isn’t illegal. It’s just the lack of disclosure?

KE: It’s all in the disclosure. The servicer can take circumstances into consideration and waive the non-arm’s-length requirement, but there has to be compensating factors. The story has to make sense.

RM: What kind of illegal flips are you seeing?


KE: One is to transfer the property to an LLC or a trust and then proceed with the short sale. Again, transferring the property to a trust or LLC isn’t in and of itself illegal. It’s something that families do all the time. But the servicer has to be aware of it and must approve it. In an illegal flip, the seller transfers the property to an LLC or a trust that’s in no way related to the family and doesn’t tell the servicer about it. The trust is operated by a middleman: a foreclosure rescue specialist or a short sale negotiator. They’re transferring the title into their name prior to selling the property, and then they flip it immediately after closing.

Another is a bait and switch transaction. The parties bait the servicer with a low-ball offer on the property and hide the fact that there’s a higher offer waiting. They get the servicer to approve the low-ball offer. At closing, the parties bring in the higher contract, substitute it for the low-ball offer, and keep the lower short-sale payoff figures. The delinquent home owner nets the amount between the lower pay-off and the higher offer. [In a recent case,] two real estate agents were charged with bank fraud [using this scenario]. They pleaded guilty. One has been sentenced to eight months in prison and three years of supervised release; the second hasn’t been sentenced yet.

We’re also seeing efforts to drive the price down on the short sale by using reverse staging. That’s where you try to make the property look in worse condition than it actually is. We’re seeing photographs on broker price opinions that actually show cupboard doors missing, appliances pulled out, and graffiti or trash on the countertops. There are actually websites 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.

RM: How do you identify fraudulent transactions?

KE: 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, 800/7-fannie, and e-mail,

RM: Is it possible real estate agents can get caught in a scheme without knowing it?

KE: In the scenario in which the parties write two separate offers, it’s possible the agents don’t know what’s going on because two different agents are being used. On reverse staging [it’s less likely the agent doesn’t know, because] most times the agent’s been in the property multiple times and they can see that something’s amiss when they go in. If they do, they can always pick up the phone and ask the servicer 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. 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: “This doesn’t feel right; can you advise me?” 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.

Fannie Mae’s anti-fraud resources.

Read our two earlier short-sale fraud posts:

Short-Sale Addendum Aims at Fraud, BofA Says Interview with David Sunlin of Bank of America

Are Your Short-Sale Clients Colluding? Interview with Kathleen Cooke of Freddie Mac

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at

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  1. It is scary to think how easy it is, and how many agents are crossing that line from representing their clients to the best of their ability to defrauding the bank.

  2. I wonder what kind of jail term the servicer’s should expect for delaying, not mitigating losses, false reporting, breaking and entering vacant but secured properties?

  3. Teresa

    I would be interested to know who is investigating the FRAUD (Yes I will say it) being commited by the banks who are INFLATING the values on the BPO.

    Seriously??? REVERSE STAGING? I have many BPO agents who are friends of mine who tell me all the time that they send in a report to the bank and they get it back. with the bank telling them what value they want and which comps to use.

    THIS ISN’T FRAUD????? Someone PLEASE help me understand why the banks are not held accountable but those of us conducting legitimate businesses are being held to the fire around every corner?

  4. Jewel

    Honesty and hard work are the best policy. Greed and schemes by those looking to the real estate industry as a means to a quick buck got us where we are today. Now the same mentality is digging us a deeper hole and not only the industry but the economy of the country is at risk as a result. Realtors take an oath. Does not integrity mean anything? This is very disturbing.

  5. Susan Wilshusen

    What is the least expensive way to earn all of the certifications necessary to succeed with the foreclosure process? My phone is (347)742-6071. I would like ot purchase investment properties with no money down. Susan Wilshusen

  6. Henry

    What about when the bank that is foreclosing on your property asked you to short sale your property and you agree, they then turn down an offer of 127,000 and put it up for auction and except 25,000. That is what happen in my case. Only to learn later the bank must have been duple dipping. They submitted their loses to Freddie Mac and got 100% compensated plus, then sold it 50 days later for 75,000. This is what they have been doing. They received over 240,000 plus penalties, interest and and expenses. Bought it back themselves and made another 50,000 after the settlement at the expense of the American People.

  7. Juana

    Are they barely figuring this out!! Come to Downey, Ca there are plenty of those frauds here. I have submitted several offers for myself and other clients that have been higher than what they closed for. I called the lenders to let them know they have either ignored me or said there is nothing they can do

  8. billy charm

    what about the banks refusing to acknowledge that short sale negotiation is an activity as difficult or more difficult than just listing a house, and insisting on denying any extra compensation for the agent who delivers this sale, while simultaneously grinding down the allowable commission. In most cases the bank benefits via the higher net vs foreclosure in a short sale, often the bank has some hidden scheme to be compensated, usually by taxpayers, and the banks expect the realtor in the field to do hours of extra work, to the banks benefit, for free. Flipping schemes are generally not fraud, they are and have been a regular part of all real estate markets. it is the bank’s responsibility to determine their own acceptable loss, not the realtor, who in any case works for the seller. NOT the bank. The banks would like you to forget that, apart from signing off on their acceptable level of loss, they are not even technically a party to the sale.

  9. billy charm

    PS not fraud when disclosed, i should say…