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When the price is wrong
Sometimes, a sudden jump in the price of a house could indicate mortgage fraud.
By DAN DEWITT, Times Staff Writer
Published February 3, 2008
This house at 3223 Hibiscus Drive, valued for tax purposes at $416,476, repeatedly sold for much more: $560,000 in April 2005, $810,000 a year later and $835,000 six months after that.
[Ron Thompson | Times]
Jim Bourgoin says fraud "messed up the market" in Hernando Beach.
[Ron Thompson | Times]
The house at 4063 Casa Court, with an appraised value of $506,485, was sold twice on the same day in May 2006, first for $490,000 and later for $750,000.
[Ron Thompson | Times]
The property at 4057 Bluefish Drive, appraised at $285,125, was sold to Soni Homes Inc. for $361,000 and, the same day, to Steven Michaelson for $575,000.
[Ron Thompson | Times]
Gulf Coast Instant Equity, with Kathy Schmidt serving as president, bought the house at 3342 Turks Cap Drive for $400,000 and resold it to Robyn Michaelson one month later for $590,000.
HERNANDO BEACH - John McRae watched as weeds took over the yard of the house across the street, 3223 Hibiscus Drive.
In an otherwise peaceful neighborhood, deputies began to show up regularly to stop fights between renters. A crew of vagrants moved into a crawl space underneath the house.
Meanwhile, the home on Hibiscus, valued for tax purposes at $416,476, repeatedly sold for much more: $560,000 in April 2005, $810,000 a year later and $835,000 six months after that.
McRae, a commercial real estate agent, suspected these sales and the property's decline were related. The buyers, he guessed, didn't maintain the house because they didn't plan to keep it; the inflated prices were designed to secure large mortgages the buyers never intended to pay back.
"Once it went above $800,000 - that's just totally, absolutely, catastrophically out of proportion to what that property is worth," McRae said. "We thought somebody was putting a lot of money in their pockets."
Such suspicious sales have made "mortgage fraud" a buzzword in Hernando Beach the past two years. Though fraud cannot be proved without a criminal investigation, evidence of improper dealings during this period has been steadily mounting.
By analyzing property records, the St. Petersburg Times found dozens of what the FBI calls indicators of mortgage fraud. These include houses, such as the one on Hibiscus, that began to slip into foreclosure almost immediately after their purchase.
The Hernando County Association of Realtors warned its members of apparent cases of fraud when it became aware of them last year, said David Carter, the group's attorney, who also said the FBI has investigated several transactions in Hernando Beach.
The Hernando County Property Appraiser's Office has eliminated 11 Hernando Beach sales in 2006 and 2007 from its calculations of property values and may cut out several more - most of them because the sale prices were suspiciously high.
If fraudulent transactions slip by the property appraiser, they can lead to inflated property tax assessments for nearby residents. And because fraud often leads to foreclosure, it has contributed to the mortgage crisis that is dragging down the national economy.
But the most direct consequence is to the local real estate market. Disinterested, absentee owners often neglect their properties, bringing down the real worth of nearby houses. At the same time, fraudulent prices artificially inflate local property values and discourage buyers.
In Hernando Beach, that combination helped bring sales to a near standstill in 2007, when only 27 houses changed hands.
Though the market has since begun to stabilize, said John Callaghan, an agent with Hernando Beach Realty, "we went through all last year without anyone walking through the door. ... The consequences were immense."
Waterfront masked inflated prices
Dishonest investors apparently targeted Hernando Beach because its waterfront houses were expensive enough to hide inflated prices, said county Property Appraiser Alvin Mazourek.
The larger problem was distant mortgage companies making loans with no knowledge of local markets, said Frank Gregoire, a St. Petersburg property appraiser and president of the Florida Real Estate Appraisal Board.
Many of these companies were too eager to grant high-risk, high-interest loans, said Jay Newton, an administrator with the state Bureau of Finance Regulation.
"It's a matter of greed, and it affected everyone from buyers who knew they couldn't afford a $650,000 home to lenders who saw the opportunity to give out a $650,000 loan at 8 or 9 percent interest," Newton said. "Lenders were crawling all over themselves to lend money."
Though the FBI would not confirm or deny whether it has investigated deals in Hernando Beach, it said the number of mortgage fraud complaints it received nationally jumped to 35,617 in 2006 from 5,623 in 2002, with an estimated loss of about $1-billion.
"We view mortgage fraud as a very significant and growing crime problem," said David Couvertier, spokesman in the FBI's Tampa office.
Houses wind up in foreclosure
One common form of mortgage fraud starts with what seems like a sure way to lose money: an agreement to pay too much for a house.
This allows the buyer to extract a larger mortgage than the house is worth - say $600,000 for a house listed at $400,000, Gregoire said.
That leaves $200,000 to split among whoever is in on the deal. That might include sellers, buyers, appraisers willing to produce inflated price estimates or real estate agents who bump up asking prices to justify overly high appraisals.
Common signs of mortgage fraud, according to the National Association of Realtors, include repeated sales, often on the same day, at prices well above the taxable value; sudden changes of a house's price on the Realtors' Multiple Listing Service, and, ultimately, foreclosure.
Though the Times analysis found nine properties in Hernando Beach and Hernando Beach South that had been sold with at least one of these indications, deals involving four of the houses most closely fit the pattern Gregoire described.
Transactions on these properties, all of which are now in foreclosure, began with a purchase by a Spring Hill investor named Kathy Schmidt or one of her companies - Soni Homes Inc. or Gulf Coast Instant Equity Inc.
Schmidt then resold them to someone associated with a now-defunct Tampa company, Real Estate Exchange Partners Inc. People involved with that company included president Steven Michaelson and Robyn Michaelson, both of whom face foreclosure on properties throughout the Tampa Bay area. Though their relationship is not clear, they list several common addresses in property records. Neither could be reached by the Times at any of the several telephone numbers listed in public documents.
Hernando County real estate agent Lance Sutter suddenly increased the asking price of the two houses that Steven Michaelson bought.
As the agent and original owner of one of these homes, on Casa Court, Sutter bumped the listed price to $750,000 in April 2006, from $499,000, and then to $815,000 on May 12 - the same day it sold to both Soni and Michaelson, who bought it for $750,000.
Later that month, Sutter dramatically increased the price of another house, this one on Bluefish Drive, one day before it sold to both Soni and Michaelson.
In both instances, Sutter said, he raised the prices at the request of Schmidt, who told him she had buyers lined up willing to pay higher prices.
"I was thinking, 'Jeepers, (Soni) must be pretty savvy. They must be privy to buyers I don't have,' " he said.
It was only after these sales, Sutter said, that Dan Richard, then owner of the agency for which Sutter works, Exit-Success, told him that raising a price to satisfy a buyer violated company policy.
Worse than that, it can be illegal, said Sam Farkas, spokesman for the state Department of Business and Professional Regulation. The Florida Real Estate Commission can also revoke agents' licenses if it proves they have changed prices to support fraudulent sales.
That was not the case, said both Sutter and Ruth Hersh, another Exit-Success agent who said she raised the price of a house in Hernando Beach that was sold to Soni.
"At the time, I don't think that big, bad thing called mortgage fraud was rampant, and I don't think I was aware of it," Sutter said.
"I don't buy that," said Michelle Paedae, another Exit-Success agent, who said Sutter and Hersh discredited the honest majority of Realtors in their agency and the county.
"If they knew what they were doing, they need to be held accountable. If they didn't know, they are so ignorant they don't deserve to have a license."
Company official defends practices
Though Schmidt did not return several telephone calls to her house and business in Spring Hill, Soni vice president Annabelle Verity took the same stance as Sutter during an interview in early January: Soni never knowingly did anything wrong, she said.
She and Schmidt began buying and selling houses in Florida in 2002, when they lived in New York. They made so much money so quickly, she said, they soon decided to move to Spring Hill as full-time investors.
"That's what I do. I buy homes for cheap and sell them for more," she said. "I don't see where I did any harm."
Jim Bourgoin does.
A Spring Hill real estate broker who only represents buyers, Bourgoin says he can no longer tell clients whether asking prices in Hernando Beach are fair because he often cannot find legitimate sales for comparison.
"Fraud just totally messed up the market," Bourgoin said.
He blames not only investors and Realtors, but the county Realtors association for also failing to address the problem.
Executive director Ed Carr said that early in 2007, he brought in Gregoire, the Florida Real Estate Appraisal Board president, to teach members to recognize and steer clear of fraud. Carr's group, which received no formal complaints of fraud among its members, is set up to educate Realtors, he said, not help prosecute them.
"I think that's beyond the scope of this organization."
Maybe so, Bourgoin said. But he is so disturbed that Hersh, Sutter and other agents involved in suspicious deals are still working in the county that he shared MLS documents with the Times.
He explained why in a letter to the paper in December.
Dishonest investors and real estate agents, he said, "are doing an injustice to our community by selling houses knowing these properties will eventually go into foreclosure and become a burden and an eyesore. ... These Realtors need to be exposed and their licenses revoked."
Here are four transactions in Hernando Beach or Hernando Beach South that bear several traits that the National Association of Realtors says may indicate mortgage fraud. These include quick resales with large differences in prices, sudden increases in list prices and, eventually, foreclosure.
4057 Bluefish Drive
Sales: On May 26, 2006, the house sold to Soni Homes Inc. for $361,000 and, the same day, to Steven Michaelson for $575,000.
Price changes: Listing agent for the property, Lance Sutter, placed the house on the market in September 2005 for $449,000 and later dropped the price to $399,000. On May 25, 2006, the day before the two sales, he increased the price to $585,000.
Appraised value: $285,125.
The update: A bank foreclosed on this property in June 2007.
4063 Casa Court
Sales: Lance Sutter, who had bought the house in October 2005, sold it to Soni Homes Inc. for $490,000 on May 12, 2006, the same day Soni sold it to Steven Michaelson for $750,000.
Price changes: Sutter, also acted as listing agent, first offered the house for $575,000. After dropping the price twice, to $499,000, he increased it to $750,000 in April 2006 and on May 12 to $815,000.
Appraised value: $506,485.
The update: A judge declared the property in foreclosure in December 2007.
3223 Hibiscus Drive
Sales: Kathy Schmidt bought the house on April 1, 2005, for $560,000. She sold it to Robert Lugo, who would later become vice president of Real Estate Exchange Partners, for $810,000 in April 2006. It was later sold to Robyn Michaelson for $835,000.
Appraised value: $416,828
Update: A bank foreclosed on the property on Aug. 14, 2007.
3342 Turks Cap Drive
Sales: Gulf Coast Instant Equity, with Kathy Schmidt serving as president, bought the house on Aug. 11, 2006 for $400,000 and resold it to Robyn Michaelson one month later for $590,000.
Appraised value: $418,828
Update: A bank foreclosed on the property on Aug. 14, 2007.
Sources: Hernando County Association of Realtors Multiple Listing Service; Hernando County Clerk of Circuit Court, and the Hernando County Property Appraiser's Office.