A warning has been issued to homeowners about an alarming rise in short sale fraud across California in a field "rife with scam artists".  

A short sale is an arrangement in which a homeowner sells his or her home for less than the outstanding mortgage, with the consent of the lender.

Attorney General Edmund G. Brown Jr. joined the California Department of Real Estate and the State Bar of California in announcing the warning."

While short sales can provide homeowners with a last-ditch alternative to foreclosure, this market is rife with scam artists," Brown said. "Homeowners and buyers, agents, and lenders should beware of short sale negotiators who operate without licenses, use straw buyers or charge illegal fees."

With so many homeowners now considering short sales, an entire industry of so-called short sale negotiators has emerged. These individuals solicit homeowners by promising to expedite the process and help coax lenders into taking part in the transaction.

The Department of Real Estate is investigating more than 40 complaints of short sale fraud, up from "virtually zero" cases only three months ago, a spokesman said.

In April, the Obama administration launched a new initiative called the Home Affordable Foreclosure Alternatives Program, which encourages homeowners in financial distress, especially those who have failed to complete a trial modification or qualify for a loan modification, to consider a short sale as an alternative to foreclosure.

Before working with or paying any short sale negotiator, homeowners should consider the following red flags:

1-No license - With limited exceptions, only licensed real estate agents or attorneys can engage in short sale negotiations with a homeowner's lender.

2- Up-front fees - Licensed real estate agents wishing to collect up-front fees from homeowners for short sale transactions must first submit an advance fee contract to the Department of Real Estate and receive a no-objection letter.

3- Surcharges - With many distressed properties listed well below market value, negotiators and agents are charging potential buyers thousands of dollars in surcharges and hidden fees just to place an offer on a home. These illegal fees are frequently not disclosed and are paid outside escrow.

4- Straw buyers and house flipping - In this scheme, short sale negotiators misrepresent the market value of a property to a homeowner's lender by only submitting offers on the property from an affiliated straw buyer. After the home is purchased below market value, the fraudsters immediately flip it and pocket the difference.

Short sale negotiators and agents use a number of titles including debt negotiator, debt resolution expert, loss mitigation practitioner, foreclosure rescue negotiator, short sale processor, short sale coordinator and short sale expeditor.