New ruse exploits short sales and home price crash: Internet Scambusters #425
The property market may have collapsed but real estate flipping is alive and well -- in the form of a new practice dubbed "flopping."
In this real estate strategy, participants buy a home from an owner who may face foreclosure, at a price well below its distressed value by agreeing to a deal with the lender, then immediately resell it for a fat profit, sometimes to a fellow conspirator.
In this week's issue, we explain how flopping works and what you can do to try to avoid it if you're selling your home or know someone who is.
Time to get going...
Flipping Real Estate Becomes a Flopping Scam
A new and unsavory side to the nation's real estate crisis has emerged during the past few months in the shape of "flopping" -- the opposite of flipping real estate, which we saw back in the boom days.
It's a scam. And, though it may not always involve breaking the law, real estate flopping could be costing struggling homeowners many thousands of dollars each year and further damaging their credit records.
The basic flopping real estate strategy works as follows:
- Unable to make their mortgage payments and facing possible foreclosure, a homeowner receives an offer below what they owe the bank.
- The owner passes the offer to the bank, which accepts the deal in settlement of the loan. This is known as a short sale. The bank prefers it because, overall, it costs them less than the foreclosure process.
- The new owner already has another buyer lined up and immediately resells the home at a higher price, pocketing the profit.
Think this sounds like an unlikely scenario? Well, one expert reckons between 1% and 5% of all short sales could be the result of flopping, which might be costing mortgage lenders around $50m a year.
Well, we're not too worried about the lenders -- they should be able to look after themselves, and we don't imagine they'd attract too much public sympathy.
The real victims are homeowners, who could have used the money that went into the floppers' pockets to save their credit record, and the taxpayer generally who might end up meeting part of the lenders' short sale loss through a federal process that enables lenders to claim a refund.
Just like real estate flipping back in the good ol' days, flopping seems to be spread nationwide. It may or may not involve the collusion of realtors, appraisers and investors.
Commonly used flopping techniques include:
This is the simplest form of flopping, outlined above. It usually involves two investors, the first of whom secures the short sale with the homeowner and lender.
This person then sells to the second investor for a profit. The second sale is not a short sale and therefore does not involve the complex paperwork that goes with this type of deal -- that's the attraction to the second guy.
The realtor may know nothing about this collusion. Or they may. The attraction to the realtor may be picking up two sales commissions on one home.
The second investor commonly rents out the home, and earns their return that way.
In this scam, a realtor sets an unrealistically high price for a home, so, of course, there are no offers.
Then, just when the house looks set to go into foreclosure, the price is lowered, a buyer miraculously appears, the bank accepts the short sale low offer, and the owner is relieved to avoid foreclosure.
Meanwhile, the original owner's credit score has sunk as a result of not making mortgage payments for months.
The new owner "flops" the home, reselling it straightaway at a profit.
Although the deal involves a deception, it's difficult to say whether anyone broke the law, though it might be possible to argue that the original owner was defrauded.
In this instance, the realtor or other agent simply turns down higher offers on the home so the seller never finds out about them.
Or he simply takes the property straight to a short sale investor he already knows.
The house is sold to the flopper, who sometimes makes an additional payment to the agent.
There may or may not be another conspirator.
Sometimes, the new buyer has been able to secure such a low price they can just re-offer the home at a profit on the open market.
This type of real estate flopping has been tried in the court system, with a couple of East coast realtors convicted of failing to disclose they had received better offers.
This out-and-out crooked deal involves a fraudulent purchase of a property by someone using a phony identity.
The "buyer" never makes any mortgage payments and the lender eventually puts the house up for sale.
An accomplice then steps in and secures a short sale purchase at a bargain price.
It's perfectly feasible for flopping to happen even when the buyer is not under financial strain, if a realtor persuades you to accept a low-ball price knowing the house will immediately be resold.
In a true short sale, sometimes owners may be required to make up the difference between what the lender gets and what the borrower owes. Obviously, if the house has been sold at below its true value, the borrower has a bigger gap to fill.
In addition to the losses suffered by the original homeowner, this perversion of flipping real estate can also push down other home values in the locale.
Attempts to avoid or restrain this real estate strategy have included imposing restrictions that forbid resale within 30 or even 90 days, but these are hardly likely to deter scammers.
Furthermore, some realtors apparently think flopping is perfectly okay provided they declare upfront to the lender that the buyer has another purchaser lined up.
But if you're the struggling homeowner at the end of this chain, you might not feel so happy.
There are a couple of steps you could take to minimize the risk or the impact.
First, check the integrity of the realtor. If you're selling your home under duress, make your realtor aware that you know about flopping and establish his/her views on the practice. Make it clear you want the best possible price for your home.
Second, if you suspect any type of deception, tell the lender. If you're in a strong financial position, get a second opinion on the appraised value.
And third, if, as a foreclosure-threatened owner, you're even thinking about becoming involved in such a deal and taking a cut of the profit, don't. You almost certainly would be breaking the law.
At least in the days of flipping real estate by improving and re-selling homes, everything was above board -- the same can't be said about this practice.
That's a wrap for this issue. Wishing you a great week!