Flipping Real Estate Becomes a Flopping Scam

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.

Before we get started, we suggest you visit last week’s most
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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:

Basic Collusion

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.

Overpricing

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.

Deal Steering

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.

Straw Buying

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.

Implications

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!