Real estate investors who legally cash in on rising home values by buying and quickly reselling, or “flipping” properties shouldn’t be confused with an offshoot band of “floppers” working the other side of the street.
Honest flipping profits from a true increase in property value. Conversely, flopping illegally profits from a false decrease in property value.
Following in the footsteps of foreclosure rescue scams and mortgage modification schemes, flopping is one of the latest scourges of the housing market.
Flopping takes aim at the short sale sector of distressed housing.
A short sale occurs when the bank allows the sale of a home for less than the existing mortgage balance, typically provided there’s a qualified buyer in the wings. Such homes are often held by home owners struggling with “underwater” mortgages — mortgages with balances larger than the value of the home.
When a flopper steps into the deal, he or she hires a broker to assess the home for less than its true market value, based on what’s called a “broker’s price opinion” or BPO, and convinces the bank to make the sale at the lower level.
Unknown to the lender, the buyer has lined up another, higher offer. The flopper buys the home at the depressed price and quickly resells the property for a profit at the higher price.
Who is flopping?
“In many cases, the Realtor (real estate agent) or broker works with the money person or “funder” to purchase the property at the negotiated short sale price. In other cases, the Realtor or broker will have the distressed homeowner deed the property to them in trust,” according to the LexisNexis Mortgage Asset Research Institute.
In its 13th Periodic Mortgage Fraud Case Report released in May, 2011, LexisNexis specifically points to the rise in flopping as a key aspect in Mortgage Fraud Suspicious Activity Reports (SARS).
LexisNexis says SARS stood at 3,245 ten years ago, rose to 35,617 in 2006 at the onset of the housing crash and rose to 70,472 in 2010, a nearly five percent increase since 2009.
“Appraisal and valuation misrepresentation continues to rank highly across all classifications, even in a weak housing market. One can attribute this steady rise to, among other things, newer fraudulent acts that take advantage of the minimal information required to validate declining values, and lender desperation. An example of this type of fraud is what the industry calls ‘flopping’,” the case report says.
LexisNexis reported 33 percent of loans investigated in 2010 included some type of misrepresentation or fraud involving the property and/or appraisal, up from 27 percent in 2006.
“This steadily-growing figure includes property misrepresentation like flopping,” according to the report.
Not only can the original sale skew values of like properties in the neighborhood, the original seller gets the short shrift on both ends. The property sells for a deflated price, forcing the seller to pay more than necessary should the lender come after him or her for the difference between the mortgage due on the property and the deflated short sale price.
Some flopping critics say some of the blame for the flopping trend goes to the Federal Housing Administration for recently suspending an anti-flipping rule cast in 2003 to stop boom-market “flipping.” Before the rule, slick investors purchased properties, cosmetically or slap-dashed “improved” them and quickly resold them at inflated prices to unsuspecting borrowers.
The rule prohibited the FHA from insuring a mortgage on homes that were owned by the seller for less than 90 days, but it’s been waived since early 2010, to help move the over-supply of distressed homes. The waiver remains in place until January 2012.
A provision of the rule, however, appears to guard against flopping. To benefit from the waiver, the rule requires, among with other provisions, that transactions must be arms-length, with no interest between the buyer and seller or other parties participating in the sales transaction. There’s obvious collusion in flopping.
Other’s blame the government’s Home Affordable Foreclosure Alternatives (HAFA) program, which permits the use of BPO’s to speed up short sales.
Though not specifically designed to guard against flopping, general anti-fraud law, appraisal regulations and the new federal “Mortgage Assistance Relief Services (MARS) Rule” all have provisions that appear to guard against flopping.
Unfortunately floppers are more surreptitious in their actions than regulators are adamant about enforcing the rules.