Scrutiny Into Short Sale 'Flopping' Deals Continues

In Phoenix, Arizona, The Arizona Republic reports:

• As more houses in metro Phoenix go on the market for short sales, some investors have begun buying and reselling them quickly for a profit, using strategies that some in the housing industry say could be unethical or worse. The deals work in a variety of ways, but all involve the same basic strategy. An investor persuades a lender to agree to a short sale, buying a house for less than what the lender is owed. But the investor has another buyer lined up who is willing to pay more.

• The bank, usually unaware of the other waiting buyer, accepts a lower price from the investor, who then quickly resells the home - for a higher price - to the waiting buyer. The deals, which have become more common as short sales have increased, are now drawing the attention of real-estate and financial regulators. Most lenders object to such deal-making because, had they been aware of the other waiting buyer, they would have taken the higher price. Banks take a loss on short sales, and the deals can make their losses greater.

• Real-estate professionals disagree over the nature of the deals. Some insist they are a smart way to make a profit in a tough market. Others call them unethical at best and question whether investors violate the law if they conceal information from a lender.

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• The Arizona Department of Real Estate, mortgage giants Fannie Mae and Freddie Mac and the FBI are all investigating flopping deals. "Short-sale flopping is one of our real-estate industry's biggest issues right now," said Judy Lowe, Arizona Department of Real Estate commissioner. "We are all looking at the legality and ethics of these deals. And it varies by flop because it appears every deal is done a little differently."

For more, see Phoenix real estate strategy of 'flopping' examined (Manipulated short sales resold for quick profits).