Friday, June 11, 2010

Feds, Others Continue Bringing Attention To Increase In Short Sale "Flopping" Scams

Bloomberg News reports:
  • Two Connecticut real estate agents found a way to profit in the U.S. housing bust: Buy low, sell fast. Their tactic was also illegal. Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed -- known as a short sale -- without disclosing that there were better offers. They then flipped the houses for a profit.

  • The Federal Bureau of Investigation, the California Department of Real Estate and mortgage finance company Freddie Mac have warned that such schemes may be spreading after a plunge in values left homeowners owing more than their properties are worth. The scams threaten to deepen losses for lenders that are increasingly agreeing to short sales as an alternative to more costly foreclosures.


  • A prevalent scam involves a practice called “flopping,” [special inspector general for the Troubled Asset Relief Program Neil] Barofsky said. In that scheme, investors or home buyers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level.(1) The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit, as in the Connecticut case.(2)(3)

For more, see Banks Face Short-Sale Fraud as Home ‘Flopping’ Schemes Spread.

(1) For an instructional video on how one company goes about convincing lenders to take lower prices on their approved short sales, see How To Influence A Broker Price Opinion - BPO, So They Consider Your Low Price.

(2) Jumana Bauwens, a spokeswoman for Bank of America Corp., reportedly said ““We have language in our short sale approval letter that prohibits the flipping of a property and after closing we will audit transactions to identify ‘flips’ or ‘flops.’ It’s not in the best interest of our investors or communities at large to encourage or allow flipping.”

Morgan McCarty, executive vice president for mortgage servicing at Birmingham, Alabama-based Regions Bank reportedly added that his company company requires a full appraisal before a resale, and also demands short-sale buyers sign statements affirming the transactions are arms length, with no hidden buyer-seller relationships, and that there are no agreements to resell the property.

(3) For other stories on alleged short sale flipping scams, see: