“Flopping” – A New Form Of Short Sale Fraud

Many homeowners today are turning to short sales as a way to get out from under their housing debt. Banks also approve short sales over foreclosure as a way to recoup more of their losses. And buyers can get a great price on a home. Short sales are a winning combination for everyone — and also a target of fraud by unscrupulous real estate agents, investors and buyers.

Short sale fraud

One such short sale fraud called “flopping” involves investors or other home buyers hiring brokers to assess a home for less than market value. They then persuade lenders to approve the short sale of homes without disclosing that they have a better offer. The investors then quickly resell the homes for a profit. The FBI and other state agencies say that such schemes may be on the rise.

HAFA

One of the government’s programs to increase the number of short sales may actually raise incentives for fraud. The Home Affordable Foreclosure Alternatives Program, or HAFA, offers up to $1,500 to servicers, $2,000 to investors and $3,000 to homeowners who participate in short sales. These bonuses are attractive targets for investors who may participate in “flopping”.

“Flopping” hurts everyone

It is estimated that “flopping” occurs in more than 1 percent of short sales, and may cost lenders up to $50 million this year, according to experts. Homeowners who sell a home through a short sale may also be hurt as they face higher deficiency judgments.
In addition, the taxpayer is hurt, as the government paid $49 billion for housing bailouts to banks who take a hit in a short sale.

Home valuation is the key

The key to the scam is the home valuation, or broker price opinion. Brokers in most cases drive by the home and do not do a full appraisal. Even if a full appraisal is done, though, there is no guarantee of the accurate value of the home being reported. It’s up to the integrity of the appraiser. Unscrupulous investors will try to persuade the broker or appraiser to skew the numbers in their favor.

Banks can control short sale fraud to some extent

Some banks require a full appraisal, and ask short sale buyers to sign statements that there is no hidden relationship between them and the seller. They can also ask for a statement that there is no agreement to resell the property. Even with such protections, however, the scams continue.

The number of short sales is expected to increase throughout this year. Until better protections for against “flopping” and other schemes are put into place, the incentive for fraud remains high.