Flopping Houses: A New Kind of Mortgage Fraud

In the aftermath of the mortgage meltdown of a few years ago, several new varieties of mortgage fraud emerged, as buyers and sellers scrambled to grab properties and turn them over as fast as possible. Among the latest: , a strategy in which sellers deliberately deface and destroy parts of houses in an effort to get the lowest possible price.

What drives the practice of flopping is the short sale, in which a house is sold for less than the mortgage is worth. The seller must ask the lender to accept the sale. In this way the lender can get most of the money back without having to take the case all the way to foreclosure.

So when a seller is underwater on the mortgage, and a lender accepts the short sale, the difference between the sale price and the actual amount owed is forgiven. The short sale then takes place between the seller and an accomplice who then flips the house – often the same day– for a quick profit.

Acceding to a new report by CNNMoney, sellers have spread possum urine around a house, pulled out appliances, and applied water stains to walls. Some report plumbing or electrical problems, providing estimates from repair companies in on the deal. When legitimate buyers see these flaws, they opt not to buy, so the seller is able to make a convincing case to the bank that the house can’t be sold without lowering the price.

One reason the scam works is that regulatory agencies such as Freddie Mac are too swamped to make full investigations of suspicious sales unless several red flags are raised. In some cases, a sale takes place and the house is flipped the very same day, or shortly thereafter. In others, the same kind of claim is used repeatedly for multiple properties. And in still others, the scam was traced through extremely fraudulent repair estimates.

Flopping currently accounts for about 2% of the short sale market, a market which has broadened considerably since the start of the housing collapse in 2008, the practice accelerated by many homeowners to avoid the full foreclosure process. Since short sales are frequently the target of flippers, who buy houses cheap, do fast, minimal repairs, and immediately list them for sale again, making a quick profit in the process, these properties move in and out of the market at lightning speed.

How does this affect legitimate real estate investors? Although the percentage of flopped houses in the whole short sale market is quite small, this kind of mortgage fraud can put legitimate deals under scrutiny if they appear fraudulent in any way. Many new solo investors working with Jason Hartman’s investing principles are buying distressed and foreclosed properties, some of which may be short sales, to launch their investing careers. And although short sale regulations vary from state to state, individual investors may be affected by the next new ways to defraud the mortgage industry. (Top image: Flickr | Vagabond Shutterbug)

The American Monetary Association Team

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