A new article from the LA Times appeared on September 5th coining a new type of scam called, “Flopping”.
In a nutshell, the article claims that agents, lawyers, and loan brokers all conspire together to devalue a house more than it really is to get a better deal on a property than it is truly worth, and it coins this, “Flopping”:
In an illegal flip, the scam artists inflate the value of the property so the mortgage company will lend more than it’s worth. Then they work a deal with the seller to pocket the difference.
A flop works the other way. Rather than inflate the value of the house, they deflate it so the lender will permit the borrower to sell the place for far less than what it’s worth. Then the buyer or realty broker, who is often part of the fraud, sells it to someone else at its true value and splits the profit with others in on the deal.
First off, we have a big concern that the LA Times makes a statement like this with little backup other than a single quote about homeowner scams from the recently released CoreLogic study.Furthermore, the CoreLogic study commentary around fraud typically deals with transactions that are not arms length and / or transactions where full disclosure is not occurring (identifying future sales or B-C flip type of transactions).
We are surprised at the traction this article has gathered on Twitter and elsewhere; because frankly it just seems so cobbled together and leaving loose ends out there. The advice at the end of the article is almost incoherent:
• Be alert to who is counseling you. Don’t respond to unsolicited e-mails, and don’t call the numbers on roadside signs. Trust only your closest advisors. Or contact a counseling agency approved by the Department of Housing and Urban Development. If a counselor is not HUD-sanctioned, look elsewhere.
• Just because you see the letters LLC after the name of a firm or individual doesn’t make it or him legit. Check them out with the state authorities to make sure that they are registered or licensed, and with your state consumer-affairs agency to see if any complaints have been lodged against them. Ditto for your real estate agent.
• Beware of claims such as “We win 99% of our cases” or “We don’t take no for an answer.” It just doesn’t happen.
• If someone suggests that the lender will agree to an offer that is far below what your house is really worth, even in the current poor market, you should be wary. The agent, in conjunction with someone else in the transaction, may have a buyer waiting in the wings at a higher price.
First off, who is this directed towards? Homeowners? If so, then why does the opening statement say that Homeowners tend to lose millions on short sale fraud, when the homeowners financial position isn’t impacted once you are in the short sale territory?
Or, is this directed towards those working with lawyers and title brokers?
The final point they make is based on the house being worth far below what it truly is – who determines that? There is only one person that determines home values – and that is a BUYER. The bank does their due diligence with an appraisal or BPO before a short sale offer is approved. A ridiculous offer should be vetted during that procedure, but again – it’s important to remember that all these numbers are only someones opinion.
As we always say – as an investor or agent, you need to disclose what the circumstances around a transaction are and be honest about the deal. If there is a mass conspiracy between BPO agents, title companies, and brokers, I would sure be surprised. It does happen, but those are clearly unethical transactions. The bank needs to cover themselves and make sure they are performing accurate valuations to mitigate their risk, and that’s the end of it.
Thoughts? Have you encountered any of these so-called “Floppers” in your neck of the woods?
