What is Short Sale “Flopping”
Don’t ever try a short sale “flopping?
Short Sale “Flopping” is a practice you must be aware of because several federal law enforcement organizations are looking at this closely. There are many gurus out there that teach this transaction – in reality, this is almost all that the short sale gurus teach. You must be aware that the FBI, several attorneys general, and the short sale banks are looking very carefully for these types of transactions, and investors and agents that are caught may be charged with fraud. Agents could lose their license and who knows what they will do to the investor. One “criminal perpetrator” who is being made an example of could go to jail (sentencing pending).
What is “flopping”? The TARP Inspector General describes ‘flopping’ as “a short sale ‘scheme’ centering on home values that are fraudulently deflated for the purpose of decreasing the cost of the short sale to a ‘straw purchaser.’ The property is then quickly resold for its true market value, leaving the difference in the crook’s pocket. Historically, these schemes often involve the participation of corrupt brokers and servicers.”
Banks are auditing their files after closing to see if there are post-closing transfers to identify transactions that are potentially fraudulent. Everybody knows that distressed sales prices are lower than retail prices. If you buy a property a property at a distressed price and then quickly resell at retail price is this fraud? The powers that be are certainly trying to classify it as fraud. If you are doing this, just be prepared to be demonized if you get caught and you better hope that your files.
It seems that that they are targeting two things. One, you have a buyer lined up and you don’t tell the bank about it. Why is it an investor buyer’s obligation to disclose that you have a buyer lined up after you purchase… you got me. Two, you are lying, providing false documentation to influence the bank, and you are persuading (sometimes by profit splits, bribes, and the like) the BPO agent to bring the value in low.
Is it inherently illegal to buy a property low and sell it quickly for a higher price? I would argue no, but I guess it would depend on the details, and I wouldn’t want to be explaining myself to a jury.
What is the correct and legal way to purchase a short sale? Buy trashed properties for good prices and do fix and flips. Partner with an investor who wants to fix and flip the property. Buy the short sales as a keeper. If you want to put more rentals into your portfolio, short sales are a great way to acquire keepers.
Bottom line, don’t do anything that looks like it could be illegal or unethical and don’t commit fraud. There are correct ways to do these transactions.
Comments (7)
Banks have been trying to fight this for a few years now. Nothing new. When short sales became prevalent this type of thing was happening on a regular basis and more recently banks have been making buyers sign documentation limiting the ability to flip a shortsale in an ABC situation. The reason, of coarse, is that the banks are greedy and have absolutely no idea how the real estate industry actually works. If theres a profit to be made they want to make sure it ends up in their pockets. Here's the problems the banks are facing. 1. In most states realtors have a fiduciary responsibly to their clients, not to the banks. If you're representing a seller then your primary responsibility is to help them avoid forclosure. If you represent a buyer then your responsibility is to get them the best deal possible and protect their interests. It gets very sticky in court. 2. Its' nearly impossible to Determine from the banks perspective when an "end buyer" actually got involved. How is the bank to prove that they existed when the initial purchase was made? 3. Short of physically defrauding a bank with false documentation as you suggested, there are many legal ways to get the price of a house down and the banks are mostly at fault. I recall a shortsale I completed in delaware where the bank was in Texas and sent an agent from over an hour away to do a BPO. Firstly, the bank ignored the fact that brokers, not agents, are supposed to do BPOs hence, BROKERS price opinion. Secondly, how is an agent supposed to do a proper evaluation on a property well out of his marketing area? The agent basically had no choice but to agree with our evaluation and current offer less he blow up a deal he has no business being in in the first place. As the old addage goes "a house is only worth what someone is willing to pay," and an uniformed appraisal is a buyer's best friend. I was once told by a prominent CPA that the difference between tax evasion and avoidance is paying the right guy to handle your affairs. This situation is very similar. With the right attorney and some basic common sense ABC short sale transactions are almost impossible to prove in court.
, almost 13 years ago
Hey There, I'm not going to say which "guru" was teaching this because I don't like to say mean things about other investors. But "Flopping" is specifically referring to a realtor who has a listing with the owner of record and and has an investor they are working with to buy the house. What the realtor is doing is keeping the house on the market for sale but also has it under contract with the investor. What the realtor is doing is presenting all the offers to the investor rather than the their client. This is what the banks don't want to see. That's why so many realtors now have to sign the bank affidavits now that there is no fraud and there isn't an end buyer lined up already.
Monica Breckenridge, almost 13 years ago
Also it's Ok to Flip a short sale but the banks are making this harder and harder on the investors. They want anti-flip waivers signed that they won't resell for 30-90 days. We've stopped doing the double closings 3 years ago and now our exit strategies on the short sales are fix and flips and Fix and Hold and getting long term financing. We think these transaction are cleaner and this is what the bank's like to see.
Monica Breckenridge, almost 13 years ago
Which "gurus" are teaching this? Although it is a flip its not anything like wholesaling or retailing! The big difference is that investors are dealing directly with owners as opposed to banks, or bribing bank affiliates to bring home values lower than what they actually are by providing fraudulent reports or bribery. Even when buying REO's, then flipping them, that's not a problem. But it would be if the investor is doing shady work with the REO agent or a bank rep to purchase the property lower than it should be. If that's "flopping", then there really is no gray area. It sounds plain wrong to me.
, almost 13 years ago
It sounds like flopping is just..... flipping.
Craig Shute, almost 13 years ago
Thanks. Its not a term you hear often. Mostly used by banks and they consider it short sale fraud. Thats part of why the banks make realtors sign certifications now of full disclosure and arms length transactions.
Monica Breckenridge, almost 13 years ago
very interesting. I have never heard of "flopping" until now. Thanks for the post!
Kevin Kaczmarek, almost 13 years ago