A recent article in the Minneapolis Star Tribune, "Straw Buyer deals fuel tidal wave of foreclosures", discusses a problem that has been big for over a decade. Back in the 1990's, it was called the "Flipping Scandal". It involves property sold at inflated prices to unsuspecting buyers
In this story, a 22 year old woman was sold 10 houses in 90 days, with none of her money down, accumulating $2.4 million in debt. Less than 18 months later, she was losing all the properties to foreclosure.
Flipping became such a bad word that it seems to have dropped out of the local vocabulary. I've seen "flipping" defined as "buying a property and then selling it at a profit in a short time period. If you think about it, despite its negative connotation, there is nothing wrong with that. However, it becomes unethical if it is sold at above fair value. It becomes illegal if fraudulent loan documents or appraisals are used.
Every Realtor knows that the problem would be prevented if buyers were represented by a good Realtor. Unfortunately, not all buyers realize this.
Things to look for:
If seller, Realtor, mortgage broker, title company etc..., are related or all know each other, this is a red flag. But it is common for professionals to refer you to other professionals they know and trust, so it doesn't mean you should avoid the deal, just keep your eyes open.
If the seller recently acquired the house, it is a red flag, but again, it may be a perfectly good house at a fair price, so don't run, just keep your eyes open.
If you are asked to sign any documents that are incorrect, or if any financial part of the transaction is not reported or is misrepresented on the HUD settlement statement, this is a big red flag. Run! And then contact the authorities. In Minnesota, that would be the Department of Commerce.
In all cases, it's a good idea for buyers to seek advice from their own Realtor.
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