"Flopping" Short Sale Properties - Criminals are always trying to find ways of profiting
Michael Richardson
"It's just that criminals are always trying to find ways of profiting." said Morgan McCarty
The goal of a short sale is to help a homeowner avoid foreclosure if they are no longer able to make payments or remain in the home. In the short sale process, a house is sold and a settlement of the mortgage debt is for less than the amount that is owed to the lender.
With the high level of foreclosure filings every month there are plenty of people out there promising homeowner's solutions that sound too good to be true. There is no lack of dishonest con artists willing to take advantage of desperate homeowners.
This particular fraud case involved a scheme called "flopping". The flopping of short sale properties usually has a real estate agent or a short sale negotiator involved in the scheme. In order to make the illegal flip work one of them will misrepresent the true market value of the property to the lender and or will fail to forward all offers to the bank reflecting the true market value.
They then buy it themselves through the use of "straw buyers", which many use, a limited liability company. They will use fraudulent broker price opinions or appraisals to support a depressed valuation. Once the dishonest agent or a short sale negotiator has the bank agree to a sale using the false value, they have their straw buyer purchase the property and immediately flip it at the true market value, too buyers who had submitted a legitimate offer.
Short sale fraud is now recognized by the FBI as real estate fraud, and more people involved will be prosecuted for this type of fraud. Unfortunately some real estate agents believe they are being creative or that it is not illegal, although the fact that they devised a scheme that includes "misrepresentation or omission" is fraud.
Sergio Natera, a Connecticut, a licensed real estate agent, pleaded guilty before United States Magistrate Judge Holly B. Fitzsimmons to one count of bank fraud stemming from his involvement in a "short sale" mortgage fraud scheme.
According to court documents and statements made in court, Natera worked with another real estate agent to defraud Regions Bank, which held two mortgages on a residential property in Connecticut.
The other real estate agent, who was a listing agent for the property, received an offer to purchase the property for a price of $132,500. However, Natera subsequently communicated to Regions Bank that the highest offer to purchase the property was for $102,375 by BOS Asset Management, LLC, and an entity that Natera controlled.
The bank agreed to a short sale of the property for the lower price, and released its mortgages on the property. Then Natera, through BOS Asset Management, sold the property for $132,500 to the original bidder on the property.
Natera is scheduled to be sentenced by at which time he faces a maximum term of imprisonment of 30 years, a fine of up to $1 million, and an order of restitution.
Nora R. Dannehy, United States Attorney for the District of Connecticut, announced the guilty plea. This matter is being investigated by the Federal Bureau of Investigation and is being prosecuted by Assistant United States Attorney Ann M. Nevins.
"Flopping" occurs in more than 1 percent of short sales and may cost lenders $50 million this year, according to estimates from CoreLogic Inc., a real estate data and research company in Santa Ana, California. About 12 percent of existing home sales, or almost 622,000 houses, were short sales in the 12 months through April, data from the National Association of Realtors show. Many experts consider this is an extremely conservative estimate.
Everyone needs to remember that in any real estate transaction fraud is committed by "misrepresentation or omission" of facts that unduly influence the decision of any other party.
In some of these cases people have "Willful blindness" which is a legal term that skirts the boundary between neglect and culpability. The concept of willful blindness, which at its heart expresses the contention that the industry exhibited "willful blindness" to an obvious fraud through ignoring it for so long, in so many cases, at the hands of so many fraudsters.
Once a white-collar criminal gets away with fraud, the process quickly becomes addictive. Success breeds more Success, and before long such crafters of fraudulent scheme clearly begin feeling that not only are they above the law but in fact, they are not doing anything wrong in the first place.
There is nothing prohibitive about flipping properties as long as you do not engage in the fraudulent activities, you disclose in writing, and structure your transaction so that every document you submit is legitimate.
It is important to know that not all short-sale flips are fraudulent as there are many real estate professionals out there closing back to back transactions in a perfectly legitimate way.
"Short sales are an important tool that can help both the bank and the borrower," said Morgan McCarty, executive vice president for mortgage servicing at Birmingham, Alabama-based Regions Bank, which lost money in the Connecticut case. "It's just that criminals are always trying to find ways of profiting."
The real estate industry cannot turn a blind eye to fraud anymore. Not only does this make us an unknowing accessory but also it is the very reason fraud remains so rampant. Those who would commit fraud know that few will report the fraud if they are discovered.
You need to inform a lot of people about your knowledge of any possible fraud in process and be sure to write down the details of the transaction and individuals involved.
If you suspect fraud a few places where you can report those that try to commit the fraud are to the senior management of the Real Estate or Mortgage Company, your state, county or city Attorney General's office, The F.B.I., The media -- newspapers, television, radio, Internet bloggers / columnists.
The only way to stop such a widespread, global problem is to look ourselves squarely in the mirror and promise to fight fraud wherever, and whenever, we can, one transaction at a time.
Michael S. Richardson
Director/Chief Quality Officer
Author of "An American Epidemic, Mortgage Fraud a Serious Business"
www.preventmortgagefraud.com
Source: Examiner.com
For more information about Short Sales, please call 240-737-5024 or send an email to shortsales@bbtrealestategroup.com!
BBT Real Estate Group, LLC Keller Williams Preferred Properties
9701 Apollo Drive, Suite 102
Largo, MD 20774
Phone: 240-737-5024
EFax: 240-296-5024
Email: shortsales@bbtrealestategroup.com
Re/Max Executive Realty - Medway, MA
CDPE,LMC,CBR
This is UNBELIEVABLE - Hope they give him the full 30 years! And where is the coverage on tv? Not that I like it when a fellow realtor (wonder - was he a realtor??) does something so underhanded. No wonder banks are so cautious when dealing with short sales (in some instances). Thanks for the heads up - Flopping is a NEW WORD for me ! Not surprised it exists though - can see how it could be lucrative for those criminals that choose to use that medium!
Jun 14, 2010 01:26 AM
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA
Great post, Brian! Thanks for pointing out this interesting case of fraud. I never heard that term "flopping". Now I have a name for what I have heard may be happening in short sales. For this reason, I do not use a third-party negotiator in my short sale transactions. I'm not saying that all third-party negotiators are fraudulent, but I want my short sale transactions to be as transparent as possible. When I complete my short sale transactions, I feel accomplished because I have helped my sellers out of a mortgage they cannot pay, their lender (because they will save money on foreclosure process), buyer because they get to purchase a home they like, and the community (keeps distressed properties from multiplying). Defrauding my seller's lender does not help anyone. If there is anything I have learned in the real estate business it is disclose, disclose, disclose.
Jun 14, 2010 01:35 AM
Success Realtors brokered by eXp Realty - Kenosha, WI
"YOUR success IS our success"
THERE ARE legitimate and LEGAL and ETHICAL ways to resell a short sale property and ethical reasons for doing so.
#1 The seller, the buyer and the agent must all sign an addendum disclosing that the seller understands that the buyer is purchasing the property for the express purpose of RESELLING the property and that the buyer gives the seller permission to resell the property.
#2 Any potential end buyer must also be disclosed in writing of the fact that the party selling the party to him/her is not yet the owner of record, but has "equitible title" to the property and that the sale is contingent upon the first transaction sucessfully closing
WHY WOULD SOMEONE AGREE TO THIS? The answer is simple. By having a property that is no longer CONTINGENT upon short sale approval, we can expand the pool of possible buyers as many buyers and agents won't write on a short sale anymore due to the lack of competence in the real estate industry at getting it done.
Aug 02, 2010 05:16 AM
Anonymous
With all due, respect this article is nonsense. If I buy a short sale property from a bank and sell it a year later for a profit, there’s no issue. If I do it a month later, no problem. Why is it fraud if I resell it a day later? Lenders are NOT losing money on the marked up price because they CANNOT sell the property; they are not the owners yet. If I buy it for cash, then I am the owner and can resell it to another for a profit.
What’s next, does Walmart need to disclose their wholesale prices on products they sell?
Lenders are not “duped” by the buyer’s low comps, they send their own broker or appraiser to do the valuation. Nobody is pulling the wool over the lender’s eyes. Again, the lender is NOT ENTITLED to the higher price because they are just a LIENHOLDER. The investor who resell it for a higher price is the OWNER and he is the one who brings the buyer to the table – thus he is entitled to a profit.
Jun 12, 2011 09:04 AM
#4
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