HERE IS A NEW ONE….FLOPPING

By
Services for Real Estate Pros with Wilde Law Firm, PLLC

There is a new game in town and it goes by the intimidating name of “Flopping.”  Freddie Mac and Fannie Mae also use another name…Mortgage Fraud.  Did that get your attention?  It should.  The real estate agent will encounter this in a number of ways but most ways will be a variation of the following example:

A real estate investor will come into your office and want to see your short sale properties.  They will want to put a “low ball” offer on a property and will insist that, because they are under contract with the homeowner, all future offers must go to the investor and not the homeowner.  Smells fishy already, doesn’t it?  They will usually have documentation that the homeowner signs giving him this right and the investor the right to market the property in the mean time. 

Additionally, the real estate investor will insist on negotiating the short sale.  Another indicator is that the listing agent will not usually get a commission when the short sale closes with the bank but rather on the sale to his future buyer. 

In reality this “investor” is trying to convince the bank that his “low ball” offer is a market price offer in hopes of buying the property for less than he will sell it for.  While he is negotiating the short sale with the bank, he is also marketing the property at a substantially higher price, hoping for a buyer to take it off his hands as soon as he gets an approval from the bank.  The plan is to get a buyer under contract, close on the low amount approved by the bank, and then close immediately with the new buyer at a higher price.  The investor gets to keep the spread for his troubles.

There are a couple of problems associated with this scheme:

1.      NCRC Violation for the Agent.  According to the Short Sale Addendum we use in North Carolina and the North Carolina Real Estate Commission rules, the bank must be informed of ALL offers once the short sale negotiations have started with the bank.   This is a requirement of the real estate agent’s governing body.  This is the responsibility of the agent, regardless of who they have helping them negotiate the short sale.  Any failure to abide by the rules will be enforced against the agent...  Ouch!

In our example, if the offers are going to the real estate investor and not the bank then the real estate agent is in violation of this rule.

2.      Practice of Law.  In North Carolina, negotiating a short sale with the bank is the practice of law.  The Seller and a North Carolina licensed attorney are the only ones permitted to negotiate with the bank.  By negotiating the short sale with the bank, the real estate investor is in violation of the law, which is a Class I Misdemeanor.  If he charges an extra fee for this service he is also debt adjusting which is a Class II Misdemeanor.  The agent may also be caught up in this violation as well.

3.      Mortgage Fraud.  The bank’s, Freddie Mac’s and Fannie Mae’s position is that it is mortgage fraud to withhold information regarding a higher price offer.  Fraud is like a hot skillet.  Everyone who touches it gets burned.

4.      No Offer, no Close.  If the real estate agent does not get a substantially higher offer during

 

the time it takes to get the short sale approved, then he will probably not close.  The result of this is that the Sellers have wasted three months or more of their selling season.  If a foreclosure is pending, then you can see how expensive this bet may be for them.

I would recommend staying completely away from anything that resembles Flopping.  If you don’t know whether you are in the middle of one of these prohibited transactions or suspect that something is amiss, then please get your short sale attorney involved.

 

 

 

 

 

Comments (10)

Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Steve - I'm hearing from my Realtor friends here in Los Angeles & Ventura counties, that this is become more and more prevalent here.  We're an escrow state (we use escrow agents instead of attorneys) a lot of times, these investor "floppers" are asking both the listing agent as well as the escrow officer to do some pretty questionable stuff.  I was talking to a Realtor friend of mine about a short sale transaction he is in right now and he suspects that his investor is trying to "flop" it and is looking for a legal way to dump the buyer A in order to get the back-up buyer in there. 

Dec 06, 2011 08:12 AM
Anonymous
Steve Wilde

I am not sure you can just dump buyer A.  First of all I would get a real estate attorney involved to look over the contracts on the seller's and agent's behalf.  I would think that after fully reviewing the documents the attorney may conclude that full disclosure to the bank is in order if only to protect the seller and agent from participating in mortgage fraud.  If that is the case the attorney would send the bank the back-up offer(s) or at least inform them of all offers.  It is difficult to make a case for "fraud" with full disclosure.

 

Steve

Dec 07, 2011 10:25 AM
#2
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Steve - That was the issue, legally he couldn't dump him because so far, the guy hasn't done anything wrong but my Realtor friend strongly believes that he is stalling because he hasn't found a buyer yet and keeps trying to negotiate a lower price.  That and the fact that he keeps trying to get a key to the property and my Realtor friend is getting some strange calls for showings from people who have spoken to the buyer first.

This could be moot though because the banks second appraisal is coming back and it's only 3k different than the last one and not what the buyer was hoping for so he will probably end up walking away and my Realtor friend has a back-up buyer (that the buyer has also been trying to get info on too!).

Dec 08, 2011 03:40 AM
Chiara Petro
eXp Realty - Angie Cody Team - Knoxville, TN
Your KEY to Home Sweet Home - Knoxville TN

Banks are requiring language in contracts that "the subject property cannot be sold within 60 days of the sale," for both short sales and foreclosures in my area. I think this will be standard language in the very near future.

Dec 11, 2011 05:20 AM
Maya Swamy
Funds Available - Long Beach, CA
Ph.D. Long Beach, CA - fundsavailable.com

Actually your investor/offerer does not have a contract yet. So he is a potential buyer but not an actual one and has no rights at all in the property. Short sales offers are accepted subject to lender approval and buyer ratification. Until both of these occur the offer from your investor or any other buyer is no greater legal standing than a letter of intent. At least this my understanding of the law as a Realtor

Dec 11, 2011 07:59 AM
Kerry Lucasse
eXp Realty - Urban Nest Real Estate Group - Atlanta, GA
Your Urban Nest Atlanta Real Estate Consultant

I think I may have stumpbled upon this about 6 months ago when I was representing a buyer who was interested in purchasing the home from an investor.  They had all kinds of fancy lingo to make it sound legitimate, but red flags were popping up everywhere.  Thankfully we found another home that they liked more...

Dec 11, 2011 09:27 AM
Anonymous
Steve Wilde

Maya,

In North Carolin the Offer to Purchase contract in a short sale is a contingent contract but a contract none the less. It is contingent on a third party approving the offer (the bank/servicer). As a valid contingent contract it is a fully enforcable contract on the "effective date" which is the time of signing, not the time that the third party approves it.  A number of agents have taken this same approach and been burned.  the NC Real Estate Commission even put it in the agent's Mandetory Update CE course this year....in big bold letters.

Unless there is specific language in a short sale addendum that you are using stating that the contract is not considered in force until the bank approves it, then I would suggest that you are are also in a contingent contract situation. I would check with an attorney in your area for his opinion before treating your Offer to Purchase as if it is not a valid contract until the bank approves.

Steve Wilde

Dec 12, 2011 04:20 AM
#7
Bob Davis
Right Move Real Estate - Huntington Beach, CA

This is just nuts! But I suppose in any type of market there are always going to be riffraff whom rather than put in a hard days honest work they will put in a hard days dishonest work. Always seems strange to me that instead of going around trying to scam people and make a living why not just get a real job and put the effort in that way. Seems like if you are really good at crime you could be really good at a legitmate job as well.

Dec 12, 2011 04:51 AM
Frank Iglesias
Working With Houses, LLC - Atlanta Real Estate Investments - Lawrenceville, GA
Atlanta, GA Real Estate Investor

The sad part about this is that there are plenty of deals out there that an investor can buy as a short sale even with a low offer and turn around and sell it for more the proper way without having to do anything questionable.  Buying low and selling high is good business.  Doing it ethically and legally is even better.  There is no reason for investors to have to try to stretch these basic truths.  We buy low and sell high and have no problem telling the Seller that.  I wish all investors would do the same!

Dec 12, 2011 12:36 PM
John Juarez
The Medford Real Estate Team - Fremont, CA
ePRO, SRES, GRI, PMN

Fraud is such an ugly word!

I once received an offer on a listing that smelled of weasel – the offer, not the listing. I called the agent who wrote the offer and told her that I was troubled by certain aspects of the offer and ran it by my broker. I told her that my broker thought that the offer smacked of mortgage fraud. I told her that “fraud” was not an attractive concept for me. She literally tripped all over herself to distance herself from the offer and suggested that I counter it in a way that would make it acceptable. Instead, the seller and I waited for an offer that passed the sniff test and sold the house to an investor on terms that were designed to keep everyone out of court and out of jail.

 

Dec 12, 2011 04:26 PM