More short sales bring new scam: flopping
In 'flopping,' a home is purchased by insiders at a steep discount, then immediately sold for a big profit.
Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.
Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright's brokerage office who wanted to buy it for their own use. She didn't think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.
When she asked the listing agent why, she was told to "leave it alone."
Wright says she is still not sure if the servicer or owner of the property ever saw her clients' much higher offer. All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.
"It's just robbery," she says. "And I don't know how to stop the robbery."
Apparently the nation's mortgage servicers don't, either. Suspicious real-estate transactions have surged in the past two years, analysts say, along with the number of short sales, in which a house is sold for less than the amount of its remaining mortgage.
Short sales are supposed to be "arms length" transactions without any relationship or collusion among the parties, all of whom must sign affidavits to that effect. But the parties often are connected.
Many times, this fraud is committed through limited-liability companies to make it hard for servicers to see who is buying the property, says Robert Hagberg, associate director of mortgage-fraud investigations for Freddie Mac.
In some cases, this type of mortgage fraud involves buyers scooping up distressed properties for a portion of their value, either for themselves or to give back to a friend or relative.
The rest involve "flopping," where an investor – with the help of an agent or middleman – persuades the bank to agree to a much steeper discount than it should, and immediately resells the property to another buyer for a significant profit without having made any improvements. The FBI says it has found numerous instances in which organized-crime groups were involved in short-sale fraud.
According to a recent study by CoreLogic, short sales that were resold the same day averaged a 34% gain (or $54,947) between sale prices.
One in every 52 short-sale transactions in the first half of last year appeared to be one of these "suspicious" resales, CoreLogic said. This year, it expects lenders, servicers and investors to incur more than $375 million in unnecessary losses from these shady deals, as the number of short sales surges an additional 25%.
"Short-sale fraud and other servicing-related fraud is definitely the fraud du jour and our greatest area of focus at the moment," Hagberg says. In 2011, more than 50% of Freddie Mac's investigations were related to short sales.
Who are the perpetrators?
For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called "facilitators," or middlemen negotiating with the banks and buyers trying to flip the properties.
Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.
Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.
Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.
In Wright's case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.
"The thing that really bothered me was the lack of ethics," Wright says. "Sure I can find my clients another house; what I couldn't explain to them very well was how (something like this) can happen."
Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.
"It set an all-time low for that neighborhood," he says.
So I tried to post and it was blocked accusing me of a hyperlink or similar to spam. Wow, I was just telling it like it is. So only "certain" comments are allowed. there was no hyperlink (don't know how to hyper link anyway, and most certainly wasn't spam, I only said I was an appraiser.
" The biggest problem is everyone is looking for a short cut and there should be system of checks and balances in place, primarily an appraisal done to determine fair market value. My sis bought a short sale and I was blown away by the process. First step of any short sale should be an appraisal by an independent appraisal familiar with the area. The scope of work for that assignment should include "forecasting" to determine what trend is evident in the market. Secondly the bank should be settting the list price and range of potential sale prices, then and only then should a realtor be hired to actually list the property. Her deal and so many others here, have list prices set by agents/brokers which may or may not reflect the "market". BPO's just don't cut it anymore, appraisers are subject to a lot more disciplinary action than others in this industry and are to be unbiased, most of us can't be bought!! The deal I witnessed was a listing, originally above the range applicable to the area, then a $30K reduction in price. An offer was made and accepted with a 15 days escrow (it was all cash) BUT if the buyer is financing then an appraisal is done for that new loan but the seller and seller's financing company have to right to the info. If it was really to be done right, both lenders (buyers and sellers) should be having an appraisal which should be within 5% of each value, if so then proceed with the deal, if not there's something rotten in Denmark. (I am an a appraiser and live in the Central Vallye, near Stanislaus"
This is exactly why people do not trust real estate agents. It should be the responsibility of the Broker to keep the agents honest. A practice lost long ago and upheld by some lenders.
Seems to me that there was a lot left out in her story and you all are blaming Real Estate Agents because you need a target but not because you actually know what your talking about.
Fact - Banks decide what amount will be taken for an offer.
Fact - Banks have communication procedures in place that discourage Real Estate Agents from actually communicating ALL offers to them - and then take DAYS to get back to Agents.
Fact - there are legal recourse procedures in place in Florida if you feel fraud has happened and you can report this directly to FREC - Florida Real Estate Commission.
Fact - This is a buyers market and Market sets the price - Economics 101 - Supply and Demand sets your price. If a neighborhood has 20 active listings and 2 sales a year - where do you think prices are going to do - go up??? NO they are going to go down!
manipulative marketing has destroyed the real estate industry....but almost necessary
when the housing market was good there were a lot of bad real estate loans thru greedy
realtors that practiced no ethics...got hooked up with bad lenders just to get their deal thru
allowed foreign buyers to drive down the prices in almost every neighborhood by putting
the choke hold on homeowners I was a former realtor in Oklahoma , we had a wealthy
group of Asian buyers from California that wanted to buy rental properties here... It seemed
good for a while but we would find some very nice homes in good areas ...fairly priced
when we would call them forward all the information on the market value condition everything
email them pics...they would tell us to make them an offer 30k less sometimes than the asking
price...we didnt want to do that ...but didnt want to lose the sales either.. we would make
the embarassingly low offers and soon developed a bad reputation among our fellow realtors
It wasnt long till we dropped that group we just couldnt do that to people...a lot of people took
the offers because the economy was so bad ....we would see them in the closings very sad
that they sold the house but walked away with very little .... Its just not the way to treat anyone
And don't doubt for a minute that investors are paying cash for homes, especially in Las Vegas where values have dropped so much. In the LA area we're seeing entire neighborhoods being bought one property at a time -- all in cash, even where homes sell in the millions. They're mostly foreign investors who offer way under market value, but owners are desperate for the sure thing because sellers (and their agents) know how tough it is for regular buyers to get a loan. It's really scary to think how easy it'll be for these landlords to buy off the politicians in a couple of years and get those inconvenient housing regulations revoked; we'll all be living in slums.
I've been thinking something like this went on with the house we were interested in. We couldn't put a bid on it because we lived out of state and didn't have a job in the state, yet (sad). But, we know the neighbors. The house never officially listed, the neighbors were told an individual had to buy it, we were told if we wanted to get a co-signer we would have to bid $15-30,000 over asking, and another neighbor bid just above asking. It ended up being sold to what we were told an individual...later we found out that it was an investor and they were bragging about how they got it for less than asking. I've been wondering how the investor got the house for under asking when the other neighbor put a bid in for more. Now it makes a ton of sense! I wonder if the 1 in 52 is higher in AZ with their record selling months in June/July of this year?
Those of you who want to paint all realtors with the "scum of the earth" brush -- please consider that the vast majority of us are ordinary, middle class people who are struggling to keep a roof over our heads and food on the table -- just like everyone else. The average agent closes about three transactions a year, and once we've paid a percent to our broker and royalty fees to our brand, and covered our business expenses, and replaced the signs that were vandalized or stolen, and paid for private health insurance (assuming we can afford to carry the coverage -- many can't), and set aside 15-20% for income and self-employment tax, we're way below minimum wage for the number of hours we work. Additionally, many of us are homeowners in the very communities we serve, so to get involved in unethical dealings that further depress property values is NOT ONLY criminal, it's also incredibly stupid.
Still, with all that being said, I do believe there is shady cr*p going on out there -- and most of the questionable transactions seem to involve dual agency. Personally, I'd like to see the practice outlawed; I don't think it's humanly possible to fulfill fiduciary duties to both parties in the transaction. It wouldn't solve all of the (many) problems in this industry, but it'd be a decent first step. And at the same time, if Lynne Wright or anyone else has evidence of criminal or unethical behavior, there's absolutely no excuse for not reporting it. We're either part of the solution, or we're part of the problem.
And how many thousands of these properties that wound up being a short sale with the banks taking it in the SHORTS would >>NOT HAVE BEEN SHORT SALES<< had the greedy, pig laden, fat porker banks WORKED with the homeowners on trying to modify their loans so they could have KEPT THEIR HOUSES IN THE FIRST PLACE. But no, they wanted the houses back, apparently, because they couldn't foreclose fast enough on these people the instant they were late on a payment.
Banks getting exactly what they deserved. SCROOGED.
Very little sympathy.