So you've heard about and seen shows about 'flipping' houses. Buying distressed homes at a steep discount below market value, fixing them up, and then re-selling them for a profit. This is common and easy to do in a home market where values are stable and increasing. While it can be good to get rid of properties that are eyesores and make a transitional, 'up-and-coming' area desirable, it opens the door to fraud. Fraudulent appraisals and inflated home values cause over saturation of properties and are followed by a steep decrease in property values (reference the 2008 real estate market) which causes a 'down' market. Since we are currently in a market where values are declining and slightly stable in some affluent areas (Sandy Springs, Johns Creek), the opportunity to flip remains, but if you're not an investor with cash on hand, the competition is stiff and the loan products available are not as favorable as they once were with 15%-20% down payments. You also have most homeowners owing more on their homes than they are worth and some in the process of losing their homes so short sales are all the rage. This has opened up an opportunity for investors to 'flop' properties.
Flopping is when an investor purchases a home from a homeowner through a short sale and then turns around and sells it for a profit. Sounds like an okay deal right? Well in some cases, investors are purchasing the homes and then re-selling them the same or the next day without even doing anything to them and not disclosing this to the seller's lender or the new buyer. That is where you have fraud.
I personally had a transaction on a Snellville home where the short sale was advertised as being investor owned. We submitted an offer, negotiated the price, went under contract, and completed the home inspection. When the title was ran, it showed that the owner of the property was a different person than the seller on our contract. We discovered that this investor (with help from the listing agent) had the home under contract with the bank at a short sale price ($80,000) negotiated with the REAL seller. The agent then marketed the property at $10,000 below market value and got a contract with my buyer at $115,000 ($15,000 below market value). My client's lender would not lend on a property that had not been owned by the seller for at least 91 days. We terminated the contract when we discovered the shady dealings of this agent.
Understand this, flopping cannot happen without a third-party facilitating the process with the seller's lender. In most cases, it is the listing agent who is in collusion with the investor. Even if the agent discloses that the investor is 'flopping' the property, it is an illegal practice because the listing agent's duty should be to sell the property to the investor ONLY. Once the investor purchases the property, they are free to do with it as they please (unless a deed restriction is in place)---even use the same agent to re-sell the property at a profit. The problem is when the agent is mis-representing the sale as being a short sale for a distressed homeowner, when it is really a 'flop' to an investor who usually pays the agent a kickback or percentage of the profit made. Also, no lender would co-operate with a short sale if it is disclosed that the purchaser is intending to immediately re-sell the property for a profit. In this case, the listing real estate agent has to be aware of the investors intent in order to facilitate a short sale like this so it's flat out wrong. Things to look out for are any extra addendums or documents required for you to sign that outline a legal entity (S-corp,trust,llc.) as the seller or a name difference of the name on title and the seller of a contract you have in place. There was a recent article of house flopping on MSN News. The biggest dangers to home buyers are the risks of losing earnest money if their loan cannot progress due to the title issue, the time wasted pursuing a property that would not work in the first place, and being accused as an accessory to real estate fraud if the original seller's lender discovers that all parties involved were aware of the 'flop'. Real estate fraud is a hot topic and sensationalized on the news so I'd rather my 5-minutes of fame on a more positive topic. Thank you.
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