Flopping. The new method of flipping in the housing market

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.

Want more house for the money? Retail & Real Estate

Outside of school districts, retail is a very close second to what drives property values in metro Atlanta's suburbs. Once you get past that your commute will suck no matter where you live (sad but true), how you much time you spend driving to do errands will become the lesser of two evils.

Alpharetta started the trend when Northpoint mall was created. This mall anchored out parcels and blocks of retail which turned into streets of bustling retail. The housing market around it benefited and still does to this day. It lessens the blow of how GA-400 is the only way in & out of Alpharetta because there isn't much you need to leave the city for outside of a museum or the fox theater. Gwinnett piggy backed on that idea by adding 2 malls (Discover mills & the behemoth Mall of Georgia) to compliment Gwinnett Place mall. Gwinnett took it a step further adding the Gwinnett arena, Braves minor league stadium and the Park of Suwanee which rivals Centennial Olympic Park. This retail growth has brought both counties other big box retailers (best buy, WalMart, home depot, etc.) that add to the surrounding retail.

Douglas & Clayton counties never quite grasped that idea. In the boom of 2000-2004 a lot of new construction went up in these counties. Lower prices & property taxes began to lure potential home buyers as values began to rise in the competing counties. The problem came when the buyers flocked to Clayton, Henry, & Douglas county, they soon discovered a simple Saturday of running errands involved a lot more driving than they were used to. Coupling that with buyers noticing that they were shopping where the moved away from!

With gas not being your wallets best friend right now, it's definitely a factor to consider when thinking about moving to a certain county to get more for your money. You could be giving that money back in gas and patience with every trip to the store!

Lease Purchase / Lease Option / Rent to Own Pitfalls

PITFALLS OF A LEASE PURCHASE
A lease purchase used to be a great way to secure a property when a buyer is unable to immediately qualify for a loan, but would have the ability to do so in 6-12 months. The buyer makes a non-refundable down payment that is deducted from the sales price when they purchase the home and leases the property for a length of time needed for them to improve their chances to qualify for a mortgage loan. The #1 problem that occurs is usually the buyer not having a competent loan officer to assess the length of time needed to qualify. Second problem is usually something happening to the buyer during the lease term (loss of job, decrease in income, late payment, score not increasing as expected, loan qualifications changing) that causes them not to be able to qualify at the end of the contract causing them to lose their down payment. Life style changes (job relocation, school re-zoning, divorce, neighborhood decline) that make the home not as desirable are common, causing the buyer to not want to purchase the property at the end of the term. Another problem is maintenance & cost of ownership whereas a home requiring multiple repairs or higher utilities that the buyer isn't used to which causes the buyer to rethink wanting to purchase that particular property.

PITFALLS OF A LEASE OPTION
Lease options were very popular when the real estate market was experiencing huge annual increases in value. The buyer leases a property and deposits 'option' money in order to have the right to purchase the property at the end of the lease term for a set price. The problem with lease options in this market is that the sales price agreed on is usually more than what it will be worth at the end of the agreement. Declining values hurt both sides in this scenario.

PITFALLS OF A RENT-TO-OWN
Rent-to-own homes have remained popular in any market due to the appearance that a buyer could eventually own a home without qualifying for a mortgage loan. The most common problem with these is that the potential buyer never has a legitimate contract in place to purchase the property nor are they required to put in any substantial funds to secure the property if the seller has a better offer to purchase the property outright. Any seller with a mortgage in place is not a good candidate to do a rent-to-own from. Period. Likewise, a seller who is delinquent on a mortgage is not a good candidate as they will likely foreclose while the buyer is under the assumption that the mortgage is being paid. A seller who owns a house outright is not a good candidate either (surprisingly) unless a legitimate contract is in place that determines the total paid up front, the specific payment terms, interest rate, length of payments, and the total paid for the property. Ideally, if a buyer can get added to the deed it is the ideal situation. Owner financing is the best option for buyers who can't qualify, but understand that if you do not have the adequate cash to put into the deal to make it make sense or a legitimate contract in place, you will end up getting burned.