*First before I start this post my disclaimer is – I’M NOT A LAWYER SO TAKE NOTHING AS LEGAL ADVICE* now you may proceed
It amazes me when I read articles, newsletters, and blogs to see the amount of confusion about short sales and the “Flip” process. Even at the end of last year Fannie Mae published “Mortgage Fraud News” (https://www.efanniemae.com/utility/legal/pdf/fraudnews/mortgagefraudnews1010.pdf) which I believe was their attempt to highlight illegal fraud activities pertaining to short sales, but unfortunately would leave even a well versed short sale reader very confused.
When Freddie Mac and Fannie Mae can’t seem to decide about flipping, flopping and the legality of these types of transactions, how is the general public supposed to decipher this material? Oh and when did Freddie and Fannie start to believe they could dictate LAW?
Fannie Mae in October last year made an attempt to highlight the newest buzz term in short sales, “flopping.” I’m not sure they were accurate with their definition or explanation of flopping, considering to my knowledge there is NO LEGAL definition. Fannie Mae stated, “There has been a lot of recent press about the notion of short sale ‘flops’ (the opposite of flipping), wherein the perpetrator influences the loss mitigation process by deflating value so the servicer will accept an artificially low short sale offer. The perpetrator then profits by selling the home to an end buyer at the home’s true market value or at an inflated value.” I’m scratching my head trying to figure out how a “perpetrator” influences the loss mit process, as most lenders order their OWN BPO, but maybe there are those lenders that allow a perpetrator to give them a value that the lender accepts as the current market value. You would think most lenders do their due diligence in this market, but maybe I’m confused. I also have a hard time believing that anyone can sell a home at an inflated value in this market. Now, if flopping is the opposite of flipping (as published in by Fannie Mae) and a flopper is a perpetrator, is one to assume that in flipping there isn’t a perpetrator, or that in flipping, there is no process of deflating a value. Oh, if that were just the simple answer, but unfortunately the article went on to say that, “flopping is one of several tactics used to perform flips.” Now if flopping is the opposite of flipping, how is it used to perform a flip? It can’t be opposite and the same now can it?
Interestingly in 2004 Fannie Mae described property flipping as, “the process of purchasing existing properties with the intention of immediately reselling the properties for profit. Individuals that flip properties employ a variety of approaches. The primary scenario in property flipping is to identify a property that can be acquired at a discounted price then resell the property for a profit. Some individuals hold title for months or just days, while some may only assign or sell their interest in a contract to acquire the property for a third party” https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2004/04-07.pdf
Now it seems that “flopping” and “flipping” have a similar definition in which the subject property is bought at a discount and then sold for profit. I’m still trying to decipher WHERE the fraud came in.
Now, are you ready for this? I JUST listened to a podcast that NAR produced and Robert Hagberg, a fraud investigator for Freddie Mac was interviewed. In the interview he stated FLOPPING was and AB BC transaction where the C buyer’s funds were used to fund the B buyer’s transaction. It was a “reverse” closing. This seems a LOT different than Fannie Mae’s view of flopping. He further went on to state the flippers are “fraudulent” because they are using transactional funding to fund their deals. Ummmm….wait, is it fraudulent to use a C buyer’s funds or is it fraudulent to utilize someone else’s money to purchase property. MY GOD can you keep up with it all? Neither that I’m aware of is fraudulent or against the law, but I guess Mr. Hagberg is high enough up to create LAW. To be fair he went on to describe reverse staging, and bribing appraisers or BPO agents which I agree with, but C’mon. Are you saying that I’m committing FRAUD if my mother agrees to help me buy a house because I don’t have my own money to buy it? Since when is it fraudulent to use someone else’s money to purchase a property? How many people have ever bought someone else a home or held a note for someone else. I’m sorry but IT’S NOT ILLEGAL.
The VERY interesting part of the part of the interview was where he stated all known offers need to be submitted to the lender. I guess he’s never negotiated a short sale before because EVERY Realtor and agent I know know you NEVER EVER submit more than one offer at a time. You work on that first offer and if it’s rejected you can THEN move onto the second. I don’t submit 5 offers and let the lender cherry pick or I risk being SUED by the first person who submitted the offer … oh wait and possibly the homeowner for tortious interference of the first contract.
There was a great part of the interview where he was giving examples of fraud and talked about a BPO where the agent gave 3 comps that were “on paper perfect matches,” but then went on to say why none of them where good matches. Apparently he lives local to that area and felt he could do a better job than the BPO agent. Is it REALLY going to go that far? We as a real estate community need to stand up to this insanity.
But the very BEST part of the interview came when the interviewer asked Mr. Hagberg how much fraud there actually was and amazingly he said he couldn’t put a number on it. REALLY? Hmmm…no kidding.
At the end of 2009 Freddie Mac published an attachment to their 2009-24 Bulletin which stated that short sale flips are not “inherently illegal” – “Legitimate property flips are acceptable transactions.” “not all transactions involving a rapid purchase and resale are improper.” Freddie Mac went on to further define that “Sales of properties that the property seller acquired at below market value after purchasing as a result of a distress sale (i.e. REO sale, short sale, tax lien sale, bankruptcy trustee’s sale, etc.), where any increase in the sales price over the property seller’s acquisition cost can be clearly shown to be a result of the difference (if any) in the market’s reaction to distress sales and typical arms-length market sales.”http://www.freddiemac.com/sell/guide/bulletins/pdf/bll0924xA.pdf Wow my head is spinning is yours? It seems that it’s perfectly ok to buy a short sale as it’s a distressed sale and then sell for profit.
Is it me or is it pretty easy to see why the general public at large is having a hard time deciphering flops, flips and whether or not there is fraud in some manner.
From what I have seen the terms flopping and flipping have been interchanged considerably. The more you read, the more the lines are blurred between the two terms. Both terms represent the resale of the subject property in a short timeframe, and lenders want full disclosure at the onset of the transaction. From what I’ve gathered in all my reading, people’s opinions on flopping a short sale are all around negative, but flipping seems to be a much more acceptable term to many?
As if the confusion over flopping and flipping wasn’t enough for the public at large, Freddie and Fannie have highlighted RED FLAGS that are buzzing around creating panic for legitimate short sales that Freddie and Fannie have failed to address. According to the articles people should be suspicious of purchase contracts where the buyer is an entity, the property is resold in a short period or has an option to resell the property. It’s unfortunate that lenders would strike such fear in Realtors, Investors, Mortgage Brokers, Appraisers, Negotiators, and the general public. As far as I know to date, property can still be purchased by an entity, option contracts are still legal and so long as all closings are there is no law stating I can’t buy a property in one hour and sell it the next. Again, they said it MAY represent fraud. All of the information is highly contradictory every time it’s published.
What is frustrating though is the amount of times I’ve seen the work that an investor does described as a scam and fraud, by what I would consider highly uninformed people, who just don’t seem to know better. 90% of people throwing around the term “fraud” have no idea what they are talking about and NONE that I’ve spoken with has ever taken the time to interview or work with an investor who works full time in short sale acquisition. Do you realize what percentage of short sales are fraudulent in this country? According to the Corelogic (a company that sells mortgage fraud software) they estimate it’s 2%. So every time you see an article with the words fraud, scammers, floppers, etc., remind yourself that only and ESTIMATED 2% of overall mortgage fraud is a short sale transaction. ESTIMATED…not actual. Oh, and keep in mind Corelogic greases their pockets with lender loot!! So the sheer fact they have a bias going into the study makes me skeptical. I wonder if they accounted for their bias in the study as all GOOD RESEARCHERS SHOULD. It’s too bad we can’t see numbers from an independent company. Oh wait let’s not forget the FBI (independent not bias) admits there is no solid numbers on short sale fraud. “As such, the extent of short sale fraud nationwide is unknown” http://www.fbi.gov/stats-services/publications/mortgage-fraud-2009
With the increased amount of confusing publications it’s no wonder the public at large have a fear working with investors. It seems every week I see a dozen uninformed individuals propagate mistruths about short sale investors, flipping, flopping and fraud, mainly out of fear. That fear comes from not knowing how a short sale investor buys and sells a property for profit legally, but nevertheless they still broadcast questionable information to fuel their own agendas.
The best precaution to take with any short sale is to make sure there are disclosures throughout the paperwork. Freddie Mac recently refined the short sale fraud definition, “Any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short payoff that it would not approve had all facts been known.” So if your paperwork discloses the aspects of the transaction, you are taking safe precautions to avoid the speculation of short sale fraud.
Maryann Little, VP Short Sale Mitigation
Nick Aalerud, Exec VP Short Sale Mitigation, Broker New Hampshire / Massachusetts
Stoneham, MA - Plaistow, NH
Short Sale Negotiation in Massachusetts and New Hampshire