You might know all about flipping houses, but have you ever heard of flopping houses? This devious short-sale maneuver has become incredibly popular with the unscrupulous real estate investor demographic in the past few months – but be warned. If you get caught flopping when you should be flipping, you could spend some serious time in jail.
Flopping houses is all about fixing prices, and real estate agents are the primary cogs in the machine. When a short-sale or foreclosure is listed on the market, a felonious agent will value the house far below its actual market price. They’ll convince the lender that the house will never sell for what it’s actually worth, and once the lender agrees to list the house at the lowered price, the agent will recruit a “straw buyer” to make an offer. The agent will “hide” every other offer on the home so that the straw buyer ends up taking the title. Then the straw buyer and the agent will turn around and sell the home for what it’s actually worth, turning a profit that can exceed $80,000 for a flopped luxury property.
As you can imagine, this is illegal on so many levels. First of all, a buyer and an agent must disclose any relationship they have to the seller under federal law. Second, by withholding bid information from the seller, an agent is committing fraud. Finally, it’s illegal for a buyer to resell a home purchased under the Home Affordable Foreclosure Alternatives Program within 90 days of closing.
Despite all these laws – which exist to prevent flopping – the scheme is disturbingly easy to pull off. Lenders are so waterlogged with distressed properties that they don’t have the time to investigate every short-sale as thoroughly as they should. According to research firm CoreLogic, one in every 52 short sales last year was a flop, and Freddie Mac reported that the scheme was the focus of 50% of its investigations.
While we support cunning real estate investors, we will never condone breaking the law to make a buck. If anyone you know has been raking in an exorbitant amount of cash from flipping houses, there’s a good chance that a few of those properties were flopped. You can report any flopping in your area to Fannie Mae’s investigative team by calling 1-800-7-FANNIE or emailing mortgagefraud_tips@fanniemae.com.
Not only are floppers committing a crime, they’re making the market more difficult for everyone. If we work together to report illegal short sales as soon as we see them, we can put a stop to this practice once and for all.
