Last Update: 04/18/16
In recent years, most of us in South Florida have become all too aware of real estate “flipping” — where a distressed home is purchased by an investor who goes into the deal with the idea of doing some improvements to the place and then reselling the place for a profit. It’s so popular that there are even reality TV shows dedicated to property flips.
However, more and more Florida real estate home owners as well as buyers looking at South Florida properties should be aware of another kind of real estate transaction that has become very popular in the past two or three years, called “flopping.” Flopping is a form of mortgage fraud.
How Florida Flopping Works
Let’s say there’s a Florida condo with a great ocean view on the market. The sellers are ready to sell; they price the home at less than the mortgage owed on the condo (a short sale). Then, a husband and wife with their Florida real estate agent go to the condo for a tour of the property. The couple likes what they see, and tell their agent that they want to make an offer on the place.
The offer is made, and it’s higher than the short sale asking price (they really want that condo). However, the couple doesn’t get the condo; it seems that another real estate agent and his/her buyer has scooped it up. Which happens all the time, right? Sure, until the couple learns that the condo was sold for thousands less than what they had offered for it.
Somehow, the condo was purchased for much less than its market value, resulting in the lender taking a loss on the deal and the seller facing a deficiency issue.
Meanwhile, the new condo owners are ready to make a killing on the place. They do this without doing anything in the way of improvements or additions to the property. They resell it for a big, big profit — often to a friend or relative. It’s a form of short-sale fraud and often the property is resold on the same day that it was bought. In 2011, CoreLogic reported that short sales that are resold on the same day average a 34% profit (around $55,000 difference between the two prices).
Realtors and Others Committing Bad Acts
Real estate flopping is where buyers and other participants take advantage of the short sale process to make a profit. Often, sadly, real estate professionals (real estate agents, real estate brokers, etc.) are involved because they have the necessary insider knowledge to target the right property.
Flopping involves fraud because the real estate transaction is supposed to be an “arms length transactions” – a transaction between independent and unrelated parties; there should be no collusion between the parties that results in unfairness or injustice to the seller. Affidavits, in fact, must be signed at closing to confirm that the deal has been at “arms’ length.”
In flopping, it may not be obvious, the parties are not “arms length.” The buyers are purchasing the home as a short sale at a low price, but the bank (who has to approve the short sale) and the seller (who has to deal with the deficiency amount between the remaining mortgage amount after the sales price is deducted from it) are not aware that the buyer is acting with others in mind.
Who are these evildoers? They are insiders. Some are real estate agents or real estate brokers who are able to persuade the bank with a handy low-ball appraisal of the property to support their offer. Appraisers are sometimes involved as they provide inaccurate appraisals to help seal the deal.
Florida is Top State for Mortgage Fraud in the Country
According to the Lexis-Nexis Mortgage Fraud Index, for the past 5 years, Florida has been Number 1 in the USA for mortgage fraud investigations, and in 2012, Florida had 8 times the average number of annual mortgage fraud investigations.
A big part of the problem is what the FBI calls “collusion fraud” where real estate professionals work together to take advantage of short sales and distressed properties to make a quick profit, working together in ways that make it hard for their efforts to be discovered by the wronged parties as well as the federal investigators.
Fraud Victims Can Take Action
If someone has a suspicion that they are a victim of flopping or another form of real estate fraud, then they should be aware that Florida laws exist to provide them justice. Fraud claims can be made the basis of a civil lawsuit where formal discovery processes can help investigate and track down (”discover”) who the wrongdoers are and what they have done to take advantage of the situation.
These days, there are many unsuspecting Florida sellers and Florida buyers who are prone to be victims of Florida real estate fraud, especially from real estate agents looking to make a quick buck, but they should know that they have legal avenues to fight back should they choose to do so.
A good piece of advice is to at least speak with an experienced Florida real estate lawyer to learn about your rights. Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
If you found this information helpful, please share this article and bookmark it for your future reference.