Flopping: New Mortgage Fraud Trend in Real Estate?

by 25 Oct 2012

Why would a real estate seller willfully damage a listed home with the intention of driving down the price at closing? In a bizarre case of reverse bait-and-switch, some homeowners are blighting their properties as part of fraudulent real estate scheme called “flopping.”

Real estate flipping became a buzzword during the heady days of the housing bubble. Flippers were made famous by at least three reality television shows on cable television: Flip This House, Flip That House and Property Ladder. Flipping follows the quintessential “buy low, sell high” doctrine of free market capitalism. Flopping, on the other hand, can be described as “sell low, trick the lender into a short sale, and sell high.”

Suspicious Transactions

Flopping has been detected by mortgage fraud specialists and analysts based on empirical evidence and real estate analytics. As recently reported in CNN Money, the first element of flopping is an underwater mortgage or negative equity situation. The homeowner involved in the flop contacts the lender and inquires about a short sale as a way to mitigate loss for both parties in the mortgage contract.

Floppers will resort to some unorthodox measures to blight the property and pressure the lender into a short sale. One trick involves the use of malodorous substances such as possum urine. By strategically spraying the home interior with possum urine and avoiding ventilation into the house for a few days, floppers hope to convince the buyer to bargain the sales price down.

Another innovative trick is to use paint on the ceiling to resemble permanent water damage. If the short sale is approved at a sharply reduced price, a straw buyer is introduced to the flop. This accomplice, who may show up at the closing table with cash, will then turn around and quickly fix the blight and perform a flip.

Real estate analytics firm CoreLogic looked at short sales in 2011 and determined that two percent looked like the work of floppers who pocketed $55,000 on average. These flops were usually settled in one day. 

Flopping Patterns

Government-sponsored mortgage agency Freddie Mac has already detected fraud patterns, performed investigations and busted nefarious flopping rings. These scams take advantage of the housing crisis by preying on mortgage lenders that are buried under piles of pending foreclosures and growing portfolios of Real Estate Owned (REO) properties. 

The possum urine trick can be easily alleviated by removing the offending stains and odor with special cleaning solutions. In the case of the fake water damage, a coat of new paint is all that is needed for the floppers to get away with their ruse.

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