By now most everyone knows that a short sale occurs where the proceeds from the sale of a property are less than the debt owed on the property. Short sales have seen rapid growth recently as both investors and lenders turn to them as a way to maximize returns over foreclosure sales. As short sales have increased, so have short sale scams. Therefore, prudent homeowners, prospective buyers and real estate agents should be vigilant to avoid short sale scams.
Some examples of short sale fraud schemes include:
- Flopping. When a property is flipped illegally, it is sold for an inflated value in order to obtain a mortgage in excess of the property’s real value. When the seller, who is often in on the scheme, is paid at closing, the difference between the actual selling price and the loan amount is split between the fraudsters. When a property is flopped, it is usually owned by an underwater borrower who has asked the lender to approve a short-sale at a price less than what is owed. In this scenario, the fraudster, which may be the owner, real estate agent, or both, supply one or more opinions of valuation that show the property to be worth significantly less than its actual fair market valuation. When the lender agrees to take the lower price, the fraudster purchases the property in his name or that of a straw buyer, thereafter flips the property to an arm-length purchaser at a higher price than the one negotiated with the lender, and pockets the difference. Like flipping, flopping is the intentional misrepresentation of a property’s true market value. However, whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed.