By Lew Sichelman
WASHINGTON (MarketWatch) — Question: My neighbor in Palm Springs, Calif., who claims to have millions or more in the bank, let his home with a $1 million mortgage go into foreclosure. A real-estate friend of his bought it from the bank and is renting it back to him. After one year, my neighbor plans to buy it back. It affects me as a homeowner because now we have a home in our community that shows a sale price for $600,000, instead of the current market of $725,000. How do I report such activities? —J. McK.
Answer: This type of thing is more prevalent than most people realize. According to CoreLogic, a real-estate and mortgage data firm headquartered in Santa Ana, Calif., lenders will lose more than $375 million this year alone when they sell undervalued houses based on the price opinions funneled to them by unscrupulous real-estate agents.
The scam is called “flopping,” and you are correct, it can have a devastating impact on property values because now, the “sale” becomes a comparable for all future appraisals of matching neighborhood properties.Like flipping, flopping is the intentional misrepresentation of house prices. But whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed.When a house is flipped illegally, it is “sold” for a greatly inflated value in order to obtain a mortgage that is far greater than the place is really worth. 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 perps, who are usually industry insiders who know how to scam the system.When a house is flopped, it is usually owned by a underwater borrower who has asked the lender to approve a short-sale at a price that’s less what is owed. Unbeknownst to the owner or the lender, the real-estate agent supplies one or more opinions of valuation that show the house to be worth one amount when it is really worth much more on the open market.When the lender agrees to take the lower price, the agent purchases the property in his name or that of a straw buyer and immediately flips the property to an honest-to-goodness buyer-in-waiting at a higher price than the one negotiated with the lender, with the difference split between the participants.Appraisal and valuation misrepresentation continue to be a big bugaboo in the mortgage sector, even in a weak housing market. And flopping is one of the biggest issues because lenders tend to take agents at their word. But when they do check, they are shocked at what they find.