Buyers Be Very Aware!

By on November 15, 2012

We all know that this is an era in which lots of short sales and foreclosures are available. We also know that these are potentially lucrative opportunities for homeowners or investors, but that they demand patience, persistence, and hard work to obtain.

If you don’t think this is the case just ask any real estate professional about the short sale process and you may run away in terror. It can take months to get the proverbial ball rolling and it can all come crashing down if the homeowners change their mind, make a different arrangement with the lender, or if the property does not appraise well.

And that last factor is now being used by defaulting homeowners to commit a fraudulent practice known as “flopping”. Unlike “flipping” in which a home is purchased, fixed up to a very high degree, and then sold for a good profit, flopping is used in a sort of reverse manner.

Here’s how it is being done: a homeowner is unable to keep up on the mortgage. They approach their lender to arrange for a “short sale”. This is when the bank agrees to “forgive” the difference between the sale price on the home and the amount owed. In other words, your mortgage is $150k, the sale price is $100k, and the bank forgives the $50k difference.

Now, it isn’t as easy as that because most banks go down fighting and will spend some time and energy in having a home appraised and a viable sale price determined. The problem is that most banks are literally swamped with short sale requests, with financial industry averages saying that short sales have tripled since 2009.

So, this is where flopping takes over. The homeowner (sometimes in conjunction with a partner) will take great pains to make the home seem less attractive, viable for rehab, or worthy of investment than it is. This discourages any home shoppers from considering it, and after a short time, the owner gets the bank to agree to a very discounted price. After that, they sell the home to their partner or a pre-arranged buyer, and do a quick rehab and profitable sale.

This is so common that it accounted for 2% of all short sales in 2011, with the owner making an estimated $55k on each act of fraud, or an average of 34% gain.

What does this mean to the consumer? It means that someone looking to purchase a short sale as an investment, or as a first home, should develop a very reasonable plan of approach to the entire process. In other words, “don’t put all of your eggs in one basket” by setting your heart on a single property. Because there are far more short sales than ever before it can mean that your wisest strategy is to begin exploring options in more than one home at any given time. It takes many weeks before you can even hear if an offer is acceptable to the owner, and even then, the deal is not set in stone. Buying a home that is in a short sale process, however, is a very appealing way to get a lot of home for a little money.

The main thing is to be well aware of the possible frauds at work and to try to avoid wasting time or even investing in a down payment or good faith payment when the owner may already have a hidden agenda. If something looks too good to be true, it may just be the case. Simply shop the market and consider all of the options and you may well find a wonderful home or investment bargain.

Jack Chien is a money expert, author and personal finance journalist who specializes in explaining complex subjects in an accessible and engaging way. He is the cofounder of PersonalFinanceNews.com, an aggregator of the top personal finance news, stories and advice. You can find more articles by Jack on the Personal Finance News Blog…he contributes regularly there.

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