There are a lot of problems in the real estate business but some seem to be bigger and greater than others. The newest kid on the block of real estate scam is flopping
Real estate markets are somewhat inefficient. This shortcoming allows me to make my living, because as an agent, I can add value with a keen sense of pricing. However, the imperfect market also allows room for scams. Meet the newest one: “flopping.”
As detailed by Lew Sichelman, a long-established real estate writer, flopping involves selling an asset at less than market price (to a friendly party, of course) and then reselling it to market.
The property that is bought low and resold high generates a profit, which is split among the parties — generally, the original seller and his non-arm’s-length buyer.
Flopping can be described as the evil twin of house flipping. The targets are desperate families who face foreclosures and have to sell their homes at a lower value. They do not know that their home will be the source of someone else’s account flooding with money.
The property market may have collapsed but real estate flipping is alive and well — in the form of a new practice dubbed “flopping.”
In this real estate strategy, participants buy a home from an owner who may face foreclosure, at a price well below its distressed value by agreeing to a deal with the lender, then immediately resell it for a fat profit, sometimes to a fellow conspirator. Unable to make their mortgage payments and facing possible foreclosure, a homeowner receives an offer below what they owe the bank.
The owner passes the offer to the bank, which accepts the deal in settlement of the loan. This is known as a short sale. The bank prefers it because, overall, it costs them less than the foreclosure process.
The new owner already has another buyer lined up and immediately resells the home at a higher price, pocketing the profit.
Sourced from: http://www.scambusters.org/flopping.html
Most realtors who have engaged in this practice in the past might have gotten away but not anymore. The long hand of the law is catching up with them. It is also important for home sellers to be informed so that they are not victims of such fraudulent activities.
In August of 2014 former Iowa REALTOR® Rick Makohoniuk, along with an attorney and three other businessmen, were charged with a federal crime — bank fraud — as a result of participating in an alleged illegal house-flipping scheme. In February 2015, Makohoniuk was found guilty of one count of bank fraud.
Two of the men involved, Nathan Smith and Patrick Steven, were accused of using companies they owned to buy 18 Des Moines area houses from banks at below-market-rate prices, then selling the houses at a profit, netting over $400,000.
Smith and Steven used their company, Iowa Loan Modifications, Inc., to negotiate short sales with banks, then once the short sales went through, they used their other company, Iowa Short Sales, Inc., to buy the houses at the lower price. Smith and Steven would then sell the houses for a profit—something known as a property flip.
Residents of Florida should be a happy lot since there is a law that will now see that the illegal activity of flopping is dropped. It is so sad that someone’s greed causes former drug addicts to relapse and even loss of life.
‘Flop Houses’ Are Responsible (In Large Part) For High Relapse and Mortality Rates
The unfortunate reality is, even recovering addicts who are desperate to stay sober sometimes find themselves in ‘flop houses’, surrounded by other initially good intentioned but since fallen casualties of the system. Starry-eyed parents happily write out weekly checks, ignorantly assuming that making a payment to “Second Chance Halfway House” must mean that their beloved son or daughter is truly taking advantage of this mercifully gifted opportunity. In reality, “Second Chance” is naught but a termite-infested 3-bedroom home nestled somewhere in the midst of a really bad neighborhood, housing 15 young men who came to South Florida to get clean and know which left to take if they feel like getting high after ‘curfew’.
Rick Scott, Florida’s elected Governor, passed a law last Thursday (June 11th) that gives sober housing communities the opportunity to become state certified – and strongly encourages noble and genuine sober living houses to take action in order to become distinguished. In order for a house to become certified it will have to undergo careful state inspection, validation of all employees, and a thorough assessment of the drug and alcohol free community it provides and strives to uphold.