Flopping – The Latest Short Sale Scam

Short Sale Loss Mitigation

Short Sale Fraud
It is estimated lenders lose hundreds of millions annually in undervalued short sale transactions. Loss mitigators working on behalf of the lenders have anywhere from 450 to 600 active files on their desks at one time. Working the best deal for the lender is an all-consuming task for the loss mitigators and each short sale has its own complexities.

When a seller applies for short sale approval, the seller submits hardship affidavits and signs forms such as a Purchaser Eligibility Certification which includes statements such as:

In making this request for consideration of a short sale I certify under penalty of perjury:

  • All of the information in this document is truthful.
  • I/We agree that the financial information provided is an accurate statement of my/our financial status. I/We understand and acknowledge that any action taken by the lender of my/our mortgage loan on my/our behalf will be made in strict reliance on the financial information provided.
  • I understand that if I have intentionally defaulted on my existing mortgage, engaged in fraud or misrepresented any fact(s) in connection with this document, the lender may cancel any modification of foreclosure prevention agreement and may pursue foreclosure on my home. I understand the lender will use the information in this document to evaluate my eligibility for a short sale.

Even with statements such as these, the loss mitigator still goes through a process to confirm the information provided by the seller is true, but some fraudsters have found ways around this.

A Short Sale Flopping Example

In August 2010 one of our our South Pasadena, Fla. offices closed a short sale transaction. The seller (we will call him Jim Kling) had two loans on the property and the lender on both loans was Bank of America. The sales price was $425,000. Bank of America agreed to the sale and issued short pay approval letters for both loans.

The buyer was a LLC and the managing member of the LLC was Bill Hamley. The buyer purchased the property with cash and did not get a purchase money loan. At closing, the buyer and seller both signed an arm’s length affidavit which contained these statements:

“There are no hidden terms or hidden agreements or special understandings between the Seller(s) and the Buyer(s) or among their respective agents which are not reflected in the Agreement or the escrow instructions associated with this transaction.

There is no agreement, whether oral, written, or implied, between the Seller(s) and the Buyers and/or their respective agents which allows the Seller(s) to remain in the property as tenants or to regain ownership of the Property at any time after the consummation of this sale transaction.”

Cindy Archer at our escrow office was the settlement agent. She closed the sale in accordance with the terms of the short sale approval letters. Upon receipt of the payoffs, Bank of America promptly prepared and recorded a satisfaction of mortgage for each loan.

In April 2011, the buyer decided to sell the property. The seller entered into a purchase and sale agreement, and opened escrow with Cindy Archer. The title report was ordered, and upon receipt of the title report Cindy reviewed the requirements. She ordered the HOA demand, checked the property taxes and looked up the LLC with the state. The LLC was in good standing but the managing member had changed. According to the state the managing member was now Jim Kling. Remember that name? Jim Kling was the borrower who signed an arm’s length affidavit when he sold his home via short sale stating he had no side deals with the buyer. This same Jim Kling was now re-selling his home for almost one hundred thousand more than what he sold it for just eight months earlier. Not in our office he’s not!

Flopping is where the buyer of a short sale purchases the property for less than the true fair market value by influencing the appraiser or real estate agent to provide a Broker Price Opinion (BPO) which undervalues the property.”

How could Jim re-sell the same property less than a year later for $100K more when the real estate market is still depressed? This is the latest trend in mortgage fraud and it is called flopping. Flopping is the opposite of flipping. Flopping is where the buyer of a short sale purchases the property for less than the true fair market value by influencing the appraiser or real estate agent to provide a Broker Price Opinion (BPO) which undervalues the property. This information is provided to the loss mitigator who approves the sale based on the fraudulent information. The buyer then turns around and sells the property at fair market value, realizing a profit the lender should have received. In this instance, both the buyer and seller participated in defrauding the lender.

Flopping is a serious concern.

According to Fannie Mae a flopping scheme requires the perpetrator to conceal or provide falsified information to the loan servicer. This is information the servicer needs to make an informed short sale decision. These concealments may include hiding:

  • The true parties to transaction
  • Any contingent transactions
  • The true value of property
  • The transaction described above was not an arms-length short sale. Clearly the principals worked together to facilitate a reduction to the existing loan, resulting in the original borrower making a profit from the sale of his home. This is mortgage fraud on the part of the seller.

Our Company will not knowingly participate in defrauding or misrepresenting to a lender any facets of a transaction. Cindy had no knowledge of the fraud during the prior transaction. But, in the subsequent transaction, she could see what transpired and was not about to facilitate the completion of this crime. Cindy resigned from the transaction.