Fraud of any kind hurts the real estate industry
June 12, 2011
By: Stephen J. Nash
Nash Law Firm
Everyone has heard the term "Flipping" but have you heard of "flopping"? Flopping is a type of short sale fraud that has gotten the attention of lenders and the FBI. In fact, they have created a diagram showing fraud from the original purchase to the short sale purchase and sale:
With respect to short sales, "flopping" is where the fraudster approaches the home owner and presents a short sale offer. Often the fraudster will use an LLC as the purchaser. The offer submitted is a lowball offer. The fraudster then acquires an interest in the property (generally for a nominal amount) so that he/she can negotiate the short sale with the lender.
If the lender approves the sale at the lowball offer, the fraudster attempts to sell the property at a higher price. If they find a buyer at a higher price they have a back-to-back closing. If they cannot find a buyer, they fail to close on the short sale purchase.
The fraudster takes no financial risk since they only close on the short sale if they have a buyer willing to pay a higher price.
As a result of this activity, lenders are requiring more and more disclosures from all participants in the short sale process. Many of these disclosures put honest participants in an uncomfortable position of having to guarantee that no fraud is taking place, yet the honest agent or title company has no real knowledge.
Real estate professionals must not allow fraud to go forward when they are aware of it. The "hear no evil, see no evil approach" only leads to more lender imposed rules or government regulation that we all hate to deal with.
Not only that, but being aware of fraud and not stopping it is illegal. Its called "aiding and abetting".
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.
Copyright 2011 Nash Law Firm