Floppers: realtors who profit by ripping off their lender clients
I first covered the flopping phenomenon a few months ago in Flopping: unscrupulous realtors deceive lender clients and profit from fraud. Apparently, the occurrence is common enough the story is gaining traction in the mainstream media. The main reason I am covering it again is because a reader posted a property that looks like a particularly egregious case of flopping. I’ll let you decide.
In ‘flopping,’ a home is purchased by insiders at a steep discount, then immediately sold for a big profit.
By Melinda Fulmer of MSN Real Estate
Real-estate agent Lynne Wright thought she had found the perfect home for her clients. The quiet house on a cul-de-sac in one of the most prestigious gated communities in Bakersfield, Calif., was offered in a short sale for $40,000 less than similar homes on the market.
Wright and the couple moved quickly and made an offer higher than the asking price, but were outmaneuvered by a husband-and-wife real-estate team in Wright’s brokerage office who wanted to buy it for their own use. She didn’t think much of it, until she saw that the property sold for $40,000 less than the $342,000 her clients had offered.
When she asked the listing agent why, she was told to “leave it alone.”
I wonder if she had to resist the temptation to punch them in the face.
Wright says she is still not sure if the servicer or owner of the property ever saw her clients’ much higher offer.
Undoubtedly, the lender did not see the better offer. Why wouldn’t they act on it if they did?
All she knows is that two agents picked up a luxury property for $80,000 less than market value, the banks took a big loss and the listing agent got both sides of the commission, representing his colleagues.
The realtors must consider that a win-win-win. They got a bargain, the listing commission, and the buyer’s commission. They win three ways, and their client — the one they are supposed to have a duty to serve — is the loser.
“It’s just robbery,” she says.
Yes, it is. It is brazen theft by a fiduciary.
“And I don’t know how to stop the robbery.”
Apparently the nation’s mortgage servicers don’t, either. Suspicious real-estate transactions have surged in the past two years, analysts say, along with the number of short sales, in which a house is sold for less than the amount of its remaining mortgage.
Short sales are supposed to be “arms length” transactions without any relationship or collusion among the parties, all of whom must sign affidavits to that effect. But the parties often are connected.
The paper trail should make these crimes easy to prosecute if a district attorney wanted to. A few high profile cases should be prosecuted to set an example for others. Today’s $900,000 flop would be a good candidate. If anyone knows the DA in Newport Beach or Orange County, please forward them a link to this post.
Many times, this fraud is committed through limited-liability companies to make it hard for servicers to see who is buying the property, says Robert Hagberg, associate director of mortgage-fraud investigations for Freddie Mac.
In some cases, this type of mortgage fraud involves buyers scooping up distressed properties for a portion of their value, either for themselves or to give back to a friend or relative.
The rest involve “flopping,” where an investor – with the help of an agent or middleman – persuades the bank to agree to a much steeper discount than it should, and immediately resells the property to another buyer for a significant profit without having made any improvements. The FBI says it has found numerous instances in which organized-crime groups were involved in short-sale fraud.
Isn’t there something in the realtor code of ethics against this behavior?
According to a recent study by CoreLogic, short sales that were resold the same day averaged a 34% gain (or $54,947) between sale prices.
The gain from today’s featured flop was over 50% after commissions.
One in every 52 short-sale transactions in the first half of last year appeared to be one of these “suspicious” resales, CoreLogic said. This year, it expects lenders, servicers and investors to incur more than $375 million in unnecessary losses from these shady deals, as the number of short sales surges an additional 25%.
“Short-sale fraud and other servicing-related fraud is definitely the fraud du jour and our greatest area of focus at the moment,” Hagberg says. In 2011, more than 50% of Freddie Mac’s investigations were related to short sales.
Investigations are fine, but there should be prosecutions at the end of the investigations for any deterrent effect.
Who are the perpetrators?
For the most part, these deals involve insiders, from the underwater borrowers themselves to investors, listing agents, brokers providing valuations and so-called “facilitators,” or middlemen negotiating with the banks and buyers trying to flip the properties.
There is no way this can go on without collusion among insiders. In an arms-length transaction, the listing agent would have to be a complete idiot to miss the comps by over 30%… well, maybe some of these sales are flopping….
Banks, with a huge backlog of distressed properties, are under pressure to do a lot of transactions and to do them as quickly as possible, says Ann Fulmer (no relation to the reporter), vice president of industry relations for Interthinx, a company that helps lenders reduce their fraud risk.
Knowing this, these insiders are able to work the system and push through bogus valuations to set the price of the sale or fend off higher offers.
When lenders are overwhelmed, there is nobody carefully watching over their agents to double-check valuation. With no cross-verification in the system, fraud is bound to result.
Fulmer has seen listing agents involved in these scams post properties in multiple-listing services in the wrong city to avoid competition. Some post pictures of a completely different, junk-filled property. Or they stipulate that only people from the real-estate office will take offers on the property, so they can control the transaction.
In Wright’s case, which was reported to the state but has not been prosecuted, real-estate agents controlled every aspect of the deal. An agent in her office was the distressed borrower; the listing agent who represented the property and buyer sat just desks away, as did the real-estate team who eventually wound up with their own luxury property for a song.
Everyone was in on the fraud. For them, it was just another day at the office.
“The thing that really bothered me was the lack of ethics,” Wright says. “Sure I can find my clients another house; what I couldn’t explain to them very well was how (something like this) can happen.”
Gary Crabtree, an appraiser in the area, said he got calls from several agents whose offers were rebuffed for the rock-bottom inside bid.
“It set an all-time low for that neighborhood,” he says.
How much more compelling does the evidence need to be before prosecutors will act?
To realize a big profit from this type of fraud, an investor, agent or middleman must first push down a home’s price. That means driving down the broker price opinion (BPO), the estimate of value that servicers get agents to provide for short sales.
While the vast majority of these estimates are probably free of influence, many aren’t. Short-sale facilitators or other middlemen often contact these agents with lowball comparable sales that they would like to see used in the valuation, such as mobile homes or major fixer-uppers. In one case, Hagberg says, he was told of a negotiator leaving two envelopes for the agent coming up with the BPO: One contained the comparables to be used in the valuation; a second contained two $100 bills.
Direct cash payoffs. That is flagrant.
Another way to drive down the price of a short sale and pack more profit into the flip is by making the house look as though it is in worse shape than it is. Borrowers or negotiators brought in by the borrower will submit false repair bills for shoddy pipes, wiring or lead paint.
“A lot of times these repairs are for things Realtors are not qualified to assess,” Hagberg says.
What are most realtors qualified to assess?
Hagberg has even seen cases of “anti-staging” or “reverse staging” in which a house is sabotaged to look weather-beaten, vandalized or smelly.
How can someone gain access to do this? Many times, an underwater borrower will give his negotiating rights – and access to his home – to a short-sale negotiator who will conduct all communications with the lender and allow other investors to manipulate the sale for a kickback.
Everyone involved is usually getting some kind of cash payoff.
“Many times, borrowers don’t know about the flip” that’s coming, Hagberg says. “And frankly I don’t know if there’s a whole lot of concern on their part. They are seeing the same loss anyway.”
Particularly now that borrowers are not on the hook for losses from the short sale, they don’t care at all. Some of them were probably in on the deal as well trying to get a cash payoff after the short sale.
There haven’t been very many indictments for this type of short-sale fraud. But such fraud can be punishable by up to 30 years in prison.
Sentencing a few to prison would certainly help.
To catch a thief
Servicers are slowly trying to improve their systems and give paperwork more scrutiny to prevent short-sale fraud, Fulmer says. Prevention is more practical than prosecution, given the limited resources of law enforcement.
And, in the past, it has been hard for investigators to get servicers to cooperate in efforts to crack down on this fraud.
Glenn Gulley, a real-estate fraud investigator with the district attorney’s office in California’s Stanislaus County – one of the nation’s hot spots for mortgage fraud – recalls calling servicers repeatedly about fraudulent deals and never getting a call back.
“In 4½ years, I’ve never had a bank call me and say we’ve been defrauded,” he says, though he adds that they’re slowly starting to respond as they put more staff in charge of mitigating these losses.
Wow! Law enforcement was being proactive by investigating these cases, and the lender’s couldn’t be bothered to call back. I wonder how many asset managers at the banks are in on the scam.
Instead, most of the calls he gets about this type of fraud are from thwarted homebuyers who read published sales transactions in the newspaper.
“I’m getting people calling and saying, ‘I offered $300,000 for a house that sold for $200,000.'”
And those are the ones who actually make an offer. Many more people are discouraged from bidding when the listing agent for a short sale puts it up on the MLS at 9 a.m., only to list it as “sale pending” at 9:01.
“Then you know the same agent double-ended it” and is bringing in his own buyer, Gulley says.
So much for getting the best price for their client. Most lenders discourage listing agents from double ending deals, but it doesn’t stop them from referring to friendly agents for a significant kickback.
Indeed, Hagberg says, some resales from the short-sale buyer to a third party actually close before the deal is negotiated with the bank, giving them the money to satisfy the lender on the short sale. In some cases, the buyer used a proof-of-funds letter generator found on the Internet to vouch for his ability to close the deal, Hagberg says, without actually having the money at the time.
Now we see how buyers are brought into the scam. If a broke buyer is facing a $30,000 bill for a spent HELOC, getting a $30,000 cash payment to pay off the debt is very enticing.
Of course, some lower-priced short sales are legitimate, pitting cash deals against homeowners with financing or repair demands.
The whole problem could be solved if lenders had a better idea what properties were worth, Gulley says. Fulmer and others say they aren’t sure that BPOs should take the place of full-fledged appraisals.
“There are no real standards for how to pick the comps to establish the value that you receive,” Fulmer says. “You can pick the lowest of the low balls and skew the results.”
Any transaction is supposed to have an independent third-party appraisal. Since appraisers cannot have cozy relationships with realtors anymore, this is less of a problem.
Whom does it hurt?
After the recent mortgage meltdown, few are shedding tears for lenders over these short-sale losses. Fulmer says that when she talks about this type of fraud, a common reaction is, “So what?”
But people should care, she says, because we’re all ultimately paying the tab for it.
“A lot of these loans are insured by the Federal Housing Administration or bought by Fannie (Mae) and Freddie,” Fulmer says. “These excess losses are translating into losses that taxpayers are going to have to make up for.”
Yes, we are going to pay for much of this fraud through bailouts.
Moreover, this type of fraud pushes down neighborhood values, potentially putting more people underwater on their loans. In other cases, the fraud is part of a larger network of schemes that leaves the house sitting empty and open to theft and vandalism.
“Once a neighborhood gets caught up in fraud, it can get recycled in fraud indefinitely,” Fulmer says. “I saw one house that was flipped and foreclosed, flipped and foreclosed for 10 years.”
Flopping is an amazing opportunity for unscrupulous realtors. They have opportunity to make thousands of extra dollars by double-ending commissions and getting kick-backs from the buyers getting a great deal. In fact, many of these agents probably list the flip and make a second commission on the deal for good measure. With the lack of oversight by overwhelmed banks, this scam will be rampant over the next several years.