How State Regulators view Flipping! - Posted by John Merchant, JD

Posted by Chuck Smith on July 06, 2002 at 16:00:49:

What a great contribution you just made!

Chuck Smith
Cleveland, Ohio

How State Regulators view Flipping! - Posted by John Merchant, JD

Posted by John Merchant, JD on July 06, 2002 at 15:25:01:

Found this interesting observation by UT State Regulator on another State’s Legislative site…and it’s probably, at its heart, just how ALL state regulators view “flipping”…somewhere between felony and crooked.

As the UT guy does admit, in his final paragraph, there’s nothing wrong with buying low, selling high, as long as there’s no fraud (deliberate mis-statement of facts)involved. So REI folk just need to be aware to DISCLOSE, DISCLOSE AND DISCLOSE so as to eliminate the possible later allegation of fraud.

Here’s the article in question:

What in the World is Flipping?
by Ted Boyer, Division Director, Utah Division of Real Estate
Reprinted with permission from the Utah Division of Real Estate

At a recent meeting of the Association of Appraiser Regulatory Officials, Jerry R. Jolly, Acting Director of the California Office of Real Estate Appraisers, John S. Brennen, Chief of Licensing and Enforcement for California and Larry Disney, Chief Investigator for the Kentucky Real Estate Appraisers Board presented an excellent and informative program on flip-ping. A flip was defined as “A fraudulent real estate transaction, where a property is bought, then sold again at a greatly exaggerated price.” Additional definitions are: “In flipping schemes, properties are quickly bought and sold and the value of the property is artificially inflated through the use of improper appraisals. Flipping schemes are characterized by non-arms length transactions between business partners.” (Star Tribune, Minneapolis, Mn.); “The flipping scheme involves legitimate initial purchases of (property), followed quickly by non-arms’ length sales at inflated values to related or affiliated parties associated with the initial purchase.” (The
Commercial Appeal, Memphis, Tn.) To illustrate their point, the presenters used actual sales histories of flipped properties. One sales history looked like this:

07/19/96 REO* purchase $262,000
10/21/97 List price $385,000
01/22/98 Amended list price $375,000
05/02/98 Purchase contract $370,000
07/27/98 Closed escrow $370,000
08/18/98 List price $625,000
08/31/98 Purchase contract $622,000
09/04/98 Appraisal $622,000
12/03/98 Closed escrow $622,000
12/03/98 Trust deed $495,000

(*REO is a term used by lenders to describe real property involuntarily acquired by them through foreclosure. Lenders often use brokers to market their REO properties.)

You might ask, “How can they do this?” Actually, a number of techniques are used, each of which involves a fraudulent appraisal. Typically, a straw buyer poses as the real buyer, preferably someone with good credit. After the final flip, the straw buyer is either paid a flat fee or shares in the excess proceeds of the purchase money mortgage. Occasionally, the straw buyer pretends to be someone else after stealing that person’s identity. Sometimes the flip is an “inside job” with the escrow, title, or mortgage company manipulating the transaction. Frequently, the subject property is located in an area of moderately priced homes with pockets of higher priced homes, facilitating the availability of higher comparable sales information near the subject.
The common thread in all of these techniques is the involvement of an appraiser. Sometimes the appraiser is complicit. On occasion, a forged appraisal is used.
Sometimes an innocent appraiser is duped into participating in the fraud. For example, the appraiser may lack geographic competency. Or, the client may offer an exorbitant fee for a rush job for which the client furnishes comparable sales information to support the pushed value conclusion. Sometimes the appraiser is motivated by the promise of future work to look for comparable sales information that supports the value sought rather than the actual value of the property.

The purpose of this article is not to teach people how to participate in fraudulent flipping, but rather, to make you aware of the problems and temptations in the market place and to help you recognize a problem when you see it. If you are suspicious about a transaction, ask yourself the following questions:

? Is the sales price significantly higher than the list price?
? Is the appraised value in line with recent comparable sales in the neighborhood?
? Has the home sold recently for a significantly lower price?
? Is the subject home located in an area of moderately priced homes with pockets of higher priced homes and overvalued?
? Is the home being transferred among related or affiliated parties?
? Has the property traded several times within a short period of time?

It is still perfectly legal to buy a property at a good price and resell it at a profit. It is only when elements of fraud enter the picture that people get in trouble and cause trouble for others.

Re: How State Regulators view Flipping! - Posted by JoeS

Posted by JoeS on July 06, 2002 at 21:27:17:

EXCELLENT post…all you “new” investors listen up! If you do every detail of every transaction above board and honestly you will prosper without having to look over your shoulder. “Flipping” is LEGAL as long as it is done correctly. Happy investing.