Home "flopping" is a practice where a home buyer hires a broker to assess a home's value for less than the fair market value. When they get the assessment the buyer convinces the bank to sell the home to them for the reduced price. Then the buyer conceals from the lender that they have a higher offer lined up on the home. After the short sale is complete the new homeowner quickly resells the property to the pre-arranged buyer and makes a quick profit. The FBI and Freddie Mac have warned that schemes like these are becoming increasingly common across the country. This scam has the potential to significantly raise the losses suffered by the lenders that have been increasingly willing to accept short sales because most short sales are much cheaper for lenders than foreclosure.
The Obama administration's Home Affordable Foreclosure Alternative (HAFA) Program has created financial incentives for parties that agree on short sales. The government has offered up to $3,000 to homeowners and $1,500 to servicers who closed on a short sale. But many critics of HAFA claim that there are not sufficient fraud safeguards in the program which allow these "flopping" scams to succeed. CoreLogic, Inc. estimates that "flopping" occurs in a little over one percent of short sales. According to that estimate this could cost lenders up to $50 million per year.
Lenders are not the only ones that are harmed by this practice. The homeowner that agrees to the short sale for less than fair market value is also hurt by these scams. If a homeowner gets less money than they should on a short sale they have to make up the difference when they pay a deficiency judgment to their lender. This scam harms everybody except for the person running the scam and hopefully our government will soon implement safeguards to protect everybody from these "flopping" scams.
