Plus, one reader’s complaint about ‘offensive’ Bank of America ads
By Lew Sichelman
Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
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WASHINGTON (MarketWatch) — Question: My neighbor in Palm Springs, Calif., who claims to have millions or more in the bank, let his home with a $1 million mortgage go into foreclosure. A real-estate friend of his bought it from the bank and is renting it back to him. After one year, my neighbor plans to buy it back. It affects me as a homeowner because now we have a home in our community that shows a sale price for $600,000, instead of the current market of $725,000. How do I report such activities? —J. McK.
Answer: This type of thing is more prevalent than most people realize. According to CoreLogic, a real-estate and mortgage data firm headquartered in Santa Ana, Calif., lenders will lose more than $375 million this year alone when they sell undervalued houses based on the price opinions funneled to them by unscrupulous real-estate agents.
The scam is called “flopping,” and you are correct, it can have a devastating impact on property values because now, the “sale” becomes a comparable for all future appraisals of matching neighborhood properties.
Like flipping, flopping is the intentional misrepresentation of house prices. But whereas flipping usually takes place when housing prices are rising, flopping occurs when values are depressed.
When a house is flipped illegally, it is “sold” for a greatly inflated value in order to obtain a mortgage that is far greater than the place is really worth. When the seller, who is often in on the scheme, is paid at closing, the difference between the actual selling price and the loan amount is split between the perps, who are usually industry insiders who know how to scam the system.
When a house is flopped, it is usually owned by a underwater borrower who has asked the lender to approve a short-sale at a price that’s less what is owed. Unbeknownst to the owner or the lender, the real-estate agent supplies one or more opinions of valuation that show the house to be worth one amount when it is really worth much more on the open market.
When the lender agrees to take the lower price, the agent purchases the property in his name or that of a straw buyer and immediately flips the property to an honest-to-goodness buyer-in-waiting at a higher price than the one negotiated with the lender, with the difference split between the participants.
Appraisal and valuation misrepresentation continue to be a big bugaboo in the mortgage sector, even in a weak housing market. And flopping is one of the biggest issues because lenders tend to take agents at their word. But when they do check, they are shocked at what they find.
Some real-estate agents are “clever, even more so than criminals,” says Michael Richardson of BrokerPriceOpinion.com, a firm which assists lenders in obtaining accurate valuations. “I’ve seen them change [comparables] to fit the scenarios they are trying to get away with. I’ve seen it where they enter fictitious listings and then remove them later. And I’ve seen it where they’ve recruited other agents” to participate in their schemes.
Flopping costs lenders tens or sometimes hundreds of thousands of dollars per transaction because the house could have been sold for more than they accepted. But it costs sellers big money, too. How? Because if you are a seller and your state allows your lender to pursue a deficiency judgement against you, you could end up owing more than had the realty agent not taken advantage of the lender’s ignorance — or trust — of your home’s actual value on the open market.
To avoid becoming a flopping victim, sellers would do well to pay $95 to $100 for a separate broker price opinion from a disinterested party to make sure the value set by their agent is at least in the ballpark. Richardson says he’d do this before even hiring an agent to put together a short sale.
Sellers should also perform the usual due diligence — with your local realty association, better business bureau, consumer affairs agency and the state real-estate commission — to make sure their agent hasn’t been caught pulling a fast one on others. If they try it once and are successful, chances are they’ll try it again — and again.
In your case, reporting these miscreants is easier said than done because what has taken place is not yet a crime, only an immoral act, and a pending one at that. I don’t even think the lender can do any more than make sure it never deals again with the real-estate agent — or your neighbor, for that matter.
Nevertheless, you should report the agent to your local realty association as well as his broker. And you should also report what has transpired to the lender which originally foreclosed on the property. It is the one which is out big bucks here.
Perhaps the lender might be able to seek a deficiency judgement against your neighbor to recover its loss once the place is resold at a much higher price. California is one of those states where deficiency judgements are not permitted. But perhaps the lender can persuade a judge to rule otherwise in this obvious case of fraud.
Question: I am a real-estate broker in San Marino, Calif., that specializes in foreclosure and short-sale properties. Although Bank of America is a client of mine that I regularly represent in such transactions, I am interested in bringing to light an advertising campaign that I have found offensive and, dare I say, even racist? Any idea how we could get these ads some publicity that might make them a little more sensitive to their customers? —P.A.
Answer: I, too, find these billboards and bus stop placards offensive. To suggest that white people can bank while surfing and hiking and that Latinos can bank while they “wait in line at the food truck” is to suggest that Latin men and women don’t hike and whites don’t work in jobs where they take their meals from the mobile lunch trucks. If not racist, the ads are certainly insensitive and do nothing more than reinforce stereotypical thinking.
Take your complaint to the Department of Real Estate in Sacramento and to local newspapers and other media outlets wherever the offensive messages appear. Also gripe to the billboard’s owners as well as the bus company. And while you’re at it, clue in Bank of America that you find the ads repulsive.
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