There is a new game in town and it goes by the intimidating name of “Flopping.” Freddie Mac and Fannie Mae also use another name…Mortgage Fraud. Did that get your attention? It should. The real estate agent will encounter this in a number of ways but most ways will be a variation of the following example:
A real estate investor will come into your office and want to see your short sale properties. They will want to put a “low ball” offer on a property and will insist that, because they are under contract with the homeowner, all future offers must go to the investor and not the homeowner. Smells fishy already, doesn’t it? They will usually have documentation that the homeowner signs giving him this right and the investor the right to market the property in the mean time.
Additionally, the real estate investor will insist on negotiating the short sale. Another indicator is that the listing agent will not usually get a commission when the short sale closes with the bank but rather on the sale to his future buyer.
In reality this “investor” is trying to convince the bank that his “low ball” offer is a market price offer in hopes of buying the property for less than he will sell it for. While he is negotiating the short sale with the bank, he is also marketing the property at a substantially higher price, hoping for a buyer to take it off his hands as soon as he gets an approval from the bank. The plan is to get a buyer under contract, close on the low amount approved by the bank, and then close immediately with the new buyer at a higher price. The investor gets to keep the spread for his troubles.
There are a couple of problems associated with this scheme:
1. NCRC Violation for the Agent. According to the Short Sale Addendum we use in North Carolina and the North Carolina Real Estate Commission rules, the bank must be informed of ALL offers once the short sale negotiations have started with the bank. This is a requirement of the real estate agent’s governing body. This is the responsibility of the agent, regardless of who they have helping them negotiate the short sale. Any failure to abide by the rules will be enforced against the agent… Ouch!
In our example, if the offers are going to the real estate investor and not the bank then the real estate agent is in violation of this rule.
2. Practice of Law. In North Carolina, negotiating a short sale with the bank is the practice of law. The Seller and a North Carolina licensed attorney are the only ones permitted to negotiate with the bank. By negotiating the short sale with the bank, the real estate investor is in violation of the law, which is a Class I Misdemeanor. If he charges an extra fee for this service he is also debt adjusting which is a Class II Misdemeanor. The agent may also be caught up in this violation as well.
3. Mortgage Fraud. The bank’s, Freddie Mac’s and Fannie Mae’s position is that it is mortgage fraud to withhold information regarding a higher price offer. Fraud is like a hot skillet. Everyone who touches it gets burned.
4. No Offer, no Close. If the real estate agent does not get a substantially higher offer during
the time it takes to get the short sale approved, then he will probably not close. The result of this is that the Sellers have wasted three months or more of their selling season. If a foreclosure is pending, then you can see how expensive this bet may be for them.
I would recommend staying completely away from anything that resembles Flopping. If you don’t know whether you are in the middle of one of these prohibited transactions or suspect that something is amiss, then please get your short sale attorney involved.