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"FLIP!" Not Just Another 4-Letter Word -- Illegal Flip Real Estate Transactions

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July/August 2000 - Volume 79, Number 4

by Lynn W. Wilburn

In the last two or three years but especially within the last year, illegal flip real estate transactions (FLIPS) have virtually exploded in numbers around the country. Much of the credit for this proliferation in fraudulent transactions can be attributed to "Infomercials" on how to "buy real estate with no money." If you are an insomniac, tune in to any one of these usually late night presentations and you will be treated to some very "creative methods" to obtain real property. Take the "creative methods" described, sprinkle them liberally with criminal intent, add a dash of falsified documents and information and, "presto," you have a recipe for mortgage fraud or FLIPS.

Surprisingly, the primary culprit for the majority of these frauds currently under investigation is the mortgage broker. Of course, he has some help from others like the real estate broker, appraiser, title agent, "straw buyers," mortgage lenders’ employees, etc. Since most of these loans are made to borrowers with minimal or poor credit, the mortgage loans (known as "B, C or D paper") generate substantial points and fees to the mortgage broker. That, coupled with the excess funds derived by the crooks from each transaction, seems to be the driving force behind the FLIPS.

Let’s discuss the "ABC’s" of FLIP transactions. Certainly, a truly honest FLIP wherein A sells to B who sells to C is a real estate investor’s dream.

• A is the current owner of the property and wants to sell

• B is buying from A intending to resell immediately to C

• C is purchasing from B and usually obtains a mortgage

• The two transactions are usually very close if not simultaneous

In the honest FLIP, the investor (B) has a seller (A) who is willing to sell below market value AND has found a buyer (C) willing to pay market value. The values are legitimate and the investor’s dream, "buy low, sell high," is realized.

The crook’s bad FLIP also involves the sale of real property from A to B to C. The principal of "buy low, sell high" is still employed but, beyond that, there are few similarities. A is usually a legitimate seller selling at or near fair market value. B is usually the crook or his designee obtaining the property from A with intent to defraud a mortgage lender. C is usually a "straw buyer" controlled by the crook and usually not qualified for the mortgage loan obtained. The two sales, A to B and B to C, are usually simultaneous and conducted by the same title agent.

Here are some of the elements of a bad FLIP. They are, more or less, in the order in which they occur.

The subject property is often "distressed." The current owner is delinquent or having financial difficulty and desperately needs to sell. Sometimes the property has already been used in a similar scam and is near foreclosure. In extreme cases the same property has been used simultaneously to scam more than one lender at a time.

Of course an appraisal to match the intended scam is necessary. Here, the crooks become very creative. They select the amount they wish to borrow and then "back into" the appraisal. In the cases under investigation, the appraisals have increased the true property values by 50% to 150%. The comparable properties or "comps" utilized are very creative. In most frauds the same appraiser is used for all FLIPS.

Usually, the borrower (C in the second transaction) is a "straw buyer" who could not possibly qualify for the loan. Therefore, the loan application says whatever is necessary to "qualify" the borrower. Bogus verifications of deposit, verifications of employment, etc., are common. In some cases, the same telephone numbers are used over and over again for various "straw buyers" and, occasionally, the same phone number has been put on the same application for both the verification of deposit and employment. The crooks have someone answering that number to give the answers necessary to support the scam.

Along with the falsified loan application, the lender is then shown a contract showing the sale from B to C with no mention of the sale from A to B.

From the title agent to the lender comes a title insurance commitment with the various requirements for policy issue and showing title currently invested in B. In fact, at the time the commitment is issued title is vested in A since the sale from A to B has yet to take place.

To close the transaction, the title agent prepares a HUD-1 or Settlement Statement indicating, among other things, that the borrower (C) brought funds necessary for the down payment. In fact, the borrower brought no money to the closing since the "down payment" came from the proceeds paid to B in the "sale" from B to C. The net effect is that the only funds for either transaction are the loan proceeds from the mortgage lender to C. In some cases, to make the closing appear legitimate to the lender, the title agent, after receiving the funding check, purchased Cashier’s Checks and deposited them back into the escrow account so they would appear to be the borrower’s down payment.

The title agent then sends the lender’s closing package to the lender purportedly representing what happened in the transaction. The falsified documents, of course, are not representative of the transaction.

So far, then, we have:

• Mortgage brokers and/or real estate brokers or agents falsifying documents, finding and providing "straw buyers," providing bogus "VODs" and "VOEs," making numerous misrepresentations to mortgage lenders as to the loans being originated, etc.

• Appraisers providing multiple bogus appraisals with extremely inflated values

• "Straw buyers" (and sellers) falsifying loan applications and other documents

• Title agents providing falsified or altered commitments, failing to follow the lender’s closing instructions, preparing HUD-1 or Settlement Statements that do not represent what actually happened at closing and fail to disclose unauthorized disbursements and bogus receipts of funds

While the majority of the title agents or their employees involved appear to be criminally complicit in these frauds, there are some that may be victims themselves, having been taken in by the crooks. Unfortunately, they all have one major problem in their failure to follow the lender’s closing instructions. In almost all the lender’s closing instructions found in the files connected with the frauds being investigated, the following wording or something similar is present:

"If you know of any change in the ownership of this property in the last six months DO NOT CLOSE THIS TRANSACTION."

A most chilling revelation has been the common thread in interviews conducted with several title agents and their employees. They have all commented that they "do not really have time to read the closing instructions and, anyway, they all say the same thing." When these same individuals were asked why they continued to close transactions that appeared questionable or clearly fraudulent, the usual answer was that the crook was their "best customer."

To recap, these are some of the more important elements of illegal FLIP transactions:

• Extremely inflated values and/or appraisals

• Altered title insurance commitments

• "Straw" buyers and/or sellers

• Falsified HUD Settlement statements

• Unauthorized disbursements

• Altered loan applications

• Fraudulent "VOEs" and "VODs," etc.

• Multiple violations of the lender’s closing instructions

• The "best customer" deals

• Same individuals involved as buyers and/or sellers in multiple transactions

• Consecutively numbered files on the same property

• Transfer of funds between files within the same escrow account

• Checks payable to "sellers" (B) deposited back into the escrow account

To no one’s surprise, multiple title insurance underwriters are receiving claims as a result of these frauds. Many of the claims are actually insured closing letter claims for failure to follow the lender’s closing instructions.

Investigations of FLIP frauds are currently ongoing in California, Colorado, Florida, Georgia, Illinois, Tennessee, Texas and Wisconsin. Losses to mortgage companies, title insurers, government agencies, etc., are estimated to exceed $30,000,000.

To combat these losses, we have instituted training seminars for the personnel of mortgage lenders, title insurers and agents, investigators, auditors and others connected with the real estate industry to detect and prevent this type of fraud. We have done assessments of current business and underwriting practices to ferret out these frauds.

Criminal investigations are underway in all the above cases at the local and/or the federal level. We are providing the evidence necessary for civil litigation necessary for recovery where possible as well as the criminal prosecution.

All available information indicates a continuing escalation of FLIP frauds. It is vital that a collective industry- wide effort be continued to educate all those that may be susceptible to these frauds as they damage not just individuals and companies, but the industry as a whole.

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