The new flipping: short sales
STAFF PHOTO / MICHAEL BRAGA
This house in Nokomis was bought on June 30 for $205,000 and then sold the same day for $230,000.
By Michael Braga & Chris Davis
Staff WritersPublished: Sunday, November 15, 2009 at 1:00 a.m.
Last Modified: Saturday, November 14, 2009 at 11:36 p.m.External Links:
Untold millions of dollars that banks could have recovered from the sale of distressed Florida homes have instead been pocketed as profits by a new breed of property flipper.
These flippers target houses on the verge of foreclosure and persuade banks and mortgage companies to accept lowball buyouts, sometimes by using questionable appraisals and not disclosing that a quick sale at a higher price has already been arranged, experts say.
No one knows how widespread the scheme has become. But a national glut of short sales -- pre-foreclosure sales in which the lender agrees to let the house sell for less than the mortgage owed -- has spawned a small industry of short-sale flippers, some of whom use these questionable tactics, experts say.
The Herald-Tribune examined nearly 18,000 property sales that occurred in Sarasota and Manatee counties in 2009. The review showed that:
• At least 250 properties have been sold multiple times at escalating prices so far this year. Nearly 50 of those properties were bought then resold within 24 hours, suggesting that banks were underpaid for properties that already had a buyer willing to pay more.
• Just the most suspicious sales, where properties flipped within a day, have cost banks $1.7 million in Sarasota and Manatee counties so far this year. On houses bought and resold within a month, the bank short sales were $3.2 million less than the houses fetched just a few days or weeks later.
• Real estate professionals are a key part of short sale flipping. Of about 120 short sale properties that sold twice within a month in the Sarasota area, more than half of the buyers or sellers were real estate agents, real estate attorneys or mortgage brokers.
• Questionable short sales accounted for 1.4 percent of all property sales in Sarasota and Manatee counties this year.
At the peak of the housing bubble, 2 percent of all sales statewide raised suspicions, based on criteria used by fraud investigators.
• Bankers and some organizations that regulate the real estate industry have taken steps to curb the latest form of flipping. But the measures, including restrictions on writing mortgages for flipped properties, have not halted questionable transactions. Experts warn the number of short sale flips is likely to continue growing nationwide.
Short sales are viewed as a crucial part of a real estate market recovery. They allow distressed homeowners to escape huge debts and let banks avoid foreclosure costs and still recoup some of the money they are owed.
And flips involving short sale properties can be legitimate if repairs are made to a property, or the original buyer pays one price in good faith and later finds another buyer willing to pay more.
In fact, some professional flippers are outspoken in defending flipping as aiding both homeowners and banks.
"Who cares if someone is making a spread on flipped properties," said Marc Pelletz, a real estate investor and agent with Hook & Ladder Realty in Sarasota. "Banks are getting money. Someone gets a deal. As long as everything is disclosed to everyone, what's wrong?"
But fraud experts warn that some of the real estate flipping they see today involves the same kind of insider deals and manipulated sale prices that plagued the housing bubble.
The FBI recently added short sale flipping, dubbed "flopping" by some mortgage fraud experts, to its list of recognized real estate fraud.
In a June 2009 report on mortgage fraud, FBI officials described various forms of short sale flipping fraud. Each type involves misrepresenting the value of a house to a lender.
Banking experts point out that those losses trickle down to taxpayers, who have bailed out the banking industry.
"These middle men are making a huge profit at the expense of banks, which means they are often making huge profits at the expense of taxpayers," said Anne Weintraub, a real estate attorney with the Syprett Meshad law firm in Sarasota.
LUCRATIVE BUSINESS
The evidence that short sale flippers are finding ways to benefit from bank losses can be found in deed records filed along Florida's Gulf Coast.
Some individual investors and small groups of flippers have bought dozens of properties at discount prices and resold them within days, each time for thousands of dollars in profit.
Since September 2008, Tampa real estate agent Joe Wright and accountant Kevin Byrne have worked together to buy more than 30 pre-foreclosure houses and condos, with Wright's brokerage as the listing agent and Byrne's company as the buyer.
In each case, the men arranged a short sale and quickly resold the property at a higher price. Of their 33 deals, 22 properties resold within 24 hours of purchase. The median one-day price increase was $25,000.
Byrne and Wright did not return repeated calls seeking comment.
Their purchases, including nine in Sarasota and Manatee counties, involved properties that ranged in value from $50,000 to $800,000. They also included four properties owned by Wright.
Court filings show that all four were on the brink of foreclosure when Byrne bought them from Wright at reduced prices and resold them for a profit.
In one deal last year, BB&T filed a foreclosure action against Wright and moved to seize a three-bedroom house he had built on Fielder Street in Tampa.
Mortgage documents show Wright had a $545,000 mortgage, but BB&T agreed to sell the house to Byrne's company for Click here to see the rest of this interesting story
