In the real estate game, there’s no shortage of wannabe Warren Buffett’s and Sam Zells who get their start flipping houses for a quick return on investment.
According to real estate research firm Attom Data Solutions, 7.2 % of all U.S. home sales during Q1 2019 were flipped homes, the highest rate in nearly a decade. But it’s a cottage industry ripe for mortgage fraud that only gets exposed when an investment goes south, legal experts say.
Miami real estate attorney Josh Migdal said rising housing prices are making it harder for average Americans to buy homes and properties are staying on the market longer than anticipated. In some cases, home flippers can’t make mortgage payments and banks initiate the foreclosure process, which is when instances of fraud come to light, Migdal adds.
“Home flippers are in a tough spot,” Migdal said. “Their strategy of buying a house, putting some work into it and then quickly selling it for a return only works when there are an appropriate supply and demand level.”
According to Attom’s Q1 2019 report, flipped homes sold at an average gross profit of $60,000, down from an average gross flipping profit of $62,000 in the previous quarter and down from $68,000 in Q1 2018. It was also the lowest average gross flipping profit since Q1 2016 and the lowest average rate of return since 2011.
In South Florida, an oversupply of homes for sale has priced out most buyers out of the market, Migdal said. “We are left with home flippers stuck with their inventory,” Migdal said. “The mortgage fraud comes into play when some of these individuals don’t tell banks that they are home flippers.”
Migdal said some home flippers represent themselves as the typical home buyer and falsely claim they intend to live in the property. “This is called occupancy misrepresentation,” Migdal said. “These are impossible for a bank to detect until the home flipper winds up in foreclosure. I expect fraud will bubble to the surface between now and 2020 as the housing market declines and home flippers begin to flop.”
Paul Levin, a California-based lawyer, specializing in mortgage fraud cases, said it could take years for banks to uncover mortgage fraud by home flippers. In some cases, home flippers use straw buyers to purchase the property and obtain a bank loan, Levin said. “If you make a loan on day one and then it defaults six months later, there is a long procedure that winds itself through the courts,” Levin said. “It is only in the latter stages of the process, that the fraud is detected.”
Levin’s job is to pursue legal remedies against other parties involved in a fraudulent home sale involving flippers. “It could be closing agents and other loan originators that broker and sell loans to securitized pools or larger institutions,” Levin said. “It could also be sellers and developers that pay kickbacks to buyers.”
During the last housing boom before the 2008 real estate crash, Florida home flippers committing fraud were buying condominiums. Today, they are buying single-family homes, Levin said. “Home flipping fraud is always a constant,” he said. “But lenders don’t go after the bad actors. They have a business model that accepts some losses.”