Monday, June 23, 2008

"One Transaction Flipping" As Explained By HACC Director Of Housing Development Jeff Skrenes

Photo by John Hoff

About a week ago, during a meeting at HACC, Jeff Skrenes told me some of the dark history behind 409 31st Ave. N. and explained a tricky form of fraud called "one transaction flipping."

"Whoah--!" I said to Jeff. "Too complicated. I can't remember all this. Jeff, You need to write all this (expletive) down... I can put it on my blog."

A few nights later, battling a bout of insomnia, Jeff composed an email and explained "one transaction flipping" just as he did for me on the sidewalk outside the HACC office. Without further ado, here it is.

The lending practice called "One-Transaction Flip" has contributed in a large part to the problems we're seeing in north Minneapolis.

The last time we saw "flipping" in north Minneapolis, it involved buying a house on the cheap, putting in minimal repairs (if any) and selling it quickly for top dollar to an unsuspecting buyer. One-Transaction flipping is different because it only involves a single transaction and it takes multiple parties collaborating to take advantage of multiple people.

Let's say Mr. Smith is trying to sell his house for $100,000 but for the last six months it hasn't sold. He's desperate to get rid of the house because he has to move. A realtor sees this and says, "I can sell your house in as little as a few days to a few weeks. The sale price will be $150,000 but the fees involved will make your net profit the same as if it sold for $100,000."

Well, why should Mr. Smith care if he can sell his house for the net gain he was looking for? Smith can't pass up the deal.

The realtor next goes to Mr. Jones, an unsuspecting buyer, and says, "How would you like to buy a house and get $10,000?" This may be presented as an owner-occupied deal, but more often it's sold to the buyer this way: "We'll manage the property for you, putting renters in, paying the utilities, etc. We just need your name on the credit to make it happen. Since we're taking care of everything, it's a risk-free investment. Plus, you get the $10,000 and any appreciation in value."

On the technical side of this, it usually takes collaboration from a realtor, mortgage originator, (broker) appraiser, and title company. The realtor is usually the one initiating contact with the unsuspecting buyer and seller.

The realtor does duel representation, which is legal in Minnesota but very rare. This keeps another realtor from being part of the transaction and calling them out on the fraud. As an added bonus, the realtor gets his regular commission from both sides of the transaction.

The mortgage broker must falsify documents or find a "no doc" mortgage product that works. One borrower who was a victim realized only after closing that the broker created a job for a time when he was actually in prison. I've heard stories of mortgage document "chop shops" or "arts and crafts sessions" where brokers literally create pay stubs and W-2s for a borrower, frequently without the borrower having knowledge this was happening.

Also, a broker can send this same borrower for 4-5 loan approvals at different companies. The appraiser has to be in on the deal, of course, so an inflated appraisal can be written up.

The title company is where it gets tricky.

(Wait, you mean it hasn't gotten tricky YET?--JNS)

In most cases, a title company is used to insure the transaction closes properly. So title companies want to be on the lookout for fraud. Let's go back to that $50,000 difference that's going to be left over. Usually the realtor or broker (whoever takes the lead in recruiting victims, usually) creates a shell limited liability corporation, with a name that makes it seem like they do some kind of home repair/general contracting. A title company is supposed to look out for red flags, such as large payouts to LLCs without evidence of the work actually being completed. So the fraudsters usually get a title company involved, finding someone who can and will fudge the necessary closing info.

Everybody gets a cut in the parking lot after the deal closes.

So how do you spot one-transaction flips? First, check to see if a realtor on the MLS does an inordinate amount of dual representations. This is so rare that even 2 or 3 a year are enough of a red flag. Next, check the properties on which the realtor did dual representation. You'll probably see they move in as little as 2 days to 2 weeks, meaning that the seller already has borrowers lined up.

If you were to go farther in your MLS research, you'd see that the houses all sell for a lot more than the should have, and were listed earlier well below the final selling price. If you've got closing papers in front of you, you'll see the shell LLC come up as a fee on the seller's side of the transaction.

This is happening a lot less than it used to, simply because 100 percent loans are going away. But it's still there, if for no other reason than a lot of the perpetrators haven't been caught yet.

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