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Lenders Losing Money In New Short-Sale Scam

Property flipping—a practice where investors buy distressed homes at a discount and sell them for a profit—has been popular for years, but a number of investor-realtor teams have turned it into a scam that poses big losses to lenders.

Under the scheme, an agent hired by to short-sell a property by a bank finds an initial buyer, then inform an investor so he or she could make a smaller bid. The agent forwards the offer to the bank and closes. The home is then sold to the first buyer for the original price, and the investor and agent share the profit.

The large inventory of distressed homes has created a strong market for flipping. Real estate information provider CoreLogic recently reported that 4% of the short sales in a recent study were resold for a profit in 18 months or less.

Not all the short sale flipping cases are scams, but the study showed that about one in 53 involved the scheme described above. It also revealed that lenders lose as much as $310 million every year from the practice.

Short sales—a foreclosure alternative where a home is sold for less than the owner’s mortgage balance—have become increasingly common as homeowners fall into financial distress and home values go down nationwide. However, scams and fraud have also turned up in recent months, slowing down an already sluggish recovery.

The government has already put in efforts to wipe out scams in the real estate market, especially since they target already troubled borrowers, although the agent-investor scheme has yet to be addressed.