There is a new phenomenon taking place in this current real estate market that needs definition.
The Flip:
The typical “flip” transaction is a transaction where a buyer, called a “flipper,” sees an opportunity in the market where a property can be purchased for less than comparable properties in a market, then sells the property for a profit. This property may need minor to major renovations to make it marketable to potential buyers.
If this is a short sale, there is full disclosure to the lender of the seller, the listing agent shows the property as contingent in the MLS, and the property is closed immediately upon approval from the seller’s lender.
The flipper’s involvement in the transaction is typically limited to the normal functions of a buyer and they do not have contact with the seller’s lender. Their offer is usually presented to the seller’s lender for consideration either by the seller, seller’s REALTOR®, seller’s attorney or loss mitigation consultant. This allows the seller’s lender to see all offers on the property and accept the offer that best suits the lender’s recovery needs.
The Flop:
In contrast, a “flopper” buyer approaches a distressed property owner and offers to buy her property, then places the property under an option contract, which may be a long timeframe. The flopper may then record the contract with the local court to secure the option contract and tie up the seller’s property.
The flopper may represent himself as a short sale expert and offer to handle the negotiations with the seller’s lender at no cost to the seller. This part of the process is key to the success of the flopper because then he controls the timing of the transaction. The flopper won’t close unless they have identified a buyer ready to close.
For example, the flopper may require the seller allow the flopper to continue to market the property at $150,000 while the $100,000 short sale offer is being processed. The flopper may insist that the seller’s agent keep the property active in the MLS (Multiple Listing Service), or the flopper may bring in his own agent to co-list the property and continue to market the property at a higher price than has been presented to the seller’s lender.
Although there are many differences between the two transactions (Flip vs. Flop), the key difference is the fact that most floppers generally will not actually close on a transaction until they have identified a new buyer that will pay the inflated price and have secured that buyer with a contract.
The potential for fraud is rampant in the flop transaction.
The flipper and flopper seek out distressed homeowners; the difference is that the flopper convinces them that he has the distressed seller’s best interest at heart and will do everything he can to get them out of this situation. But how can this be true if the flopper’s goal is to purchase the property for as little as possible and sell it simultaneously for as much as possible without the lenders knowledge? How can he also look out for the distressed seller’s best interests? Wouldn’t it be in the seller’s best interest, as it pertains to the deficiency with the lender, to get the highest price for the property in order to be released by the lender of the debt? Since the flipper doesn’t have contact with the lender, the flipper is only representing his best interest, which is to buy low and sell high.
The flopper typically controls the real estate agents involved in the transaction. Therefore, if other offers come in on the property, those offers never make it to the seller’s lender for consideration, even if the offer would have been enough to satisfy the distressed lender’s requirements. This part of the process may put the distressed seller in further peril, because every day that goes by without a settlement with the lender is one day closer to foreclosure—but this doesn’t bother the flopper because he has no risk in the deal.
When the flopper controls the transaction and the interaction with the lender, he has no motivation to obtain a speedy settlement with the distressed seller’s lender. That is, until he has identified a buyer at whatever inflated price he’s placed on the property. In contrast, the flipper seeks as quick a closing as possible; flippers are eager for the seller’s lender to approve the sale.
Rightfully or wrongfully, the seller’s lender relies on all parties involved in the transaction to disclose all arrangements and agreements between the parties. They rightfully seek to recoup as much as the market will bear in order to offset their loss, and even though the populist might vilify the banks, it is reasonable to believe that if there is a penny available through the liquidation of the property, it should go to the lender to offset their losses. The flipper presents his offer along with others and the best offer wins; if there are no other offers, the flipper wins and closes immediately. The flopper may control the real estate agent, the listing, and the offers presented to the bank. He can manipulate the offers so the lender is unaware of a potentially higher offer. The flopper only closes when he has identified a buyer, then immediately sells the property to the higher buyer, in some instances the same day.
Effect on the distressed home owner
The distressed home owner is also a potential victim of the flopper. If the flopper controls the transaction and the interaction with the lender, he has the ability to delay the acceptance of the short sale, which leads the home owner closer to foreclosure. In some instances, if a buyer cannot be found at a price that the flopper will accept, the flopper will actually require the distressed seller pay a break fee to cancel the option contract. The flipper, on the other hand, never claims to have the distressed seller’s best interest at heart, and typically never has contact with the seller or their lender. The flipper may actually benefit the home owner by bringing liquidity to the situation, thus allowing the seller to avoid foreclosure.
Jay Hill
Hill Mortgage Consulting