1. mgtaylor
Wells Fargo Funding Risk Advisory Bulletin
Detecting Flipping and Flopping Schemes
ƒ Inconsistent current property owner/seller between: ƒ Average neighborhood values (from a source
purchase contract, title commitment, appraisal, and independent of the appraisal) are lower than the sales
settlement statement. price of the subject property.
ƒ Ambiguous or deceptive wording on the title ƒ Appraisal comparables have other sales in the last
commitment: year and significantly increased prices.
Title is currently in the name of (or will be at ƒ Recurrent participant combinations; for example, the
time of closing) “John Q. Mortgage” – This same settlement agent, real estate agent, and
indicates that there may be a hidden interim seller/LLC are common to several loans.
transaction. ƒ Borrower was renting previous residence and is
Title is in the name of “John Q. Mortgage” by purchasing a multi-unit property.
deed dated XX/XX/XX” – If the date listed is ƒ Assets appear high for the borrower’s income and are
subsequent to the date the title commitment supported by bank statements. (Although assets
was issued, it indicates a future event. may appear well-documented, high-quality bank
Title commitment is dated in the future – This statement alterations and fabrications are common).
indicates the status of title at the time it was ƒ Down payment is a gift, and donor is not a close
prepared may not be the same as shown on relative.
the commitment. ƒ The listing agent is affiliated with the interim
ƒ Payoffs on the settlement statement appear too high buyer/LLC.
based on original lien amounts on title commitment. ƒ The existing homeowner has designated a third party
ƒ There are no lien payoffs on the settlement to act on his/her behalf to negotiate the short sale,
statement. and that third party is affiliated with the listing agent
ƒ Seller is an LLC and there is no real estate or interim buyer.
commission. ƒ Involvement of a transactional lender who charges
ƒ There is no earnest money. high fees for a very short-term loan (such as a 2%
fee plus $495 for a 1-day loan) to facilitate short sale
flips.
Example: Short Sale Flop, Flip and Combination Transactions
Scenario #1 Scenario #2 Scenario #3
Short sale flop Flip Combination Short Sale
Flop and Flip
Home’s true value $150,000 $150,000 $150,000
Existing mortgage $160,000 NA – foreclosure sale $160,000
balance
BPO for short sale $110,000 NA $110,000
Sales price – $110,000 $135,000 (below value due to $110,000
transfer to interim foreclosure)
buyer
Appraised value for $150,000 $185,000 $185,000
new loan
Sales price – $150,000 $185,000 $185,000
transfer to new
buyer
New mortgage $142,000 $175,000 $175,000
amount
Transaction Homeowner sells to interim buyer Interim buyer purchases at Homeowner sells to interim
description for $110,000; on same day foreclosure auction for $130,000, buyer for $110,000; on same
interim buyer sells to new buyer and re-sells for $185,000 day, interim buyer sells to
for $150,000 new buyer for $185,000
Gross profit $40,000 $55,000 $75,000
Issues The existing lender was deceived New loan exceeds collateral Existing lender took larger
into accepting a larger loss than value; new buyer may be straw loss; new loan exceeds
necessary because the offer from buyer or overpaid for property; collateral value; new buyer
the new buyer was withheld. loan qualification misrep is likely. may be straw buyer or
overpaid for property; loan
qualification misrep is likely.
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RAB11-01
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