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Investment Property Owners: Beware of Flopping

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The imperfection of the real estate market – whether for investment properties or owner-occupied homes – lends itself to scammers and con artists.  Well, there is a new scam in town; “flopping,” which is designed to falsely undervalue the price of a property so it can be bought at a below-market price.  As such, this practice negatively impacts the values of the surrounding properties and generally wreaks havoc on local real estate markets.

Here is a typical scenario for this.  A property owner let’s his home become a foreclosure property and gets the lending bank to agree to a short sale.  An agent then supplies a few opinions of value that depict the property to be worth less than what it would get on the open market.  When the bank agrees to the lower price, the agent then buys the property and immediately flips it to a buyer at the higher / correct market value.  The sad truth is that the banks usually take agents’ word at face value without substantiating their claims.

The main problem with this scheme, aside from the fact that it is akin to lying, is that it manipulates market pricing which has residual effects on other nearby properties.  The undervalued sale prices become comps for all future appraisals of similar properties in the neighborhood.  It also costs lending banks millions of dollars in forfeited profit, which reduces their ability and propensity to lend and serves as a drag on the market recovery.  In fact, it is estimated that lending banks will lose over $375 million in 2011 as a result of selling undervalued properties (a 20% increase from 2010).

To minimize the occurrence of flopping, if you plan to sell property always pay for a separate price opinion from a neutral third-party so you understand its true value.  Additionally, you’ll want to do your own due diligence by researching the market, recent comps, the local association of Realtors, and even the BBB.  As they say, an ounce of prevention is worth a pound of cure!

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