Guide to Real Estate Fraud

The Flipper Fraud

This occurs when someone buys a property in bad shape for a cheap price. Say $50,000. They make some cosmetic repairs spending say $1,000 and then sell it at an inflated price say $80,000 to a buyer who puts little or no money down.

The seller takes a mortgage back for a large amount, say $78,000, and gets a phony appraisal based on the inflated sales price.

You are then offered the mortgage at a discount at what looks like an attractive yield.

Soon afterwards the buyer stops making payments and moves out. Leaving you with a trashed house.

The key to this fraud is the inflated appraisal. Remember that appraising is an art not an exact science. Nonetheless an appraisal should be within 10% of the true value of the property.

This fraud can be hard to spot. Many legitimate investors DO buy properties for much less than their true value and are able to genuinely sell them for a higher price.

• The key is to check out the comparable properties on the appraisal form and satisfy yourself that they are truly comparable.
• Try to specify the appraiser and not use one provided by the investor.
• Check the credit rating of the new borrower. Especially if they have only put down a small down payment.
• Be wary of mortgages for sale that have not been aged, that is, a number of payments made on them.

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