In its third special feature on the world's most prevalent real estate scams, TheMoveChannel.com examines the growing menace of illegal property flipping...

Illegal property flipping is a fraud for profit scheme whereby recently acquired real property is resold for a considerable profit with an artificially inflated value. The real property is resold within a short time frame, often after making only cosmetic improvements to the real property

How it works

• A buyer contracts to purchase a property for ₤150,000, usually using a false identity.
  
  
• Before closing the deal, he draws up a second contract to sell the property to a co-conspirator - known as a "straw buyer" – for ₤200,000, a price substantially higher than market value.
  
  
• He seeks a loan for a second contract through a mortgage lender or a mortgage broker and submits an application.
  
  
• A surveyor (either unintentionally or conspiratorially) inflates the value of the property, enough to justify the loan.
  
  
• A mortgage lender approves the application and releases the ₤200,000.
  
  
• Next, the contracts for the property are closed either simultaneously or within a short time from each other.
  
  
• The originator of the scheme takes the ₤200,000, pays off the ₤150,000 and divides the remaining ₤50,000 between himself and any other plotters — usually the mortgage broker or loan officer and sometimes the second buyer.
  
  
• The lender ends up with a 100% or greater loan to value mortgage.
  
  
• The buyer makes a few payments on the property, then defaults and allows it to go into foreclosure.
  
  
• Finally, the lender learns that the property doesn’t even cover the loan value.

In a recent interview with the BBC, One senior detective investigating property-related crime noted how difficult it was to keep track of flipping fraudsters: “They buy up loads of properties, make lots of sales - clocking up £20-30,000 a time - and the more times they do it, the more difficult it is for us to track where the money came from.

“Crucial to activities of illegal flippers is a small minority of property professionals - estate agents, independent financial advisers, accountants and lawyers - prepared to offer their services to crooks. Organised criminals are exploiting these professionals. It's a small minority, but once criminals find out who they are, they become the one everyone goes to."

The false identities used in the scams often come from identity theft - sometimes from within the offices of finance firms, with added details provided by accountants or other financial professionals. Alternatively, there are those who willingly - if, perhaps, naively - allow their identities to be abused in this way.

Flipping rife in the US

In the US, where the process of prosecuting mortgage fraud is more advanced, there have been many recent examples of illegal flipping scams perpetrated using false identities.

In a recent case in the Southern State of Georgia, the FBI prosecuted a ring of 21 people - estate agents, valuers, brokers, lawyers - who were paying a university employee  $10,000 a time to provide personal information about students, so their identities could be used to make fake loan applications.

In another recent case, a fraud ring headed by a particularly canny fraudster managed to lure dozens of Atlanta's great and good into putting their name to property investments. Those investments resulted in more than 400 fraudulent applications for mortgages, as properties were flipped at eye-popping prices - and then hundreds of repossessions, which have actually caused property prices in some neighbourhoods to collapse.

The dire state of the US property market is one reason why more flipping cases are coming to the fore than in the UK. Housing starts - the issuing of permits for new homes - are plummeting, as are mortgage approvals and amid the "sub-prime" lending crisis, prices in many parts of the US are heading downwards.

This has resulted in deals that might have slipped under the radar (under the disguise of a booming housing market), now being spotted as lenders and homebuyers tighten their belts.

Tighter application procedures needed?

Sue Anderson of the Council of Mortgage Lenders concedes that illegal flipping is difficult to spot: "Clearly there is mortgage fraud, and clearly in a rising market one of the things that can be trickier for lenders is spotting it, because property price inflation can mask a multitude of sins.

 “New-build properties in the UK, for instance, have been at the heart of the housing boom - but valuations are difficult, and rapid resales are far from uncommon, thus making potential flippers even harder to spot”.

Dan Johnson, Director of TheMoveChannel.com agrees: "The lazy mortgage approval policies that underpin the feasibility of this scam are symptomatic of the boom times that have apparently come to an end for the UK mortgage industry.

”The appetite for poor quality debt amongst lenders in both the UK and the US is limited at present and tighter application procedures should follow, hopefully bringing the curtain down on this particular activity".

Previous special features:

No 1 - US Foreclosure Scams
No 2 - Cyprus Immovable Property Tax Scam

Jaimie Kanwar