Does “flopping” truly imply mortgage fraud?  That’s what some are saying, but I’m not sure that I fully agree.  Let me walk you through my thought process and you can let me know if you think I’m on the right track or just a bumbling idiot!  However, if you call me the bumbling idiot, all I ask is that you back it up with highlights to where my logic is wrong.

“Flopping” is a term starting to gain acceptance as indicating the flip of a short sale property.  The idea is that you buy a short sale property for $X from the lender, and then sell it for $Y shortly thereafter.  The spread between $X and $Y is the gain the flopper stands to make.  Put some real numbers to this: maybe you can negotiate with a bank to acquire a short sale for $100k and then turn around and sell it to another buyer for $125k just a few days later … as the flopper in this scenario, you would have just grossed $25k.  Not bad for a couple days work.

Accelerate this idea and have a buyer lined up before you actually acquire the property from the bank.  Now, you’re not waiting a few days to hopefully resell the property, but, instead, you are ensuring yourself of a buyer and able to turn the property over in a matter of hours.  This type of behavior isn’t uncommon – check out the the article “The new flipping: short sales” that highlights it being done in Florida.

The argument by those opposed of this practice is that you are defrauding the bank of the extra money that you just made off the $X/$Y spread.  Let’s say a bank holds a $150k mortgage on a property and sells it to you for $100k.  They just took a $50k hit.  Now, if you turn around and sell that property to someone else for $125k, you just made $25k … that’s $25k the bank could have potentially recouped if they had been able to sell the house to your buyer.  But, my question is, why should this be considered mortgage fraud rather than the natural course of business?

To me, business is all about matching a customer to a product at a price that the customer finds justifiable.  If the bank wasn’t OK with selling the property at $100k, then they shouldn’t have made the deal.  They should have put in the effort to find a buyer that would have paid them $125k.  That’s not the flopper’s fault – it’s the bank’s.

Think of it this way – let’s say you are shopping for a sweater and find one at Nordstrom that you like, but, unbeknown to you, the exact same sweater could be purchased for less from Macy’s.  Now, if the Nordstrom employee knows that the sweater is cheaper at Macy’s, should they be required to disclose this to you?  Of course not!  Were you just a victim of consumer fraud?  Of course not!  You lost money because you didn’t take the time and put in the effort to find the best deal … just like the bank.

Some will probably say this is an unfair comparison because the bank could be in a distressed position while the Macy’s/Nordstrom stores are not.  But, is this not part of doing business?  The bank is smart enough to understand the repercussions of agreeing to the sale of the property, and, if they’re not, they shouldn’t be in business in the first place.

I’m struggling to see how this is mortgage fraud, but would love to get clarification from anyone that has a better understanding…