How the scam works:
The down economy has caused a lot of homeowners to become 'underwater' on their mortgage, meaning they owe more on their mortgage than the home is worth.
This leaves homeowners wanting to sell their homes to get financially ahead, but unable to do so because they will still owe money on a mortgage for a property they no longer own. Sadly, this has caused several underwater homeowners to flop their homes.
'Flopping' a home is a form of mortgage fraud where sellers, trying to get the lowest sales price as possible, will deliberately damage their homes in order to prove to the bank that they can't get full value out of the home.
This then allows them to make a short sale, which forgives the difference between the sale price and the amount owed. But these owners take the scam a step further. They will sell the home (at the bargain basement price) to an accomplice who will then clean it up and flip the home for a quick gain. The seller and the accomplice will then split the proceeds of the sale.
How to avoid:
While there is no repercussion to people who ultimately purchase a “flopped” home, be aware that this scam has caused banks to take losses on properties, which then often drives up interest rates in the housing market, making it more expensive for homebuyers to realize the dream of homeownership. If you are underwater on your mortgage be aware that this is illegal and perpetrators of this fraud are subject to federal prosecution under mortgage fraud laws.
If you know of someone perpetrating this scam you can report them to Freddie Mac (The Federal Home Loan Mortgage Corporation) at 1-800-4FRAUD8.
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