What to Know When Buying Your First Home: Avoiding "Property Flipping" Scams
Beware of Predatory Home Sales Scams
Recently, many New Yorkers shopping for their first homes have fallen into a financial trap known as “property flipping,” usually involving a mortgage insured by the U.S. Department of Housing and Urban Development (HUD) and its Federal Housing Administration (FHA) program. “Property flipping” is when a real estate speculator buys a property at a discount, performs minimal repairs, and then sells the home at a huge, fraudulently marked-up price to a new homebuyer. New homeowners find themselves trapped in expensive mortgages, and stuck with properties in terrible condition that they cannot even sell.
If you are a first-time home purchaser, you should be aware of this scam and learn how to avoid it. If you believe that you have fallen victim to a property flipping scheme, there may be resources available to help you.
The One-Stop Shop: When Your Realtor Promises to “Take Care of Everything”
Many dishonest real estate sellers take advantage of new homebuyers by advertising as “one-stop shops” that arrange all aspects of the home purchase on behalf of the buyer These realtors promise to “take care of everything” for the buyers, including showing available properties, fully renovating the homes, arranging the appraisal and inspection, helping buyers apply for and obtain a mortgage, and even providing an attorney to represent the buyers. You should stay away from any real estate company that offers to arrange these services on your behalf — any appraiser, inspector, or attorney arranged by your realtor could be working for your realtor, not for YOU!
- Real estate companies, sometimes together with contractors, often promise that properties will be fully renovated and in “like-new” condition by the time of the closing. You should always make sure that any promises by the realtor to make repairs are put in writing and reviewed by an independent attorney before signing.
- Property inspectors look at homes to find any obvious or hidden defects, especially with the four major home systems (roof, heating, plumbing, and electric), and prepare a written report. Appraisers also inspect properties, and prepare an appraisal report that estimates the fair market value of a property, usually by reviewing similar properties in the same neighborhood. Dishonest inspectors and appraisers sometimes prepare false reports that misrepresent that properties are in good condition, and that the resale value is high. You should always arrange your own inspection and appraisal; meet the inspector and appraiser at the property so that you can learn about any problems with the home; and review a copy of their reports before closing.
- Homeowners are sometimes steered by real estate brokers to work with particular mortgage lenders. Dishonest lenders sometimes falsify information or encourage borrowers to do so, such as making up fake proof of income, or asking someone to co-sign the mortgage even though the co-signer does not intend to live in the property. Though you may fear that you cannot qualify to purchase a home without engaging in fraud, beware of this trap! If you sign for a mortgage based on false income or fake co-signers, you may get stuck with a loan that you cannot repay, and fall into foreclosure.
- New homebuyers often feel reassured when a broker arranges for an attorney to represent them at the closing. Often, these attorneys meet the buyers for the first time at the closing, and refuse to answer questions or protect the buyers’ rights. You should always find an independent attorney to represent you in a real estate transaction, by asking family or friends for referrals, asking the attorney questions (Do you usually represent homebuyers or sellers? Have you worked with this realtor before?) and checking her references (ask to speak with past clients). Never accept an attorney arranged by a real estate broker.
How to Spot Property Flipping
Real estate brokers that engage in property flipping have perfected a sales pitch to pull homebuyers into bad deals, and to hide any problems with the transaction until it is too late. You should regard the following as potential “red flags”:
- Look for the one-stop shop: Do not do business with a broker who tells you that he or she will “take care of everything” for you.
- Look for potential discrimination: Many dishonest brokers target non-white and low-income communities because of their belief that those clients will be more attracted to the one-stop shop arrangement, more susceptible to misrepresentations, and generally easier to scam. Check whether your real estate broker has worked to attract clients of color: many of them advertise heavily in local newspapers, distribute leaflets, or may even solicit business door-to-door. Federal and state laws prohibit discrimination in housing, and you should be careful of any business that appears to target people of color for business, for example through photo advertisements.
- Reasonable access to the property: Homes that are sold through the flipping process almost always need substantial repairs. Brokers conceal this fact by refusing to allow buyers to inspect properties until after the sale is complete, sometimes claiming “insurance” or “safety” reasons. Homebuyers should also be wary of a broker’s assurances that the property will be “overhauled” or “gutted out” before the final sale. You should always get all promises of repairs in writing, and insist on doing a final walk-through of the property before you close the deal.
- Be wary of assurances about the HUD/FHA Mortgage Insurance Program: Brokers engaging in flipping will often try to make themselves appear honest by reassuring prospective buyers that they are protected by the U.S. government, HUD, or the FHA mortgage insurance program. You should be aware that FHA mortgage insurance protects lenders, not homeowners. Some brokers will even falsely inform buyers that participation in the FHA loan program assures them of accurate property appraisals. This is not true; HUD does not independently review appraisal reports and does not guarantee a property’s value. Finally, although some lenders and appraisers have been disqualified from the FHA loan insurance program because of fraud and other illegal acts, the fact that a lender or appraiser is a participant in the FHA program does not guarantee quality or honesty.
- Trust your instincts: If you feel uncomfortable or pressured to close a deal, don’t do it. Some contracts allow potential homebuyers to cancel the purchase if a property is in bad condition (check with an attorney). If you have already paid a down payment, and then learn that there are problems with the house, you should check with a real estate attorney to find out if you can cancel and get your money back. Sometimes it is even better to lose your down payment than to buy an unaffordable home or a property in bad condition that could ruin your credit record and your finances.
Where To Turn
The best way to avoid falling into a property flipping scam is to investigate all parties involved in the sale. You should not assume that licensed and FHA-authorized companies are all honest – but you should definitely avoid companies with complaints filed against them!
- Find out if your real estate broker, broker’s office, and appraiser are licensed: Call the NYS Department of State at (516) 474-4429, or on the Internet go to http://www.dos.state.ny.us and click on “Search for Licensees Here”. In addition, to learn whether your appraiser is licensed to do FHA appraisals, go to HUD’s website at https://entp.hud.gov/idapp/html/apprlook.cfm (sort by name; for both active and terminated licenses; and for exams passed yes and no).
- Check whether your contractor is licensed and learn whether homeowners have filed complaints: Call the NYC Department of Consumer Affairs at (212) 487-4110.
- Look up your mortgage lender and broker: Call the New York State Banking Department at (800) 334-3360 or go to http://www.banking.state.ny.us/supinst.htm (for lenders, search “licensed lenders” and “mortgage bankers”; for brokers, search “mortgage brokers”). To see if your lender is FHA-authorized, go to (a href=“http://www.hud.gov/ll/code/llslcrit.html” target=”_new”>http://www.hud.gov/ll/code/llslcrit.html.
- Find out whether your attorney is in good standing: For attorneys licensed in Brooklyn, Queens or Staten Island, call (718) 875-1300. For Manhattan or the Bronx, call (212) 779-1779.
- Check out your appraiser: Though it does not guarantee performance, the American Society of Home Inspectors (ASHI) requires that its members demonstrate extensive experience and pass proficiency exams. Call ASHI’s Inspector Referral Service at (800) 743-2744.
New York area non-profit and community groups that offer homebuying courses:
- Asian Americans for Equality: (212) 964-2288
- Concord Community Development Corporation: (718) 638-7762
- Long Island Housing Partnership: (631) 435-4710 ×330
- Margert Community Corporation: (718) 471-3724
- Neighbors Helping Neighbors: (718) 686-7946
- Pratt Area Community Council: (718) 783-3549
- Westchester Residential Opportunities: (914) 428-4507 ×307
To order free guides, “Knowing and Understanding Your Credit” (in English, Spanish, Chinese, Korean, or Vietnamese), call (800) 541-6300; “Choosing the Mortgage that’s Right for You” or “Opening a Door to a Home of Your Own,” call (800) 688-4663.
Internet homebuying resources:
- http://www.fanniemae.com/homebuyers/assistance/counselors/www.lawyers.com (click on “Research Legal Topics,” then under Personal Needs heading go to “Real Estate” and then “Buying or Selling”)
This article was posted March 31, 2007