"Flip That House" Fraud was Widespread

By Michael Braga, Chris Davis & Matthew Doig
Staff Writers

Published: Sunday, July 19, 2009 at 1:00 a.m. 
Last Modified: Saturday, July 18, 2009 at 6:40 p.m. 

Fraudulent property flipping ran rampant during this decade's housing boom, with $10 billion in suspicious deals in Florida alone, a Herald-Tribune investigation has found.

The deals -- many of them inflated sales among friends, family and business associates -- drove up property values and tax bills during the boom, fed bank bailouts and failures after the boom, and fueled the foreclosure wave that has gutted property values.

Unscrupulous property flippers would buy houses or condos, then drive up the price in a few days or weeks by selling it to someone they knew. Buyers used the inflated price to get bank loans for more than the property was worth, leaving money for flippers to split as profit.

Despite their role in one of Florida's largest white-collar crime sprees, the vast majority of unscrupulous real estate flippers will never be prosecuted. Most Florida law enforcement agencies have done little to investigate property flip fraud. The FBI has been left to chase far more cases than it can handle.

But evidence of illegal deals is available in the public records filed when a property changes hands.

The Herald-Tribune spent a year gathering and reviewing nearly 19 million Florida real estate transactions for red flags that can help identify flipping fraud. Using public records, including land deeds and mortgage filings, it found that:

Since 2000, more than 50,000 Florida properties flipped under circumstances that fraud investigators identify as suspicious -- where homes, vacant land or commercial properties were bought and resold in 90 days or less and increased in value by at least 30 percent. Even during the hottest days of the housing boom, average home prices increased at half that rate. More than a dozen fraud experts interviewed by the Herald-Tribune said such large price increases within 90 days are an indicator of fraud.

In June 2005, when flipping hit its peak, more than 2 percent of all Florida real estate sales fit the criteria for potential fraud.

Many of the questionable flip deals were orchestrated by real estate professionals. A close review of several thousand flips in Sarasota and Manatee counties showed that 40 percent of the flippers were industry insiders -- real estate agents, mortgage brokers and attorneys.

Lenders facilitated fraud by approving mortgages on suspicious transactions. In deal after

deal, loan officers either failed to make the most basic checks to flag risky loans or ignored what they found. In some cases, the Herald-Tribune found, bank employees knew deals were suspect but approved mortgages anyway.

Lenders continued to finance flips even after the boom, when property values were declining and price increases should have raised suspicion. Across Florida, more than 10,000 flips involving significant price increases occurred from 2006 to 2008 -- after the market peaked in the second half of 2005. In 2007 alone, nearly $1 billion in suspicious flip deals took place.

The actual amount of fraudulent land deals in Florida is likely more than $10 billion, according to several fraud experts, who believe the newspaper's findings are understated.

While some of the 50,000 deals identified by the Herald-Tribune may be legitimate, many more fraudulent deals were not counted because they involved smaller price increases or took place over longer periods, said Bill Black, a University of Missouri economics professor and bank fraud expert who helped the World Bank develop anti-corruption initiatives.

"It isn't even close to the bare minimum," Black said. "You have been so conservative in your technique. Just in the world of flipping fraud, it's many times that number."

Quick property flips accompanied by price increases have long been used as an indicator of fraud.

In 2003, the U.S. Department of Housing and Urban Development announced that the federal government would no longer insure mortgages on properties resold in 90 days or less -- regardless of the increase in value. A report issued by HUD stated that the sales were likely to involve mortgage fraud and therefore too risky to insure.

At least as far back as 1999, the FBI began using computerized land records to create a national database of suspicious flips similar to the one created by the Herald-Tribune for Florida.

FBI officials would not provide details about their database, but mortgage fraud experts familiar with the project said it helps identify patterns of flipping with large price increases over short periods.

Despite the unusual price increases that accompanied their sales, many of the flippers identified by the Herald-Tribune said they did nothing wrong. They described themselves as victims of a real estate downturn and said their actions had not hurt anyone.

But their manufactured sales distorted real estate prices and drove up property tax bills. The inflated sales led some homeowners to borrow more and more money against their own homes because skyrocketing sales prices had made their houses appear to be worth more. And when the bubble popped, the flippers' bad loans saddled banks with properties worth far less than what was owed, threatening the stability of the entire banking system.

UNHEALTHY SPECULATION

Flipping has long been a part of the real estate business.

Smart investors find bargain properties, fix them up or simply wait a few months and resell at a profit.

But during the past decade, changes in the way mortgages were funded virtually eliminated the incentive banks had to screen people applying for loans.

Mortgages were transformed into a commodity that could be sliced up, then bought and sold on Wall Street. Banks that once wrote mortgages carefully, knowing they could lose money, found they could pocket fees for initiating the loan and then sell it, making someone else the loser if the loan was not repaid.

Strict screening was replaced by an entirely different banking tenet -- volume.

As a result, bank executives ignored warnings from employees whose job was to weed out questionable loan applications, said Jill DeLormier, executive vice president of Diligence Solutions, a Florida consulting firm specializing in bank fraud protection.

"I can't count the times I heard, 'Just close it, we already have it committed for sale,'" DeLormier said. "Volume is all that counted."

The relaxation of lending standards combined with historically low interest rates to superheat the housing market.

And flipping was transformed into a national pastime, with Florida becoming one of the key playgrounds.

From 2000 through 2008, thousands of Florida properties doubled in value in a single day, the Herald-Tribune's statewide analysis found. In some new subdivisions, investors from cold-weather regions snatched up entire streets of new homes. Many were back on the market the same day, waiting for the next speculator to come along.

The number of suspicious flips began a steady climb in early 2004 and had tripled by the time sales peaked in summer 2005.

In June that year -- a month before "Flip This House" premiered on television -- the state averaged 80 suspicious flips a day. That month alone, real estate flippers pocketed $242 million more than they originally paid for their properties, a transfer of wealth nearly equal to every flip completed in 2000.

The speculation drove every aspect of Florida's economy. Lenders and real estate companies made millions in fees and commissions. Contractors had more work than they could handle. Governments, collecting record property taxes, hired new employees and awarded raises to everyone from police officers to code compliance officers.

The volume of real estate sales provided perfect cover for fake sales and manipulated property values.

"It became easy to do any type of mortgage fraud," said Scott Friedman, a special agent with the Florida Department of Law Enforcement. "Even people who never thought they'd do that type of thing found themselves caught up in it."

FROM FLIPS TO FRAUD

At its heart, illegal flipping is a mechanism to artificially drive up the value of properties. It becomes mortgage fraud when those artificial values are used to justify bank loans.

During the past decade, flippers honed schemes that allowed them to secretly inflate the value of homes. Often everyone involved was a willing participant, leaving few victims to complain to authorities.

Sarasota real estate investor Neal Mohammad Husani is one of Florida's most notorious property flippers.

From 2004 through 2006, Husani bought seven pieces of land in the Sarasota area for $42.5 million. In each case he increased the price by millions, then flipped them on the same day to his then-partner, Michael Tringali.

According to federal prosecutors, who indicted Husani and Tringali last July on charges of mortgage fraud and money laundering, Tringali never actually paid for the properties.

Instead, the men faked the sale to qualify for loans that covered Husani's original purchase price and left $40 million to split as profit.

Not long after his deals, which are among those captured by the Herald-Tribune database, Husani left the country. Mortgage payments on the loans stopped, leaving banks with more than $70 million in defaults on property worth a fraction of that amount.

Husani's flips remain among the most egregious to spill out of Florida's real estate bubble.

But similar approaches were used by thousands of real estate players going back as far as the mid-1990s.

In the Herald-Tribune's review of flips statewide and in Sarasota and Manatee counties, the newspaper found that some investors brought their own twist to flipping.

One group in Sarasota held on to properties for several years, trading among the same buyers only when someone in the circle needed cash through a mortgage loan.

Another flipper pulled together investors to repeatedly trade properties back and forth so he could collect real estate agent and mortgage broker fees on each sale.

At least one other flipper sold property as part of an investment partnership. He would buy a home, recruit investors through real estate seminars, then promise to pay the monthly mortgage if the investors would purchase the property in their name. The goal was to sell the house again and share the profit. But when the real estate market turned, the original flipper simply walked away.

AIDED BY BANKS

Banks were in a unique position to recognize and stop questionable property flips. But like millions of property investors during the boom, many lenders believed real estate values would continue to rise.

Even when sales began to slow in the second half of 2005, banks continued to approve loans on questionable flips between related parties.

In fact, the Herald-Tribune's analysis shows, the inflated values for suspicious flips became even larger as the real estate market got worse.

In 2005, the median difference between what a flipper paid for a house and what he sold it for was $65,000. A year later, after the real estate market had begun a noticeable decline, that amount increased to more than $73,000. And by 2007, the spread between the original purchase price and the flip was still more than $70,000.

This intensification occurred, in part, because banks allowed struggling builders and real estate investors to bail themselves out by taking out larger and larger bank loans against their properties.

That is what happened to Shlomo Manor, a real estate agent in Hollywood, Fla., who for years worked with Israeli nationals wanting to invest in Florida real estate.

Manor was one of the flippers identified by the Herald-Tribune. His deals would not be fraudulent if he disclosed to banks his relationship to those selling him property. But they do help illustrate lax lending practices by banks.

In 2004, deeds show, Manor and his investors started buying new homes and vacant buildings in St. Lucie and Lee counties. The market was so hot that Manor easily flipped the properties to willing buyers, Manor said during a telephone interview from Israel.

But he said buyers disappeared in late 2005. He and his clients were left holding 10 unsold houses and dozens of vacant lots.

Hoping the market would turn and in need of a short-term fix, Manor said he and several investors participated in a number of sales to each other. Mortgage records show those sales allowed Manor and his associates to get $1.38 million in fresh bank loans.

He said he also had his wife buy one of the properties because of pressure from an investor who was not happy that the house would not sell.

Manor eventually defaulted on six loans totaling $1.65 million. He defended the flips, saying they were necessary to protect his clients.

"When you bring in investors, you can't throw them in the garbage," Manor said. "If you are not loyal to your customers, you will lose them."

 

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