What Is Property Flopping and Is It Illegal?

The real estate market often presents opportunities for investment and profit, leading to various strategies like property flipping. However, within these discussions, a less ethical practice known as “property flopping” sometimes emerges. This term describes a deceptive real estate maneuver that manipulates property values for illicit gains. Understanding this specific term is important for anyone navigating the complexities of property transactions, particularly given its manipulative nature. This article aims to clarify what property flopping entails and its significant ramifications for those involved.

Defining Property Flopping

Property flopping refers to a fraudulent real estate scheme involving the rapid resale of a property for a significantly higher price than its recent purchase cost. This practice often relies on deliberately undervaluing the property in the initial transaction to create an artificial profit margin for the orchestrator. It stands in stark contrast to legitimate property flipping, where an investor purchases a property, enhances its value through renovations or improvements, and then resells it for a profit reflecting the added value and market appreciation.

In a property flopping scenario, the gain is not derived from value creation or market forces but from a deceptive manipulation of the initial sale price. The core distinction lies in the intent and method: legitimate flipping adds tangible value, while flopping manufactures an illusion of value by suppressing the first sale price. This manipulation typically involves concealing information or providing falsified details to the original seller or a lender.

How Property Flopping Occurs

Property flopping schemes often begin with a property in distress, such as one facing foreclosure or a short sale scenario, where the homeowner is under pressure to sell quickly. The orchestrator, often an initial buyer or a real estate licensee, identifies such a property and then works to depress its perceived value for the first transaction. This can involve influencing appraisers or real estate agents to provide a Broker Price Opinion (BPO) or appraisal that significantly undervalues the property. This artificially low valuation is then presented to the distressed homeowner’s lender, typically a loss mitigator, who may approve a short sale based on this misleading information.

A common tactic involves the initial buyer arranging for the property to be sold to a “straw buyer” – an individual who purchases on behalf of another to conceal the true parties – at this suppressed price. The orchestrator may also intentionally overprice a property initially, ensuring no legitimate offers come in, only to then “discover” a short-sale buyer at a below-market price just before foreclosure.

Once the property is acquired at the artificially low price, the orchestrator then swiftly resells it to a legitimate second buyer at its actual market value, or even an inflated value, realizing a substantial profit. This rapid resale, sometimes occurring on the same day, is a hallmark of the scheme. To facilitate the second transaction, fraudulent appraisals may be used to justify the inflated price to the new buyer’s lender. Orchestrators often conceal the true parties, any contingent sales, or the property’s actual value from the loan servicer.

Legal and Financial Ramifications

Property flopping is illegal and constitutes fraud. These schemes frequently involve mortgage fraud, where false information is provided to lenders to secure loans based on inflated property values. Appraisal fraud is another common component, as appraisers provide falsified valuations to justify artificially low initial prices or inflated resale prices. Such actions can also lead to charges of bank fraud, wire fraud, or mail fraud if interstate communications or postal services are used.

Legal consequences for individuals and entities involved in property flopping include criminal charges, substantial fines, and lengthy imprisonment. Penalties can reach up to 30 years in prison and a $1 million fine for offenses like bank fraud. Beyond criminal prosecution, victims can file civil lawsuits to recover financial losses. Professional licenses for real estate agents, brokers, or appraisers can also be revoked, ending their careers.

The financial impact of property flopping extends to various parties. Original homeowners, especially those in distressed situations, may unknowingly sell their property for less than its true market value, losing potential equity or increasing tax liability if a lender writes down a larger amount. Lenders face losses on mortgages issued based on inflated values, particularly if the subsequent buyer defaults.