Here in Arizona, property flipping can sometimes be considered a sport. But when it comes to getting financing on a house that has been flipped, there are certain red flags that Underwriters look for. Certain characteristics of a transaction may be red flags that may be indicative of an improper property flip scheme. These characteristics include, but are not limited to:
- Appraisal lacks sufficient analysis of all pertinent offerings or listings for the subject property, the contract of sale for the subject property, and the sales/transfer or listing history of the subject property and comparable sales.
- Comparable sales or listings used in the appraisal report are properties involving the same property seller and/or real estate broker as the subject property in an attempt to create an artificially inflated market.
- Transactions in which the property seller or any other party claims that the property was significantly renovated since being acquired by the property seller but the claimed renovations were not actually performed or cannot be sufficiently documented. Improper transactions often use inflated appraisals that falsely claim to be justified renovations.
Transactions in which there appear to be unusually large profits for the property‘s market area without appraisal that provides a reasonable explanation and justification for the large increase in property value.
- Transactions in which the property was acquired by the property seller as a part of a distress sale in which the property seller, or a related party was a party to an option contract to purchase the property from the prior for an option price substantially below actual full market value. The option contract and the true market value of the property are typically not fully disclosed to the prior lender.
- Transactions in which the property seller, or an agent representing the seller, arranges or assists in arranging financing, settlement services or the appraisal, including some cases where the property buyer and seller are represent by the same real estate agent or broker (dual agency). Some improper transactions result from collusion between the seller, real estate broker, lender/loan officer, and appraiser to defraud an unwitting buyer.
- Transactions in which the contract seller is not the current owner of record.
- Undisclosed ― simultaneous, double, or back to back closings or escrows.
- Purchase transactions with undisclosed secondary financing, in which part of the purchase price is refunded to the buyer, or is quickly followed by a cash-out refinance. Such payments may or may not be reflected on the HUD-1 Settlement Statement.
Of course there are other things that Underwriters will look for when it comes to property flipping, but at least now you have a good idea of the basics.