A short sale fraud scheme known as “flopping” is on the rise across the U.S. and two Connecticut real estate agents may be on their way to prison for their involvement in this illegal activity.

Flopping is when an investor or homebuyer hires a broker to assess a property for less than its market value (certainly not hard to do these days) and convinces the lender to sell at that price. The buyer hides the fact that he already has a higher offer and then flips the property for the higher price and a profit.

According to an article in BusinessWeek:

“A majority of the short-selling fraud is related to LLCs and investment companies trying to make a quick profit,” said Tim Grace, vice president of fraud analytics at CoreLogic. LLCs refer to limited liability corporations.

The Treasury has “put reasonable protections in place” to prevent short-sale fraud, requiring that the buyer and seller have no hidden relationship and banning most resales within 90 days, said Laurie Maggiano, policy director of the department’s Homeownership Preservation Office in Washington.

Suspected property-valuation fraud almost doubled from the end of 2007 through the first quarter of this year, according to a June 8 report by Interthinx Inc., an Agoura Hills, California- based company that sells mortgage fraud detection software.

In addition to banks losing money, “flopping” may hurt homeowners who complete a short sale and face higher deficiency judgments as lenders seek to recover unpaid mortgage balances, Ann Fulmer, vice president of Interthinx, said in an interview on Bloomberg Television.

Investors often use real estate broker opinions, which may rely on drive-by inspections instead of full appraisals, to persuade lenders to sell at a low price, Fulmer said. She suggested an Internet search of “How to influence a broker price opinion,” which yielded 74,800 results.

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