Norman Bartholomew’s Property, Business And Life Blog

Fraudulent Flipping in the USA

With the pound currently so strong against the dollar and the prolific amount of seemingly bargain property to be found across the US it’s definitely worth considering looking across the pond for investment property. However, it’s obviously best to be wary of possible scams and we recently published an article on the Buy To Let Investors website containing a list of current cons being used to trick investors, click here to read it. Bearing this in mind I thought it necessary to draw your attention to a new ‘property flipping’ craze that’s currently rife in certain parts of New York State.

You may think of ‘flipping’ as a perfectly normal practice where a property is bought Below Market Value, has value added and is then sold on for a profit, however there has been a spate of unethical property flips happening across western parts of New York State, and the city of Buffalo in particular. Some large UK property clubs are offering deals in this area, and on paper they certainly do look enticing: yields of 25 – 40%, low headline prices compared with the UK, good capital growth prospects, easy to understand buying process, no language barrier, I could go on… So why wouldn’t you jump at the chance to invest there? Well, you need to be extremely careful that the deal you’re interested in isn’t associated with ‘fraudulent flipping’.

Unethical property flipping typically works in this fashion: A property is valued at £80,000 but purchased for £60,000 by someone claiming to be an investor. After a few months it’s resold to another ‘investor’ for £100,000 without any improvements being made, then sold again within six months, again without improvements, to an unsuspecting homeowner for the inflated value of £250,000. The seller works with a surveyor to inflate the value of the property so a mortgage can be obtained for £250,000 even though the property is still only worth £80,000.

When I was researching these investment opportunities I found examples of flipping horror stories on local council websites. The first one is that of an Australian lady by the name of Kathy, who bought 3 properties in Buffalo from a US investor named James Graham. The first house cost Kathy $79,500 and had originally been bought by Graham for $37,000; she paid $51,900 for the second property, which Graham had bought for the astonishing price of $11,000 just two weeks previously! The third property cost Graham a mere $13,000, which he quickly sold on to Kathy for $34,900. News of this resulted in a public outcry, not least because Kathy is a single and seriously ill single mother and Graham is a self-professed devout Christian. He made a quick gross profit of $105,300 off the back of these deals. The second case is that of St Matthew’s Church in Buffalo. The problem with property flipping in this area is so bad the local Mayor, Byron Brown, has introduced an Anti-Flipping Task Force (AFTF) to combat this unethical and fraudulent property flipping. The AFTF was established after residents complained about the property flipping of homes in distressed neighborhoods and has had some high profile cases such as when David Serota and Scott Weinstein bought St. Matthews Church at a city auction for $3,500 and then put it on Ebay a few months later. The ATFT took over and made them stop the auction after receiving several complaints.

With fraudulent flipping, problems start to present themselves after a few years when the overpriced loan takes its toll on the homeowner, who has trouble paying the bills because of the need to pay for major repair work on the property, and so the mortgage payments are no longer affordable. Although not all property being sold in Buffalo and Western New York is the result of unethical flipping, it’s more important than ever to undertake thorough due diligence if you’re considering a property investment in this area.

Flipping scams are prevalent in Buffalo as it has a shrinking population, resulting in too many homes for the amount of residents. There was a time when the population was almost 600,000 but this has now halved and the oversupply of property in some areas has resulted in property values dropping considerably. This inexpensive housing has a high perceived value compared with other local markets so out-of-towners are often seduced by what they think are low property prices and the flippers make extremely large profits. All too often the property being sold is cheap because of its dilapidated state, which the seller hides by making cheap ‘quick fixes’ and so the property continues to decrease in value while being sold on for an inflated price.

As property investors we are always looking for the next ‘hot spot’ where prices are low based on regional comparisons but the situation is changing for exceptional reasons so we can make easy profits. It’s always best to tread carefully when trying to determine a ‘hot spot’ as it’s easy to get drawn into what looks like a deal-in-a-million – remember that if something seems too good to be true, it probably is. Always consider the investment’s performance in the long term – is the area likely to become less attractive over time as more investors buy property there? Of course this is true across the world, not just in America. It’s true that big money can be made by ‘zigging’ while others ‘zag’, but firstly it’s best to find out why no-one else has taken this path, in case there’s a logical reason behind it.

I wish you well with your adventures into property investing, so long as you always put sound research and due diligence at the top of your list you shouldn’t come unstuck.