When 'house flipping' turns into real estate fraud

Not so long ago, the practice of buying residential property at a low price, renovating it and selling it for a profit was all the rage. Popular reality TV shows such as "Flip That House" wooed viewers into thinking that the practice was a relatively easy way to make money in the real estate industry.

Not only are these prospects much more difficult to pull off than the shows portrayed, but in some cases the practice of "house flipping" is illegal and punishable by heavy fines and prison time. If you've been implicated in a mortgage fraud scheme involving a flipped property, you undoubtedly have questions about where things went wrong and what your risk is of being prosecuted.

The main distinction between a successful, profitable property flip and an illegal one lies in the information provided on the mortgage loan application and other documentation. Providing false or misrepresented information about the buyer's income, assets and the source of the down payment funds constitutes mortgage fraud, as does lying about who the true owner will be or whether the buyer will live in the house.

Another common illegal house-flipping practice is to present a false appraisal. Someone may buy a house, have it appraised at a falsely inflated price and immediately sell it for a higher profit based on that appraisal.

In many of these cases, the buyer of the property is not acting alone or may even be the victim of mortgage fraud. A "straw buyer" is one whose credit, income or other desirable credentials are used to purchase the home so someone else can reap the benefits of the house flip. It's then that the straw buyer who faces the legal consequences, whether or not that person realizes they were part of a scheme.

A real estate fraud conviction can have extremely dire consequences; fines up to $1 million and long prison sentences are not unheard of under the Fraud Enforcement and Recovery Act, which expanded in 2009 to include enforcement of illegal mortgage practices. There may also be civil penalties imposed by the lender.

Fortunately, defendants have options when it comes to clearing their name or minimizing the damage. A crucial first step is to consult an attorney who focuses on fraud defense and understands its complexity. Given the stakes of these accusations or criminal charges, having an experienced professional on your side who can unravel the case against you may be worth more than the real estate profit you hoped to gain.

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