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This article by Kathleen McGinn Spring was prepared for the September 11, 2002 edition of U.S. 1 Newspaper. All rights reserved.
Real Estate Flipping: Profitable, but Illegal
Flipping houses is enriching lawyers and appraisers
throughout the state, netting them $100,000 or so a pop for just a
few hours work. The practice is illegal, hurts neighborhoods, and
is embarrassing to honest professionals.
On Thursday, September 19, at 1:30 p.m. the Metro New Jersey Chapter
of the Appraisal Institute holds a seminar on flipping and other forms
of real estate fraud at the Woodbridge Hilton. On the panel are
H. Scrivens Jr., appraisal board liaison to federal and state enforcement
to the appraisal board; and
Investigative Services. Price $50. Call 732-494-4716.
is a growing problem throughout New Jersey. Flipping, he says, takes
place primarily in cities and primarily involves residential real
estate, but other types of fraud, including identity fraud, are occurring
in every part of the state and are happening with commercial as well
as with residential transactions.
And what exactly is flipping?
"You have three or four people," Bovasso explains. "Someone
buys a house, usually in an inner city." The purchase is legitimate
up to this point, with the property changing hands at or below market
value. Then, Bovasso, continues, "that same day, the house is
transferred to another party for two or three times the amount of
the earlier price." For example, a house that was purchased for
$100,000 at 11 a.m. might be sold for $300,000 at 3 p.m. The buyer
of record typically is a hard-to-trace corporation. A lender provides
the funds for the sale based upon a grossly inflated appraisal. The
buyers split the difference between what they paid early in the day
and the amount for which they obtained a mortgage later on — in
this hypothetical, $200,000 — make no payments, and leave the
The finance company is hurt, of course, because it has to foreclose,
a lengthy procedure which will most likely net it nothing at all.
The neighborhood is hurt because the house will stand vacant, quite
possibly forever, or at least long enough to deteriorate significantly.
Residents of the city are hurt because these transactions are recorded
as sales, thereby driving up the average sale price of houses, and
along with it, their property taxes. And appraisers are hurt, says
Bovasso, because the image of the profession suffers.
Flippers are now active in a number of New Jersey cities, including
Asbury Park, Jersey City, and Trenton. There are now more than 1,000
cases of flipping being investigated by the FBI’s Newark office.
Bovasso, an appraiser with the Cooney Valuation Group in Secaucus,
has been in the industry for 16 years, specializing in commercial
transactions. He says his branch of the profession is largely unaffected
by flipping, but is being hurt by identity theft, through which criminals
get hold of an appraiser’s name and certification number, and appraises
an office building or other commercial property, often inflating its
value so that the owner can secure a larger loan.
A weak economy may, in some instances, provide greater motivation
for criminal activity. The commercial market, says Bovasso, is weaker
now than it has been since the late-1980s. "Vacancy rates in north
and central New Jersey are at 15 to 16 percent," he says. The
much-talked-about exodus of employers from New York City to New Jersey
following September 11 was "just a temporary situation," in
his view. That influx has stabilized.
The big problem now, Bovasso says, is that corporations that "beefed
up" in the last years of the past decade, hiring like crazy and
gobbling up huge chunks of space to house the overflow, have since
contracted. "A lot of corporations took 200,000 or 300,000 square
feet, and then downsized," says Bovasso. These major employers
are trying to sublease that extra space. "Twenty-five to thirty
percent of available space is sublease now," he says.
Still, there are pockets of vigor.
"Industrial has not been as hard hit as commercial," says
Bovasso. Older, multi-story factory space is hard to lease, but, he
says, single story, functional factories and warehouses are moving
well. "The 8A market is very hot," he says. The big box warehouses,
often with 300,000 to 400,000 square feet of space, are in demand
— and quite safe from real estate flippers.
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