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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 Robert

H. Scrivens Jr., appraisal board liaison to federal and state enforcement

agencies; Susan Carboni, deputy attorney general and counsel

to the appraisal board; and Paul Smith, president, Integrity

Investigative Services. Price $50. Call 732-494-4716.

Robert J. Bovasso Jr. is the event’s organizer. He says fraud

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

house empty.

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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