BEWARE OF LAND FLIPS: READ CLOSING INSTRUCTIONS CAREFULLY!

Recently, many lenders have been changing their closing instructions to include requirements that seek to identify land flips. If an ATG closer fails to follow the closing instructions and the transaction turns out to be a land flip, ATG could be liable for losses through its closing protection letter. Using this method, lenders are seeking to shift land flip losses to title companies. Therefore, ATG members should understand what a land flip is and the type of closing instructions that could cause problems for title insurers.

A land flip is a fraud perpetrated against a lender. To effect the fraud, an instigator will seek to purchase property either in his or her own capacity or as a shareholder, sole owner, or officer of a legal entity. The instigator conspires with a straw person to conduct two transactions. In the first transaction, the instigator purchases the property at a low price. In the second transaction, which occurs very soon thereafter, the straw person purchases the same property from the instigator for a very high price. The straw person then obtains mortgage funding at the higher price. After the second closing, the instigator, as seller, walks off with the loan proceeds, and the straw person disappears without ever paying off the loan. The fraud culminates when the lender forecloses and can recover only a small percentage of the loaned amount.

Land flips have caused some enormous losses to the banking industry nationwide. As a result, lenders are seeking to shift their losses from land flip frauds to title insurance companies. Lenders are including requirements in their closing instructions that try to identify land flips and could render a title company liable for land flip losses if the closer does not scrupulously follow the lender's instructions. Following is an example of one lender's version of this type of instruction:

"You must deliver to us prior to closing a source of title showing the name, date, and recording information of the document that transferred title to the current owner. This loan cannot be closed or funded without the prior written consent of our President at ________, (1) in conjunction with, or simultaneously with, any other sale or financing of the property securing this mortgage loan (i.e. double escrow, double closing, flip sale, pass through, equity skimming, etc.), or (2) if such source of title shows a transfer of the subject property during the six months preceding the closing date."

Additionally, lenders' closing instructions may require that the transaction not be closed if the buyer has acquired or will acquire an interest in the property before the closing or, in the case of a refinance, if the borrower does not yet have record title prior to closing. Please read lenders' closing instructions carefully. Do not assume that what may look like the same closing instructions have not been changed. Follow the closing instructions scrupulously, and do not deviate from them in any respect.

© ATG UB0199vol4no1

 

Print this page