QUESTION: I thought purchasing a "flipped property" was getting easier but my current transaction has turned into an appraisal nightmare. Why?

ANSWER: The two highest incidents of mortgage fraud are income and property valuations.

Mortgage Asset Research Institute (MARI) reports that incidents of mortgage fraud are continuing to climb. Fraud related to appraisals, increased from 22% in 2008 to 33% in 2009. Conventional wisdom is that the majority of the fraud was conducted before the appraisal HVCC was implemented last July.

UNDERWRITERS HAVE BEEN GIVEN A LIST OF RED FLAGS FOR PROPERTY FLIPS. THEY ARE, BUT NOT LIMITED TO:

1. Seller is an LLC, Corporation or Trust. That's okay as long as it was established in accordance with applicable state law. There are reports of shenanigans with LLC's and Trusts over the past 24 months. Expect to be asked for proof of legitimacy.

2. Multiple title transfers in the past 12 months. This will require additional review and additional documentation. The property may not be eligible for financing with some banks.

3. If the sales price is 20% or more over seller's acquisition cost and the increase in value is due to improvements/renovation: The appraiser is required to verify the repairs or work to the property in order to substantiate the increase in value. A seller's list of improvements added to the body of the appraisal with the appraiser's comments could justify the increase in value.

4. If the appraiser cannot warrant that legitimate work was done to the property to substantiate the increase in value, then a second appraisal will be required. This parts hurts: the lower of the two will be used for the appraised value.

5. The increase in value is not due to any significant improvements: The appraiser will be required to provide explanations of the increase in property value and provide sales comparables to support that value since the prior title transfer; OR if the appraiser cannot justify the increase in value, a second appraisal is required. The lower of the two will be used for the appraised value.

6. If sales price is less than 20% over seller's acquisition cost then you will probably be hassled, but not as much, as long as the increase is substantiated.
Additional comps, letters, proof of improvements, second appraisals, before and after pictures are the new normal on properties that have changed hands within the past 6 months. The delays kick in because issues cannot be addressed until it is through underwriting.

YOUR PATIENCE IS REQUIRED. In the ancient days of 2009, corrections or additional documentation would be received within hours. Now with the HVCC, the same process can take much longer. Once received, the file will have to be cleared by the underwriter.

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