Bulletin: FL000068

Dear Associates:

There appear to be a great many "flip transactions" taking place in Florida these days and from a claim prospective they are a cause of much concern. A flip transaction is not necessarily fraudulent nor illegal buy many flip transactions are both. You must use care to be certain that you are following closely all closing instructions from a lender which may be involved in a flip transaction and you must also make sure that your title commitment and your HUD 1 accurately disclose the essential details of the transaction.

In Schedule A of the commitment, you must show the actual current record title holder. Some commitments have been prepared showing the middle man, that is, the party who is acquiring the property and turning it over in the flip transaction, as being the owner of record. He is not. The holder of record is the current owner notwithstanding what is contemplated in the flip.

In Schedule B requirements, you must specifically recite that a deed is required from the present owner to the middle man and additionally a deed form the middle man to the ultimate planned owner. In this manner, the nature of the flip transaction and its correct details are disclosed to the lender who will, therefore, not be in a position to complain at a later date that they were not aware of the circumstances.

As to the HUD 1, there must be two separate HUD 1's, one for each of the two transactions taking place. If there is no actual cash being brought in by the middle man to acquire the property but the cash in that transaction is actually being funded by the loan put in place for the second transaction, the HUD 1 should accurately reflect the same preferably by reciting right after the line provided for cash down payment a cross reference to the HUD 1 on the second transaction. Therefore, it is disclosed to the bank that the equity in the first transaction may have been theoretical and if this is acceptable to them, there is no problem. It is our duty to disclose. Again, that way if the ultimate purchaser of the property is not actually bringing in cash but his equity is on a profit from the earlier transaction, this has been disclosed to the lender.

A flip transaction based on someone's ability to locate a bargain price on a distressed property and to bring about a resale of that property before actually taking title is not illegal. The problem with many flip transactions if failure to disclose the circumstances to the lender, the use of inflated appraisals and the use of strawmen for the intermediate transaction who do not actually exist.

It is also important to be aware that if a bank suffers a loss on a flip transaction because of nondisclosure of the circumstances, and if there is, in fact, no defect in the title work involved, it may be the agent alone who bears liability to the bank as the resulting claim may not relate to a title insurance defect.

On the other hand, if the title underwriter is held liable to the lender due to the closing agent's failure to follow closing instructions or to misapplication of the lender's funds, you need to be aware that the underwriter will look to the agent.