By Alexis McGee
First of all, I am not an attorney, nor do I
practice law. This article is for your information only and
not to be construed as legal advice. Please seek the services
of a local real estate attorney for proper legal advice before
you close on any real estate transaction.
So, is flipping property illegal?
Well, sort of -- ILLEGAL property flips are ILLEGAL.
First lets define what is flipping
property? Are you ready for this? Every time you buy
and sell a property; you are flipping property.
Whether you buy wholesale, retail, lease-option or owner financing,
when you sell it, youve just flipped a property.
Most people use the term flipping
to describe buying a property at wholesale and reselling it
at retail -- but its ALL flipping. Its either
a quick flip or a slow flip, but its still a flip no
matter how you look at it.
Ok, now you are probably wondering why flipping
is illegal? The Answer Is -- Its NOT.
The term "flipping" seems to be used
a lot in cases where an investor bought a property and sold
it a short time later. However in all the legal cases (See
Related Links: Legal Corner, Past Articles) that
Ive read, it was a FRAUDULENT ACT that brought on the
criminal and civil actions. Some poorly advised or unscrupulous
investors have made a practice of pursuing illegal activities,
and now the law is catching up to them. Thank goodness!
So what kind of fraud did these investors perpetrate
to cause all their legal troubles?
Heres A Short List of What NOT to DO:
Pay an appraiser to over value your property
so you can get a bigger loan for your buyers, or your refinance.
Create side deals with your buyer, so they dont
have to put up the lenders required minimum down payment.
Modify lender-required documents to get your
buyer approved, when if the lender knew the truth, your buyer
would NOT be approved. Phony tax returns showing inflated
income to get the buyer qualified have been a common example
Misrepresenting or failing to disclose the true
condition of your property to the buyer.
Change lease agreements (such as back dating
them) to create a track record of payments that werent
actually made, so you can refinance.
The Bottom Line: Anytime your actual deal is
different than what is presented to the lender it is
FRAUD regardless of how many other people participate
in the process.
How does this relate to the new Anti-Flipping
HUD Rule? (See Related Links: New "Anti-Flipping"
Rule Holds Lenders, Sellers and Appraisers Accountable.)
The answer is -- that lenders who financed low-income
homebuyers for the purchase of non owner-occupied or investor
owned properties have experienced a much greater default rate
(See Related Links: Preying on Borrowers etc.) than
when the seller was the occupant of the subject property.
Now those lenders (including their FHA/HUD insurers) have
gotten much more cautious about whom they lend to.
Sad to say, its become almost standard
practice in the low end house business to stretch
the truth to get unqualified buyers qualified for a purchase
home loan. Thats exactly what has happened to the term
flipping and why we now have the new HUD ruling.
These unconscionable and fraudulent practices just give a
bad name to those of us who do operate responsibly and within
But remember, flipping properties to qualified
buyers at true market value is NOT illegal!
Theres no law to my knowledge (See Related
Links: Foreclosure Laws State by State and Legal Corner
Past Articles), that says you cant buy a house, fix
it up (thereby increasing its market value) and then sell
it for a profit.
The problem comes when lenders see investors
buying at deeply discounted prices and selling for two or
three times that amount a few weeks later, without doing anything
to add value to the property. The lender may assume there
must be fraud involved for you to make what (to them) seems
to be such an unconscionable profit.
If youre buying and rehabbing houses it
would be a good idea to document what youve done to
the house to increase its value. Keep a file on everything
youve spent, so you can easily justify how you raised
the value so quickly. You should also keep before and
Of course some lenders wont be happy with
anything you provide and simply wont fund your buyers
purchase money loan unless youve owned the property
for 180 days or more. The best way to deal with lenders who
dont want your business is to NOT GIVE THEM YOUR BUSINESS.
Lending is an extremely competitive business.
If your buyers are qualified and the value is there, you will
find someone who will give your buyer a loan. Dont sweat
How long you own a house before you resell it
is YOUR business. How much profit you make is YOUR business.
Providing for your family is YOUR obligation. The best thing
you can do with people or institutions that want to make your
business their business, and make your life more difficult,
is to tell them THEY ARE FIRED!
Before you even take a buyer to a lender for
a loan, ask the lender right up front if your length of ownership
is an issue. If they give you any indication that its
a problem, move on to the next lender. There are thousands
of lenders doing business right where you live, and theres
a ton of money available!
Remember, all those mortgage brokers and lenders
need YOU more than you need them!