Is "Flipping Properties" Illegal?

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 let’s 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, you’ve just “flipped” a property.

Most people use the term “flipping” to describe buying a property at wholesale and reselling it at retail -- but it’s ALL flipping. It’s either a quick flip or a slow flip, but it’s still a flip no matter how you look at it.

Ok, now you are probably wondering why “flipping” is illegal? The Answer Is -- It’s 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 I’ve 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?

Here’s 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 don’t 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 of this.

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 weren’t 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, it’s become almost standard practice in the “low end house business” to stretch the truth to get unqualified buyers qualified for a purchase home loan. That’s 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 the law.

But remember, flipping properties to qualified buyers at true market value is NOT illegal!

There’s no law to my knowledge (See Related Links: Foreclosure Laws State by State and “Legal Corner” Past Articles), that says you can’t 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 you’re buying and rehabbing houses it would be a good idea to document what you’ve done to the house to increase its value. Keep a file on everything you’ve spent, so you can easily justify how you raised the value so quickly. You should also keep “before and after” photos.

Of course some lenders won’t be happy with anything you provide and simply won’t fund your buyers’ purchase money loan unless you’ve owned the property for 180 days or more. The best way to deal with lenders who don’t 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. Don’t sweat it!

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 it’s a problem, move on to the next lender. There are thousands of lenders doing business right where you live, and there’s a ton of money available!

Remember, all those mortgage brokers and lenders need YOU more than you need them!



© 2003 Yamon! Investments Incorporated. | Privacy Policy