World Wide Property Sales
Flipping is Illegal
by Ron LeGrand
Oh No! All this time you’ve been telling me I could make a killing buying &
selling (flipping) houses and now you’re telling me it’s illegal, Ron?
Well, sort of! But before you get all upset, I’d better explain. Don’t worry;
you’re not going to jail. Here’s the deal. Illegal flipping is indeed illegal.
But first, lets define flipping because it is a misunderstood term, sort of like
the term "nothing down." When I say you can buy houses with nothing down, I mean
you’re not using your own money. That doesn’t mean the seller doesn’t get money.
Some-times they don’t and sometimes they get cashed out. But, it is NOT your
money; it’s a "nothing down" deal.
When you take over a loan "subject to" the mortgage, and the seller doesn’t want
any money, it’s a nothing down deal. When you pay all cash but borrow the money
from a private lender, it’s still considered a nothing down deal. Thousands of
people don’t believe in the nothing down philosophy and aren’t doing real estate
because they simply don’t understand the term, and therefore they’re convinced
they can't buy houses without their own money. Their loss. A closed mind and an
open mouth will keep you broke and working for those who are willing to learn.
Just try and tell my Boot Camp grads (especially those who have become
millionaires because they refuse to listen to the morons) you can’t buy houses
without your own money. The same ignorance seems to be attaching itself to the
term "flipping." Totally misunderstood and misrepresented.
Here’s The Shocker.
Every house you buy and sell is a flipper. Whether you’re in wholesale, retail,
sell- on-lease-option or owner financing, you’ve just flipped a house. Most
people use the term when applied to wholesaling, but it’s all flipping. It’s
either a fast flip or a slow flip, but it’s still a flip no matter how you look
at it.
Ok Ron, So How Come It’s Illegal?
The Answer Is It’s Not.
The term "flipping" seems to be used by the media in cases where an investor
bought a property and sold it a short time later. However in all the cases I’ve
read, fraud was a part of all their deals. These investors made a practice of
illegal activities and got away with it long enough for the long arm of the law
to catch up to them...then they instantly became a news item. Flipping houses is
not illegal. Fraud is. So what kind of fraud did these guys get in trouble over?
Here’s A Short List Of Possibilities.
1. Paying appraisers to grossly appraise properties to get bigger loans for
themselves or their buyers.
2. Rigging down payments to put unqualified buyers in houses that shouldn’t be
approved for the loan in which they’re applying for.
3. Falsifying documents required to get a buyer approved such as pay stubs,
verification of equipment, tax returns, verification of deposit, etc.
4. Selling houses to unsophisticated buyers, representing them to be in good
condition but covering up obvious problems to get the loan closed. This is the
most abused type of fraud, and once discovered it leads to an investigation of
all the investor’s activities and usually uncovers all other kinds of fraud.
5. Back dating lease agreements to prove a track record of the tenant making
payments on time and a year or more occupancy, when in reality the tenant just
moved in. This is very common. I’ve had loan processors with large mortgage
companies suggest I do it. The last time was on a $600,000 house. I asked the
loan agent if he knew that was lender fraud. His reply was, "my boss said it was
o.k. We do it all the time."
Just remember this. Anytime the deal is different than the contract presented to
the lender, it’s lender fraud. The loan is based on the stated facts. If you
misrepresent those facts, it’s fraud. Regardless of how many other people
participate in the process.
O.K., Back To Flipping.
What does lender fraud have to do with flipping and the stigma some of the media
have placed on it? Some lenders have had so many loans default on lower priced
properties sold by investors it’s opened their eyes and made them cautious, and
justifiably so, if I were a lender making loans at 80%-100% of the purchase
price, I’d be cautious too. In fact, I’d be paranoid, but then again I’d be
neither because I’d never even consider doing it.
I have no way of proving this, but if I had to guess, I’d say 75% of all loans
closed to fund low income homebuyers contain some kind of false statement or
fraud.
I know that’s a bold statement, but I’ve been around a long time. Long enough to
see numerous loan companies take a dive from bad loans. It’s almost standard
practice in the cheap house business to stretch the truth to get unqualified
buyers qualified. This creates default and a bad name for those who operate
within the law. That’s exactly what has happened with the term “flipping.” But,
Ill say it again. Flipping is not illegal.
There’s no law against agreeing to buy something at price ÒAÓ and then finding a
buyer at a higher price. Suppose you had a stereo unit you agreed to sell me for
$500, and I told you I would pay you next month when I get my tax refund check
(fat chance!). You agree to wait the 30 days it takes me to raise the money. We
then sit down and write a letter stating that, and we both sign it.
A couple of days later, I’m talking to a friend who mentions he needs a good
stereo. I decide to sell him the one I’m buying for $1,000 and make myself a
$500 profit. Obviously I can’t deliver his stereo until I give you $500 because
you probably won’t turn it loose until you get paid. However that doesn’t stop
me from searching for a buyer.
Once the buyer agrees, I can collect all the money in advance and pay you,
collect a $500 deposit and pay you, or I can pay you first with my money and
then collect from him. There’s no law that says I have to pay you and take
possession before I can talk to anyone about the stereo. If they were on Ebay,
they'd have a problem. Half the stuff sold on eBay isn’t in the possession of
the person doing the selling. They agree to buy at a lower price from another
auction site and put it up on Ebay. When it’s sold, they simply have the old
owner ship it to the new buyer.
That’s called drop shipping and it’s very common in any industry that sells
products. That’s exactly what we do with real estate sometimes. You don’t have
to own it to shop for a buyer. You simply must control it, which is what you do
with a contract. The problem comes when lenders see investors buying at deeply
discounted prices and selling for two or three times the amount a few weeks
later. Some just assume there must be fraud somewhere to make such an
unconscionable profit. You see, they haven’t attended my Wholesale/Retail boot
camp.
If you’re buying and rehabbing houses it would be a good idea to document the
work you’ve done to the house. Keep a file on everything you’ve spent to make a
case on how you raised the value so quickly. You should also furnish before and
after photos. It is also not a bad idea to create your own album to keep while
you’re doing this. It will help with future credibility with everyone you deal
with including bankers for a line of credit.
If you’re using private money from a loan broker, you probably have an escrow
account for repairs. That means an appraiser may be supplying the mortgage
broker with a completion certificate once the work is done. Get a copy and add
it to the pile of evidence. Of course some lenders won’t be happy with anything
you provide and simply won’t fund the loan unless you’ve owned the property for
a year or more. I wrote a past newsletter article on six ways to get around
that, but the best way to deal with lenders who don’t want your business is . .
.Whack 'em!
Flipping is not illegal. The length of time you own a house is your business.
Making a killing is your right. Providing for your family is your obligation and
the smartest thing you can do with people or institutions who want to make life
difficult is cut them off at the knees and tell them to take a hike . . . and
that’s my final answer. They are the weakest link.
Before you even take a buyer to a lender for a loan, ask them right up front if
your length of ownership is an issue. If they give you any indication that it’s
a problem, move on. The country is full of lenders and there is a ton of money
available. They need you more than you need them. Don’t take any crap from any
lender and don’t let them make you believe their rules are the law or even the
norm.
Well, I’m getting tired now! It’s been a long day of battling ignorance and
skepticism and I’m worn out! I think I am going to go "flip" open the
refrigerator and get a little snack, then “flip” on the shower, then “flip” down
the bed spread and shut my eyes for the night. Life seems to be one flipper
after another. Hope it’s legal.
Bio:
Ron LeGrand is a nationally recognized real estate expert and trainer with 25
years experience in both residential and commercial properties and a 20 year
history of hard money lending and brokering. His experiences include personally
buying and selling over 1,600 single family houses and completing over
$300,000,000 in Commercial Property deals with student partners all over
America.
He’s obtained current real estate developments across America with market values
exceeding two billion dollars, all under his control. His properties include
office buildings, industrial, commercial, mixed use and residential land
development, luxury condominiums, marinas, etc.
Mr. LeGrand is a highly sought after platform speaker whose addressed audiences
as large as 20,000 and as small as 100 in hotels and convention centers across
North America, sharing the stage with leaders such as Donald Trump, Robert
Kiyosaki, Rudy Giuliani, Tony Robbins, Larry King, Dr. Phil, Suze Orman, and
many others. For the last 20 years he’s been helping thousands of ordinary
people take their lives back and create financial freedom by implementing his
systems for success as real estate investors. Today he’s considered the
country’s leading expert and is referred to by many as the “millionaire maker.”
His book is in stores and online and over the years he’s created dozens of home
study products, held live training events on various real estate related
subjects. He spends much of his time passing on his experience at those live
training events, held in various parts of the country, while simultaneously
running over ten different business he owns and controls.
Ron LeGrand's 41 year marriage to his wife Beverly has produced four children,
nine grand children, and two great grand children.