World Wide Property Sales
Is Flipping Homes Illegal?
by Steve Cook
Question:
"Every time I turn around I seem to read something in the newspaper or see
something on the news about unscrupulous real estate "investors who are going to
jail for illegal schemes involving flipping real estate. Is flipping real estate
illegal?
Answer:
Great, great question. And believe me, it's one I hear all the time. The concept
of "Flipping Homes" is really one of symantics. "Flipping" is just another way
of saying "buying, and then selling". Let me be state very clearly that flipping
real estate (also known as buying and selling a home) is not illegal in any way,
shape or form. There is absolutely nothing wrong with buying a home cheap and
then selling it for more then what you paid. Think about this: If I owned a car
lot, I would be purchasing cars at one price (wholesale) and then reselling them
at another price (retail) -- and hopefully turning a nice profit, right? In
essence, I would be "flipping" cars.
If I owned a Home Depot, I would be "flipping" everything from power drills to
Christmas trees to my customers. What we're talking about here is capitalism -
the free market exchange of goods and services for valuable consideration. Our
economy depends on it and it's a normal way of life for all of us. Businesses
"flip" goods and services to us that we, in turn, pay them for. The profit they
receive is not unethical. So what about the "flipping" scandals we hear so much
about in the media?
To put it simply, real estate flipping becomes illegal when loan fraud is
involved. Typically this is because the resale relies on inflated appraisals,
fake documents, sales to "straw" buyers who represent original sellers, or
"phantom" second loans. There is absolutely nothing wrong with buying a home,
investing in it (through repairs or just "riding" a good market's appreciation),
and selling the same real estate for whatever larger value someone is willing to
pay. If your buyer wants to pay you substantially more than market value, and
they have the means to pay you, then it's their choice, plain and simple.
Flipping Playstations ®
Let's look for a moment at the video gaming phenomenon. When the latest gaming
system comes out, people will pay insane, crazy amounts of money just to get
their hands on one the day it launches. When the Sony Playstation 3 ® was
released in November 2006, the stores sold them for $600, give or take. That's
the retail value. But as is typical for the high-end gaming systems these days,
the initial supply for the PS3 was far outweighed by it's immediate demand, and
only a handful of people actually got their hands on one the day it launched.
Most people who were dying to get one were forced to wait until the next
shipment.
However did you realize that a large number of those who were actually fortunate
enough to get one weren't even interested in keeping it? Instead they went right
to the online auction arena and let the market do it's thing. Did you hear about
it? On launch day, when the stores sold the precious few game systems they had
available for the "retail price" of $600, the buyers were simultaneously
"flipping" thier systems on eBay and getting staggering return on their
investment -- anywhere from $3,000 to $10,000 from the hungry masses of gaming
buyers.
Was this illegal? No. Immoral? Unethical? No. What were these systems really
worth? Well the "appraisal" value (sticker price) was (and is) $600. But the
market determined the value to be in the excessive four figures. Did the hungry
eBay buyers know they were paying a price substantially higher than the sellers
had just paid for the same system at thier local Wal Mart? Absolutely - and they
didn't care. At that moment, the value of having a game system of their own on
launch day was more important to them than the difference between the $600
sticker price and what they were willing to pay online.
How Is Value Determined?
In truth, value is not determined by how much something costs to make or
purchase initially, but by what an eager buyer is willing to pay for it right
now in an honest, open marketplace. Getting back to the point of this, as I
said, what people typically refer to as "illegal flipping" of real estate is
actually just mortgage fraud. But the media has for some reason, in it's
glorious ignorance, latched onto the term "flipping" as the buzz word for
describing these scams. This is a sad disservice to a world of honest, ethical
real estate investors who "flip" for a living.
As a result the media has given real estate investors in general a bad name,
because they aren't focusing on the real problem. The real problem with "illegal
flipping" is when investors, mortgage brokers, loan officers, appraisers, etc.
get together to create (i.e. fabricate) a better picture of a buyer's loan
package to a lender than that which actually exists. They lie. They do things
such as inflating appraisals, gifting down payment, drawing up false w-2's,
manufacturing pay stubs, writing credit letters, etc…
The people who do this often do (and should) go to prison.
However real estate investors who are engaged in the legitimate business of
flipping houses (whether as "wholesalers" or "fix-and-flip" rehab investors) are
actually playing a key (and under-appreciated) role in stimulating our economy.
They shouldn't unjustly be lumped into the category of "unethical" or "illegal"
just because they invest in quick-turn real estate. The bottom line is, if you
buy houses at a below-market value, sell them higher for a profit, and do so
honestly, ethically and without committing loan fraud, then you are not doing
anything illegal. You don't have anything to worry about.
Bio:
Since 1998 Steve Cook has flipped many hundreds of houses as an active
Baltimore-area real estate investor. Steve's unique specialty is the "flipping
homes 1-2 punch", a proven system of real estate investing that powerfully
combines wholesaling and rehabbing houses. Steve Cook is dedicated to helping
others succeed through understanding and aggressively applying his time-tested,
step-by-step approach to flipping real estate.