Is House Flipping Illegal?

by : Jason Loucks

Is flipping houses legal or not? At seminars, I'm often confronted by people who insist "Flipping" is illegal.

What they don't understand is that the part that's "illegal" isn't the transaction, it's the mortgage fraud that some people commit in order to get the deal funded.

When you Option a house and sell it, the end buyer is responsible for their own financing, no "fudging" on your part, and no possibility of fraud.

The Buyer agrees to pay a certain amount, and has a down payment and credit to match, and knows the deal. The haven't been misled, and you haven't helped anyone commit fraud.

Here's what some people consider "flipping":

They'll buy a house, or even just contract it, and then turn around and sell it to an unsuspecting homebuyer or Investor, often from out of town or with no Real estate experience, and usually with no money down or for very little down.

Next, they'll bribe an appraiser to give a fictitious appraisal, much higher than the true Comparable sales. They'll work with a mortgage broker who will show the borrower how to submit false documents to the mortgage lender to qualify for a loan they often can't afford.

Then last but not least, they'll forge the closing statements from the Title Company to show a down payment and/or closing costs coming from the borrower, in order to get the bank to fund the deal.

Is this what you consider "Flipping"? Bribing appraisers and falsifying loan documents and paperwork? If so, then you're right, it is illegal.

But when you "Flip" a house by selling it for retail price to a retail buyer, who works with a legitimate appraisaer and Mortgage Broker and gets their own financing, with no "funny stuff," there's nothing even slightly illegal or grey about it. It's simple and easy, with no B.S.

Some people are just simply SOOO lazy that can't be bothered to buy houses at a discount- instead, they falsely jack up the price, bribe an appraiser to confirm it, and try to pass them off onto an investor or homebuyer who commits mortgage fraud to get them funded. THAT is illegal.

Don't get me wrong, I don't have a whole lot of pity for the Buyers in those fraudulent transactions. They are the ones buying houses without enough common sense to even check the value first!

Here's something else you should learn from this: These supposed "victims" (who all volunteer to commit mortgage fraud and know what they are doing, by the way) buy these properties at grossly inflated values based on appraisals someone else ordered for them. (I know, it's hard to imagine they were taken advantage of, huh?)

NEVER believe what someone tells you about a property without verifying it for yourself. That means you have to do your Due Diligence- check every assumption- about the property BEFORE you buy it, not after.

While house flipping has gotten a bad reputation in the last few years due to a few bad apples, it is still a great way to get into Real Estate Investing if you know what to watch out for. Done properly, house flipping is legal, moral and ethical, and is a great way to invest in real estate wiothout tenants, rehabs, or risk.