In my career as a full time real estate investor and teacher, I’ve found there are a quite a few common questions people tend to ask fairly frequently. But there is one question in particular that just seems to keep rearing it’s ugly head over and over again.

“I’ve heard in the news lately about some investors who went to prison because they were flipping houses. Is flipping houses legal?”

The reason this question keeps coming up has a lot to do with the job the media continues to do in misrepresenting the real estate investing industry. So let me set the record straight.

First, let me be very clear. The concept of flipping real estate is not illegal in any way. There is absolutely nothing wrong with buying a home at one price, then selling it for a higher price.

And that’s exactly what “flipping” is – just another way of saying "buying, and then selling".

Think about this: If I owned a car lot, I would be purchasing cars at a wholesale price, and then selling them to end users for a higher, retail price. And hopefully I would make a profit in the process, right? Would you feel I’d be doing something wrong by “flipping cars” like this? Of course not – it’s done every day.

And if I owned a hardware store, I’d be "flipping" everything from hammers to nails to my customers, right?

Understand that essentially what we're talking about here is capitalism, and our economy depends on it. It’s a normal way of life for all of us in the US. Businesses "flip" goods and services to us that we, in turn, pay them for. And the profit they receive is not considered to be in any way unethical.

So what about the "house flipping scandals” we hear so much about in the media?

To put it simply, flipping real estate only becomes illegal when fraud is involved. And when this occurs it’s typically that the resale relies on inflated appraisals, fake documents, sales to "straw" buyers who represent original sellers, or "phantom" second loans.

Loan fraud is illegal. But buying and selling houses for profit is absolutely not. In fact, there’s not even an ethical problem if your buyer wanted to pay you substantially more than market value – as long as you don’t lie about value or defraud the buyers or lenders.

Most lenders won’t loan more than a property is worth. However if your buyers have the means to pay you, and the property is worth it to them, then it's their choice, plain and simple. And no laws are broken whatsoever.

Flipping...Video Games?

For a little more clarity on this, let's look for a moment at the video gaming industry. Have you noticed that when the latest generation of gaming system is released, people will pay insane, crazy amounts of money just to get their hands on one the day it launches?

In fact, when the Sony Playstation 3® was released in November 2006, the retail value was about $600. But as is often the case these days with the high-end gaming systems, the initial PS3 supply was far less than it's immediate demand, and only a handful of people wound up able to get their hands on one the day it launched.

The hyped-up demand for these gaming systems is in and of itself intriguing. But even more interesting is the fact that most people who purchased a unit on launch day weren’t even interested in keeping them. Instead they went right to the online auction arena and let the market do it's thing.

On launch day, these $600 game systems were being "flipped" on eBay for staggering returns -- anywhere from $3,000 to $10,000 from the hungry masses of gaming buyers.

Was this illegal? Unethical or immoral? No, no and no.

What were these systems really worth? Well the sticker price was about $600. But the market spoke and 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 their local Best Buy? Absolutely - and they didn't care.

To buyers on launch day, the value of having a game system as quickly as possible was more important to them than the radical price increase.

Truly value is determined by what the honest, open marketplace is willing to pay rather than the “sticker price” or appraisal value.

Getting back to the point of this, as I said, what people typically refer to as "illegal real estate flipping" is actually mortgage fraud. But the media has for some reason, in it's glorious ignorance, misappropriated 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 are legitimately flipping houses for a living.

As a result the media has given wholesale flipping and real estate investing a bad name in general , 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 fabricate a better picture of a buyer or property to a lender than that which actually exists. Said another way, they lie.

They do things such as drawing up false w-2's, manufacturing pay stubs, inflating appraisals, gifting down payment, writing credit letters, etc…

People who do this deserve to go to prison. But this is NOT the same thing as flipping real estate.

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. And to have them unjustly categorized as "unethical" or "illegal" just because they invest in quick-turn real estate flipping is sad.

The bottom line is, if you buy a property below-market value, sell it for higher and make a profit – and if you do so honestly, ethically and without committing loan fraud, then you are not doing anything illegal. You don't have anything to worry about. Print Add a Comment Back to All Articles