Flipping Houses is Legal, Easy, and Profitable Done Right

October 13, 2008

Is home-flipping legal or not? At seminars, Im often confronted by people who insist Flipping is illegal.

What they dont understand is that the part thats illegal isnt the transaction, its the mortgage fraud that some unscrupulous people commit in order to get the deal funded.

When you use an Option to Purchase to control a house and sell it, the end buyer is responsible for their own financing. That means 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. They havent been misled, and you havent helped anyone commit fraud.

The problem comes in when the seller and the Buyer are working together to get an unqualified Buyer a loan they really shouldnt get. As an example, heres what some people consider flipping:

Theyll 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, theyll bribe an appraiser to give a fictitious appraisal, much higher than the true Comparable sales. Theyll 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 cant afford.

Then last but not least, theyll 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 youre 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 appraiser and Mortgage Broker and gets their own financing, with no funny stuff, theres nothing even slightly illegal or grey about it. Its simple and easy, with no B.S.

Some people are just simply SOOO lazy that cant 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.

Dont get me wrong, I dont 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!

Heres 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, its 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 without tenants, rehabs, or risk.

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