When Is Flipping Illegal?
I was looking for a real estate attorney to close my deals and I asked the normal "do you have any experience and do you do simultaneous assignment of contract, and lease options closings"
He answered me, "yes we do so long as the transactions are not considered "flips" by the state and federal gov'ts. we have an entire department dedicated to this function"
As far as I know and have been doing...wholesaling (flipping) wasn't illegal... Prentending that I had ever wholesaled a property...did I break the law?
JB
[addsig]
A buy/sell deal could be illegal if the buyer is having to swear he's going to live in the RE, when he's actually intending to flip immediately.
This would be fraud against the lender and there are people in jail for exactly this.
But as long as you're not signing a HUD 1 to the effect that it's going to be your home, or otherwise swearing that you're going to be living there, should be no problem.
Newbie here, but:
My understanding is that the confusion is caused by the word "flipping." Illegal activities have been tagged with the term "illegal flipping scheme." when actually the "flipping" part was not the illegal part.
For instance, say you went into a poor neighborhood and bough up a whole block. You then had a buddy of yours give an insanely inflated appraisal on one of the houses and used it to help get some unsuspecting low income person into the house at a payment they probably can't afford.
After you've done that a few times, now you have comps. You'll be able to sell the rest of the block at these inflated prices.... then one of the homebuyers defaults because they can't make the payments. They end up talking to an atty who figures out that the numbers are too high. A little research uncovers that you are the common element in the inflated properties, and the AG steps in on their white horse to right the injustices you have levied on the downtrodden.... how am I doin' so far, folks?
Anyway, you may have picked-up and "flipped" a number of properties in the area and resold with bogus appraisals. The illegal act happened when you submitted the inflated numbers and asked for financing. Thus, $ was obtained under false pretenses: See Websters and look under "fraud."
Because most people wouldn't know a "flip" from a summersault, the term got associated with these kinds of activities, and the nickname for "illegal filiiping scheme" has become "flipping."
However... sell with a genuine appraisal, and none of the above applies. You can flip all day long very profitably so long as you buy at a good discount. and aren't making fraudulent claims along the way.
OK... there's my essay answer to my first RE test... anybody got a grade?
*edited to say*
Oh, yeah... just read the above post... what John said too.[ Edited by thestudentisready on Date 05/24/2004 ]
I think flipping is illegal when the intent is to defraud.
What our astute friend StudentisReady had to say is exactly what happened in a poor neighborhood in Minneapolis a few years ago. Someone from MN may correct me if I'm in error, but Minneapolis instituted seasoning requirements as a result of this flipping scam and some neighborhood organizations started watching investors like hawks.
And it was an intentional scam. But buying a handyperson's special for $20k, then selling it for $30k, when the house will appraise for $40k, is not a scam.
The best thing to do is to follow up on what your atty told you. Talk to someone in that specialized legal department. Find out how your state defines "flips." I'm pretty sure they'll tell you the same things the folks here have said.
Amelia
I have rehabbed many properties in the mpls area. As long as you have proof of what you fixed you will be alright. The illegal flipping can occur if you do nothing to the property. So, in other words, do something to it, and as far I understand, you are good to go...
Most illegal flipping scams involve sellers and buyers working in conjunction with an appraiser. They'll sell the property, have it appraised for a higher price, "sell" it again, have it appraised for a higher price... repeating this process in order to defraud the endbuye and lender into paying an artificially inflated price for the property. That is illegal.
The flipping that I (and most Wholesale flippers on this site) do is simply finding a house that the owner doesn't want, make him and offer to gain control of the property and then put it under contract to a buyer for more than you're "paying" for it. It's perfectly legal. Since most flip deals to other investors are for cash, there is never a seasonality issue because lenders aren't involved. If flippinf still makes you uncomfortable, just try assigning the contract. You'll make less per deal, but for your peace of mind, it might be worth it.
[addsig]
Flipping is legal.
Committing fraud (with or without flipping) is illegal.
Many folks who commit fraud happen to do it while flipping. It is not the flip that is illegal just like it is not the pen used to sign the documents. It is what people say when they fill out the documents.
John
[addsig]
This is exactly why I really dislike using the term "flipping" for short term real estate transactions. It's the negative associations with the word "flipping" If pro abortion people can call themselves "pro-choice", and anti-abortion folks can call themselves "pro-life" why we call what we do something else like "wholesaling" or "rehabbing" to disassociate our legitimate business activities with this garbage and avoid the confusion.
Just venting!
Jeff
How about flapjacking?
[addsig]
The HUD article for this is at
www.hud.gov/news/release.cfm?content=pr03-055.cfm
Hopefully this url will still go through.
Robert
[addsig]
From a former teacher I give thestudentisready an A+, very clear and concise explanation in laymen's terms. Thanks. Flapjacking sounds good to me, HolleratG......