Is Flipping Legal? A lot of hullaballoo has been made in the press over the last few years about flipping being illegal. For the press it has been fantastic because they've been able to make hay and sell lot of papers on the back of this supposedly illicit sensation called flipping. Of course, the press gets wind of how much money can be made flipping and immediately starts looking for a scandal to sell. The only problem is they have mischaracterized "flipping" for fraud. Flipping, as it as known, is the act of the quick buy-sell; selling the property immediately after buying it. Investors it's also refer to as quick-turn. It's been around for years, people have been doing it for years, and not only with houses. People flip notes, mortgages, pools of mortgages, apartment buildings, commercial property, entire businesses. Anything of value that people sell, can be, and is, flipped every day all over the country. If you were following the business press about ten years ago there was a big story around CBS when Lawrence Tisch finally sold it. The group buying CBS astutely negotiated and arrived at a price Tisch could live with. Upon closing the deal with Tisch the new owners immediately resold the company to another group at a higher price, and closed a few months later. The investor buying from Tisch "flipped" CBS and pocketed around $300M for his trouble. What this investor did with CBS is what real estate entrepreneurs and investors do with houses every day, all over the country. The buy beat up houses cheap from homeowners who just want to get rid of them, and resell to rehab investors who are better at fixing up houses than finding the deals. There is nothing illegal about flipping at all. It is simply a component part of the housing rehabilitation business that is beginning to fragment due to competition in the market place. Flipping, or the wholesaling of houses, is nothing more than the division of labor among real estate investors. Some people have found they are much better at managing contruction crews and getting rehab work done than they are at running marketing campaigns and negotiating with sellers. These are the retail investors. Some people have found their strengths lie in marketing and negotiating with sellers, and the fixing up of houses is their weakness. These are the wholesalers. However, in the mid 90's there were a rash of transactions taking place in cities all over the country where individual fraudsters (I won't call them investors) would team up with a corrupt appraiser, a corrupt loan officer, and a corrupt title officer. The fraudster would acquire a property, typically a HUD house in a low income area, which only needed cosmetic repairs. The house would then be resold at a price 2-3 times its real value to an unsophisticated owner occupant buyer. The corrupt loan officer would organize the loan for the buyer and make sure it got through underwriting and was approved, the corrupt appraiser would write up an inflated appraisal for the loan, and the corrupt title officer would make sure everything went smoothly at the title company and the lender's title policy was issued with no questions asked. To keep the buyer focused, the fraudster would set the buyer up with a repair allowance that would be rebated to him/her in cash at the closing. So at closing, the buyer suddenly finds him/herself in possession of a check for more money than they've probably ever seen in their life. They don't rock the boat. The endgame for the fraudster is upon closing he receives a nice sized five or six figure check from the sale "proceeds", which he splits with his corrupt team. Everything remains fine until the buyer goes to either refinance or sell his house and finds out his loan is twice the size of his house's value. Foreclosure was usually the result. Wholesaling houses was gaining popularity among investors in the mid to late 90's when these episodes of fraud were being reported in the press, so not surprisingly some industrious reporters decided that "flipping" sounded racy enough to be dangerous so they put the two together. "Voila", they had a story. Every real estate investor knows these fraudulent transactions bear no relationship to the true and honest practise of wholesaling houses ... flipping if you will. But the press had their story and they milked it for all it was worth. There will always be unethical operators in any field where it is possible to make large profits. In this particular case, loan fraud is especially bone-headed because it can only be done once, maybe twice, before you get caught and put in jail. To add insult to injury, if the same amount of time and energy was put into the correct practise of flipping houses, honestly and ethically, the fraudster would make just as much money, probably more, and be able to do it for the rest of his life, amassing the riches he/she no doubt desires in the process. Flipping houses, or anything else of value, is perfectly legal in every state in the country, and it always will be because it is creating value for all the participants involved in the transaction. Flipping is NOT the same as loan fraud as some opportunistic newspaper reporters have characterized it. Loan fraud is loan fraud and the two are not the same. Wholesaling (flipping) houses will become more prevalent in the future as real etate investing evolves and we are going to see and hear more about it, as the legitimate business niche it is. Investors ... Happy Wholesaling.