The practice of flipping houses has come under fire from some experts
recently regarding the legality. While there may be some issues to work through
in the flipping process, the bottom line is there’s nothing illegal about the
majority of situations in which flipping real estate occurs.
Typically, flipping happens when a person buys a house below market value
with no intention of taking physical possession of the house. That means that
the “buyer” never moves in, never uses the property for personal use, and never
has the deed in his or her name. It also means that “buyer” doesn’t pay any
closing costs on the deal and doesn’t even have to have financing in place
(though you should beware of this step).
Here’s why house flipping works that way. The “buyer” has another buyer in
mind – the person who’ll either use the property as an investment or will take
physical possession of the property. Buyer 1 makes an offer for the house. Then
Buyer 1 approaches Buyer 2 with the information about the house and the price
Buyer 1 expects to get. This is where the deal could become sticky and some
opponents of flipping declare that it isn’t legal.
How can Buyer 1 offer the property for sale if he or she doesn’t yet own it?
There are some who say he can’t. Period. But the practice of flipping is
generally accepted to be legal as long as Buyer 1 meets all the agreements of
the contract he or she signed.
Some of the potential downfalls of flipping houses include the simple
possibility that Buyer 2 isn’t interested. Those successful at flipping real
estate say backup buyers and “plan B” should be in place. If you’ve signed a
contract and put down earnest money, you may be forced to go through the closing
and take possession of the house or lose your earnest money – not to mention
what backing out a deal can do to your personal and professional reputation.
In flipping real estate, some talk about the ethics of taking potential Buyer
2s to the house to look it over while the original owners are still in
possession. It’s sometimes described as awkward or unethical. Those who see
nothing wrong with this part of house flipping have found ways around the
situation. You may ask for a key so that you can take potential Buyer 2s in
while the owners are not at home. Some even tell the owners up front that
they’re flipping the property so they aren’t surprised when potential buyers
come to look. Some admit to very creative ways around this issue, and that’s a
matter of personal ethics and choice.
One important point to consider in house flipping is the contract signed by
Buyer 1. Assignment refers to the ability to transfer your rights in a
particular piece of property – the basic concept of flipping real estate. If the
contract you sign as Buyer 1 limits or forbids assignment, you can be sure that
the condition can be enforced. At the very least, you can be required to go
through the closing process (including paying closing costs) before you sell the
property to Buyer 2.
You should also keep in mind that property laws vary from state to state, and
that you may very well be limited by the requirements of the contract. Be sure
that your actions don’t violate these restrictions and you can be assured that
flipping is legal.
You can find additional information on the legality of flipping houses at
http://recenter.tamu.edu/news/53-0504.html,
http://www.intellibiz.com/realty/flipping.html,
http://www.4realestateinvesting.com/downloads/real_estate_investing_article_11.pdf#search='flipping%20%20legal
