Q: Can you please explain the difference between "illegal flipping" and legally selling a property for
a profit? 每CB, Cincinnati
A: I've gotten this question a lot lately, thanks to the passage in May 2003 of the HUD "anti-
flipping" rule and the subsequent attention the media has been paying to "illegal flipping." Buying and
quickly reselling a property for a profit is still perfectly legal (and a great way to build wealth!), but
has, unfortunately, gotten a bad name thanks to the fraudulent activities of a small number of investors.
The "illegal flipping" to which you've seen reference involves deception, false appraisals, and,
usually, bank fraud. Although it wears many faces, an "illegal flipping" transaction typically has some
or all of the following characteristics: It is done with the intent to defraud the buyer, who is almost
always an unsophisticated, low- to moderate-income first time home buyer. The property is purchased
at a very low price and sold at a higher-than-retail price by a seller who has done does minimal repairs
to the property, often covering up major defects without fixing them. The seller colludes with an
appraiser to get a higher-than-market appraisal, and with a mortgage broker to falsify information on
the buyers application, making the buyers seem more qualified than they are. The result is that the
buyer overpays for a property that he can't really afford, and which turns out to have major problems
that he can't afford to fix. He can't sell his property, because he paid more than it's really worth, and
when he can't hold on any more, the property is foreclosed upon. The buyer loses his home and his
credit rating, the bank loses when it gets the property back每and we all lose when homes go vacant by
the hundreds and property values drop as a result.
Before the word "flipping" was hijacked by these folks, it was most commonly used to describe a
strategy called "retailing. In a "retailing" deal, the investor buys a property at an under-market price,
then fully repairs and renovates it with the intention of making a profit by providing a qualified home
buyer with a top-quality home. Unlike "illegal flipping" transactions, the home buyer is generally
middle- to high-income, as the properties chosen by real retailers are not in low-income areas. The
seller prices the house at每not above每true retail value; therefore, no appraiser collusion is necessary.
The seller pre-qualifies all potential buyers to assure that they will be able to purchase the property
quickly and with no hitches, thus assuring the seller a quick return on his investment. The buyer goes
through the normal loan process with the lender of HIS choice每not one chosen by the seller for the
lender's willingness to "bend the rules".
The "anti-flipping rule" put into place by HUD last year in an attempt to stem the tide of
foreclosures resulting from illegal flips. Under the rule, FHA will not insure loans on properties where
the seller has owned the home for less than 3 months, and requires additional appraisals and paperwork
in order in insure loans on properties where the seller has been the owner for 3-6 months. This rule has
ended up affecting almost all home sales by investors, as most conventional loans每even those not
insured by FHA每now require a 6 month holding period. The unfortunate side has been that thousands
of homeowners have been denied affordable loans on some of the best properties in their chosen areas,
simply because the retailer hasn't owned the property long enough. In trying to stop a few bad people
from defrauding home buyers, the government has succeeded in limiting housing choice for tens of
thousands of potential buyers.
Source: www.regoddess.com
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