Flipping is Illegal – Part 1

Oh No! All this time you’ve been telling me I could make a killing buying & selling (flipping) houses and now you’re telling me it’s illegal, Ron?

Well, sort of! But before you get all upset, I’d better explain. Don’t worry; you’re not going to jail. Here’s the deal. Illegal flipping is indeed illegal. But first, let’s define flipping because it is a misunderstood term, sort of like the term “nothing down.” When I say you can buy houses with nothing down, I mean you’re not using your own money. That doesn’t mean the seller doesn’t get money. Sometimes they don’t and sometimes they get cashed out. But, it is NOT your money; it’s a “nothing down” deal.

When you take over a loan “subject to” the mortgage, and the seller doesn’t want any money, it’s a nothing down deal. When you pay all cash but borrow the money from a private lender, it’s still considered a nothing down deal. Thousands of people don’t believe in the nothing down philosophy and aren’t doing real estate because they simply don’t understand the term, and therefore they’re convinced they can’t buy houses without their own money. Their loss. A closed mind and an open mouth will keep you broke and working for those who are willing to learn.

Just try and tell my Quick Start Real Estate Boot Camp grads (especially those who have become millionaires because they refuse to listen to the morons) you can’t buy houses without your own money. The same ignorance seems to be attaching itself to the term “flipping.” Totally misunderstood and misrepresented.

Here’s The Shocker.

Every house you buy and sell is a flipper. Whether you’re in wholesale, retail, sell- on-lease-option or owner financing, you’ve just flipped a house. Most people use the term when applied to wholesaling, but it’s all flipping. It’s either a fast flip or a slow flip, but it’s still a flip no matter how you look at it.

Ok Ron, so how come it’s illegal? The answer is, it’s not.

The term “flipping” seems to be used by the media in cases where an investor bought a property and sold it a short time later. However in all the cases I’ve read, fraud was a part of all their deals. These investors made a practice of illegal activities and got away with it long enough for the long arm of the law to catch up to them…then they instantly became a news item. Flipping houses is not illegal. Fraud is. So what kind of fraud did these guys get in trouble over?

Here’s A Short List of Possibilities.

1. Paying appraisers to grossly appraise properties to get bigger loans for themselves or their buyers.

2. Rigging down payments to put unqualified buyers in houses that shouldn’t be approved for the loan in which they’re applying for.

3. Falsifying documents required to get a buyer approved such as pay stubs, verification of equipment, tax returns, verification of deposit, etc.

4. Selling houses to unsophisticated buyers, representing them to be in good condition but covering up obvious problems to get the loan closed. This is the most abused type of fraud, and once discovered it leads to an investigation of all the investor’s activities and usually uncovers all other kinds of fraud.

5. Back dating lease agreements to prove a track record of the tenant making payments on time and a year or more occupancy, when in reality the tenant just moved in. This is very common. I’ve had loan processors with large mortgage companies suggest I do it. The last time was on a $600,000 house. I asked the loan agent if he knew that was lender fraud. His reply was, “my boss said it was o.k. We do it all the time.”

Just remember this. Anytime the deal is different than the contract presented to the lender, it’s lender fraud. The loan is based on the stated facts. If you misrepresent those facts, it’s fraud. Regardless of how many other people participate in the process.

Come back next month and I will go more into detail about lender fraud and what it means to you and your real estate investing business.