Flipping is Illegal – Part 2

Welcome back! Last month I told you about the stigma behind the word “flipping” and how some are considering it to be illegal. Flipping houses is not illegal. Fraud is.

O.K., Back To Flipping.

What does lender fraud have to do with flipping and the stigma some of the media have placed on it? Some lenders have had so many loans default on lower priced properties sold by investors it’s opened their eyes and made them cautious, and justifiably so, if I were a lender making loans at 80%-100% of the purchase price, I’d be cautious too. In fact, I’d be paranoid, but then again I’d be neither because I’d never even consider doing it.

I have no way of proving this, but if I had to guess, I’d say 75% of all loans closed to fund low income home buyers contain some kind of false statement or fraud.

I know that’s a bold statement, but I’ve been around a long time. Long enough to see numerous loan companies take a dive from bad loans. It’s almost standard practice in the cheap house business to stretch the truth to get unqualified buyers qualified. This creates default and a bad name for those who operate within the law. That’s exactly what has happened with the term “flipping.” But, I’ll say it again. Flipping is not illegal.

There’s no law against agreeing to buy something at price “A” and then finding a buyer at a higher price “B”. Suppose you had a stereo unit you agreed to sell me for $500, and I told you I would pay you next month when I get my tax refund check (fat chance!). You agree to wait the 30 days it takes me to raise the money. We then sit down and write a letter stating that, and we both sign it.

A couple of days later, I’m talking to a friend who mentions he needs a good stereo. I decide to sell him the one I’m buying for $1,000 and make myself a $500 profit. Obviously I can’t deliver his stereo until I give you $500 because you probably won’t turn it loose until you get paid. However that doesn’t stop me from searching for a buyer.

Once the buyer agrees, I can collect all the money in advance and pay you, collect a $500 deposit and pay you, or I can pay you first with my money and then collect from him. There’s no law that says I have to pay you and take possession before I can talk to anyone about the stereo. If they were on eBay, they’d have a problem. Half the stuff sold on eBay isn’t in the possession of the person doing the selling. They agree to buy at a lower price from another auction site and put it up on eBay. When it’s sold, they simply have the old owner ship it to the new buyer.

That’s called drop shipping and it’s very common in any industry that sells products. That’s exactly what we do with real estate sometimes. You don’t have to own it to shop for a buyer. You simply must control it, which is what you do with a contract. The problem comes when lenders see investors buying at deeply discounted prices and selling for two or three times the amount a few weeks later. Some just assume there must be fraud somewhere to make such an unconscionable profit. You see, they haven’t attended my Quick Start Real Estate Boot Camp.

If you’re buying and rehabbing houses, it would be a good idea to document the work you’ve done to the house. Keep a file on everything you’ve spent to make a case on how you raised the value so quickly. You should also furnish before and after photos. It is also not a bad idea to create your own album to keep while you’re doing this. It will help with future credibility with everyone you deal with including bankers for a line of credit.

If you’re using private money from a loan broker, you probably have an escrow account for repairs. That means an appraiser may be supplying the mortgage broker with a completion certificate once the work is done. Get a copy and add it to the pile of evidence. Of course some lenders won’t be happy with anything you provide and simply won’t fund the loan unless you’ve owned the property for a year or more. I wrote a past newsletter article on six ways to get around that, but the best way to deal with lenders who don’t want your business is . . .Whack ’em!

Flipping is not illegal. The length of time you own a house is your business. Making a killing is your right. Providing for your family is your obligation and the smartest thing you can do with people or institutions who want to make life difficult is cut them off at the knees and tell them to take a hike . . . and that’s my final answer. They are the weakest link.

Before you even take a buyer to a lender for a loan, ask them right up front if your length of ownership is an issue. If they give you any indication that it’s a problem, move on. The country is full of lenders and there is a ton of money available. They need you more than you need them. Don’t take any crap from any lender and don’t let them make you believe their rules are the law or even the norm.

Well, I’m getting tired now! It’s been a long day of battling ignorance and skepticism and I’m worn out! I think I am going to go “flip” open the refrigerator and get a little snack, then “flip” on the shower, then “flip” down the bed spread and shut my eyes for the night. Life seems to be one flipper after another. Hope it’s legal.