Is Flipping Illegal?

I regularly get phone calls asking me “Do you do Flips?” and my response is always the same: If done correctly I am willing to do a Flip. While many people, even some lawyers will tell you that any Flip is illegal, in fact there are legal ways to do Flips in Georgia.

The simplest way is when everyone in the transaction is using cash. If the A to B closing is cash and the B to C closing is also cash, then a Flip transaction is not illegal.  Even if you used the funds from the B to C closing to fund the A to B closing, you are all right in an all cash transaction. Disclosure is still generally a good idea. A lot of buyers are having their own attorneys review the title exams or a title commitment. They then will freak out when they see that the B seller is not on title. Let your C buyer know “I will be buying this property on the same day,” and you will save yourself a lot of trouble in the long run. You are not required to disclose your purchase price. I will suggest as a rule of thumb making more than 10% may cause hard feelings. Remember that your customer today may buy more houses from you if you deal with them openly and directly.

If the transaction is not a cash transaction, it becomes more problematic. Almost no conventional lenders will allow a Flip transaction. The illegality comes when an investor or an attorney purports the property to be owned by B when in fact the property is still owned by A. That is Fraud and will end up with you spending time as a guest of the State. If you can send a title commitment to the lender showing that A owns the property, but that B will be buying the property, you have not committed Fraud, but the lender may not lend to you.

The next issue for a non-cash Flip is how the lender’s money is being used. If the lender’s money for C is going to fund the A to B closing, that must be divulged and approved IN WRITING. The attorney in the loan transaction represents the lender, and he must get specific written approval to use the lender’s money in the A to B transaction. In many cases where the lender funds the C deal, the B buyer will need to take advantage of transactional funding. B will take out a very short term loan, often a one day loan, in order to fully fund their transaction before selling the property to C.  Some states require that B use their own funds.  Many title companies in Georgia are starting to take this position as well, but at this time it is not legally required.

In short, there are pitfalls that can trap an investor that wants to do a Flip transaction, but with a little foresight and precautions, those pitfalls can be navigated. As usual, I recommend you consult an attorney for your specific transaction.

Disclaimer: The information contained in this article is for informational purposes only and is not legal advice or a substitute for legal counsel.  It does not constitute advertising or solicitation. The information in this article may or may not reflect the most current legal developments; accordingly, this article is not guaranteed to be complete, and should not be considered an indication of future results.