Property flipping, or simply flipping, is a type of investment strategy wherein a real estate investor purchases property and resells it at a higher value in order to make a profit. In general, property flipping usually involves the following three steps:
- Purchasing a piece of property like land or other real estate;
- Making improvements on the property purchased to increase its value (e.g., remodels, renovations, landscaping, etc.); and
- Reselling the improved property within a short time frame from when it was initially purchased.
Property flipping is a widespread practice used throughout the real estate industry. As long as it is done correctly, property flipping is entirely legal. In fact, a person can earn a decent and legal living through the practice of property flipping. However, there is one major concern and that is the fact that property flipping entails considerable financial risks.
Again, when performed legally, property flipping can offer other advantages, such as restoring rundown business districts or residential neighborhoods. These are things that an entire community can benefit from.
For example, when an old neighborhood undergoes renovations, it may attract new residents, which in turn, may attract new businesses to open in the area. New businesses can create jobs and increase revenue for local governments through property taxes.
The unfortunate side effect of what seemingly sounds like a positive concept is gentrification: the process of changing a poorer neighborhood to attract wealthier businesses and residents, thereby forcing its current inhabitants to relocate elsewhere.
While taking on high financial risk and gentrification are two significant drawbacks to property flipping, neither is illegal. Property flipping only becomes illegal when fraud and other unlawful schemes are involved in the process. Therefore, you may want to consider consulting with a real estate lawyer before engaging in any property flipping practices. A lawyer can help to ensure that your actions are above board and in compliance with the relevant laws.
When Does Property Flipping Become Illegal?
Not all forms of property flipping are illegal. In fact, there are even television shows and websites that provide tips on how to flip property. However, there are certain instances when property flipping may become illegal.
An example of illegal property flipping might be when a property flipper inflates the listing price of a home based on making improvements, but never actually did. In such situations, a seller will often hire a property appraiser to rate the property at a higher value than it is actually worth.
Alternatively, this type of scam may also be carried out by a property appraiser and a real estate broker. Regardless of the other parties, the buyer is usually the only one who is not aware of the scam.
This is because those who engage in illegal property flipping typically target buyers who wish to purchase a new home, but know they cannot afford to buy it outright or will not be approved for a mortgage loan.
Thus, scammers also attempt to fool victim-buyers by offering to lend them money for a down payment or getting them a mortgage loan despite their poor credit history. Sometimes, a scammer will go ahead and allow the buyer to move-in without making any upfront payments.
How Can I Avoid Becoming the Victim of an Illegal Property Flip?
One way that an individual can avoid becoming the victim of a scheme involving an illegal property flip is by hiring their own property appraiser. A property appraiser is a type of professional whose expertise involves determining the value of a particular piece of property. Without the assistance of a property appraiser, it can be extremely difficult to evaluate land or real estate since it requires a certain skill set.
A property appraiser may also be able to expose an illegal property flip while they are performing an evaluation of the property in question. Some signs that may indicate that a property is not worth its sticker price include the following:
- The mortgage lender or seller ignores or refuses to answer questions regarding the condition of the property and its sale price;
- The person in charge of the sale transaction is not the owner or does not represent the owner of the property;
- The property is much more expensive than the price of other properties being sold in the same location (e.g., the surrounding neighborhood);
- The seller promises the buyer that they will make certain repairs on the property, but refuses to incorporate those guarantees as part of the sales contract; and
- The seller tells the buyer that the property is available for immediate use or before the transaction is complete.
In addition, an individual can also avoid becoming the victim of an illegal property flip by ensuring that their mortgage loan is not fraudulent. Some factors that may suggest that a mortgage loan may be fraudulent include the following:
- The mortgage loan application is only partially complete or contains wrong information about the buyer. For instance, if:
- The buyer’s name or other important details are missing,
- The application provides the wrong income or an income that is much higher than what the buyer actually earns for a living; and/or
- The application does not list the buyer’s debts.
- The seller asks to be in charge of arrangements that are typically a buyer’s responsibility, such as obtaining the loan, performing an inspection, and settling the loan payments.
- The seller dissuades the buyer from getting advice from outside, unaffiliated, or independent sources (e.g., a lawyer, a lender, etc.).
- The seller convinces the buyer that they can get them a mortgage loan despite the fact that the buyer has bad credit.
- The seller offers to lend the buyer money so that they can pay off their debts.
- The seller offers to “gift” the buyer the money for closing costs or as a down payment.
- The seller deliberately gives the buyer false information about loans or the real estate market.
Lastly, be sure to check things like an appraiser’s or real estate broker’s license and accreditations. Reading online reviews from other homebuyers about a particular service or individual can also be helpful in avoiding illegal property flipping schemes and fraudulent mortgage loans.
Should I Hire an Attorney?
If you believe you are the victim of an illegal property flipping scam or mortgage loan fraud, you should contact a local mortgage attorney right away. An attorney who has experience in dealing with such matters will be able to review the facts of your case and can determine whether you can file a lawsuit against the offending party.
Your attorney can also recommend the best course of action based on the circumstances of your case and can discuss the remedies you may potentially recover if you decide to take that action. In addition, your attorney can answer any questions you may have about your case and can assist you in filing the necessary legal documents in court. Finally, if you need to appear in court, your lawyer will be able to provide legal representation as well.
On the other hand, if you are being sued by someone claiming you committed mortgage loan fraud or participated in an illegal property flipping scheme, you should speak to an attorney immediately about the issue since you could end up facing serious legal penalties.