In my career as a full-time real estate investor and teacher, I have found that there are quite a few common questions that people tend to ask quite frequently. But there is one question in particular that seems to keep rearing its ugly head over and over again.
“I’ve heard on the news lately about some investors who went to jail because they were moving houses. Is it legal to flip houses?“
The reason this question keeps coming up has a lot to do with the work the media continues to do in misrepresenting the real estate investment industry. So let me clear things up.
First, let me be very clear. The concept of investing real estate is not illegal in any way. There is absolutely nothing wrong with buying a home at one price and then selling it for a higher price.
And that’s exactly “flip”, another way of saying “buy then sell”.
Think about this: if you had a lot of cars, you would buy cars at a wholesale price and then sell them to end users at a higher retail price. And hopefully you would make a profit in the process, right? Would you feel like I would be doing something wrong by “flipping cars” like this? Of course not, it is done every day.
And if I had a hardware store, I’d be “flipping” everything from hammers to nails for my clients, right?
Understand that essentially what we are talking about here is capitalism, and our economy depends on it. It is a normal way of life for all of us who live in America. Businesses “provide” us with goods and services for which, in turn, we pay them. And the benefit they receive is not considered unethical in any way.
So what about the “house change scandals” that we hear so much about in the media?
Simply put, selling real estate only becomes illegal when it comes to fraud. And when this occurs, the resale is typically based on inflated appraisals, false documents, sales to “fake” buyers representing the original sellers, or “phantom” second loans.
Loan fraud is illegal. But buying and selling houses for profit is not at all. In fact, there is not even an ethical issue if your buyer wants to pay you substantially more than market value, as long as you don’t lie about the value or defraud buyers or lenders.
Most lenders do not loan more than a property is worth. However, if your buyers have the means to pay you and the property is worth it to them, then it is their choice, plain and simple. And no law is broken.
Flipping … Videogames?
For a little more clarity on this, let’s take a look at the video game industry for a moment. Have you noticed that when the latest generation of gaming systems are released, people will pay crazy and insane amounts of money just to get their hands on one on launch day?
In fact, when Sony’s PlayStation 3® was released in November 2006, it had a retail value of about $ 600. But as is often the case these days with high-end gaming systems, the initial supply of the PS3 was far less than its immediate demand, and only a handful of people were able to get their hands on one on launch day.
The exaggerated demand for these gaming systems is in itself intriguing. But even more interesting is the fact that most of the people who bought a unit on launch day weren’t even interested in keeping them. Instead, they went straight into the field of online auctions and let the market do its thing.
On launch day, these $ 600 gaming systems were “flipped” on eBay for staggering returns, ranging from $ 3,000 to $ 10,000 from the hungry masses of game buyers.
Was this illegal? Unethical or immoral? No no and no.
How much were these systems really worth? Well, the tag price was about $ 600. But the market spoke and determined that the value was in the excessive four figures.
Did hungry eBay buyers know that they were paying a substantially higher price than sellers had just paid for the same system at their local Best Buy? Absolutely, and they didn’t care.
For buyers on launch day, the value of having a gaming system as fast as possible was more important to them than the radical price increase.
In truth, the value is determined by what the open and honest market is willing to pay rather than the “tag price” or appraised value.
Getting back to the point of this, as I said, what people often call “illegal real estate trading” is actually mortgage fraud. But the media, for whatever reason, in their glorious ignorance, has misappropriated the term “flipping” as the buzzword to describe these scams.
This is a disservice to a world of honest and ethical real estate investors who are legitimately moving houses for a living.
As a result, the media has given wholesale investing and real estate investing in general a bad name because they are not focusing on the real problem. The real problem with “illegal investment” is when investors, mortgage brokers, loan officers, appraisers, etc. come together to build a better image of a buyer or a property for a lender than it actually exists. In other words, they lie.
They do things like write fake w-2s, make pay stubs, inflate appraisals, give away the down payment, write letters of credit, etc.
People who do this deserve to go to prison. But this is NOT the same as investing in real estate.
Real estate investors in the legitimate business of selling homes (either as “wholesalers” or as “fix and switch” rehab investors) are actually playing a key (and underrated) role in stimulating our economy. And it is sad that they are unfairly classified as “unethical” or “illegal” just because they invest in a rapid change in real estate.
The bottom line is that if you buy a property below market value, sell it at a higher price, and make a profit, and if you do it honestly, ethically, and without committing loan fraud, then you are not doing anything illegal. You have nothing to worry about.
