Existing Member Login

Forgot Password?

Follow Us

Become a Fan on FacebookFollow Us on TwitterConnect with Us on LinkInWatch Us on YouTube
Home » Resources » Blog » Flipping is Illegal!

Flipping is Illegal!

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. Some-times 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 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 over-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, its lender fraud. The loan is based on the stated facts. If you misrepresent those facts, its fraud. Regardless of how many other people participate in the process.

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 homebuyers 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. 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 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.

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.

This entry was posted in Blog, Resources. Bookmark the permalink.

31 Responses to Flipping is Illegal!

  1. Roger Young says:

    Thanks Ron for the excellent article. Flipping is just buying and selling. Like Wal-Mart does. They float cheap junk over here from China and flip it to unsuspecting buyers for a profit. Almost everyone loves them.

    My favorite part of the article is that lenders need us more than we need them. I love that.

    Guess I will flip over to the Resources area and get that new Lease/Option with Assignment contract.

  2. CRES Mandujano says:

    Thanks Ron for the excellent article. Flipping is just buying and selling

  3. Heather Olson says:

    So awesome!
    Thank you Ron for being the most excellent entertaining educator ever!

  4. Quentin & Kristina Freeman says:

    Great article!

  5. Dustin Briggs says:

    I do worry about covering myself, thanks.

  6. Dale Dudley says:

    Thanks Ron after reading your article i have a beter understandng of the term flipping

  7. James Noullet says:

    good article Ron

  8. Mr. Ross says:

    You tell em buddy .

  9. Joseph Hernandez says:

    Now, “That’s Entertainment”. Great article,Ron.I love the humor behind the education.

  10. Wally Cook says:

    It is always “en-lighting” when, after you have negotiated a great deal with a bank, you are told by a lender that any “profit” should go to your buyer and not you!!

  11. John Rogers says:

    Good explanation of “flipping” properties.

  12. Sharon Collins says:

    I love this article. I also love your tell it like it is approach to life. Life is too short to listen to ignorance.

  13. Staci Ross says:

    The Ebay drop ship analogy is excellent – this is a really good explanation of why “flipping” houses is NOT illegal.

  14. KJ Roberts says:

    This is really important
    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.

  15. Matthew Hell says:

    I agree to keep reports of everything that you do and track the results of what you are doing. Robyn Thompson is great for this, just get one of her retailing courses and check it out. She explains things real well.

  16. Sidney King says:

    Great article! not only did I learn a little more about flipping houses, I also learned that I’ve been doing Ebay all wrong! I wish that I’d found the gold club YEARS ago!

  17. Obi Ozoemena says:

    Just listen to the Guru not the Morons and you will be fine.

  18. DENISE RUSH says:

    well said: simply said

  19. David Woodside says:

    Great article. I get asked about “illegal” flipping all the time.

  20. Keith Weaver says:

    It is so difficult to do Real Estate deals with people telling me that “Flipping is Illegal”. Especially Realtors. I once had a Realtor say to me: “You take advantage of people”. I said to her: “What are YOU going to do if you don’t get the house sold?”

    I can imagine what went through her mind and it wasn’t good. The owner still had to make the payments and I know that the Realtor wasn’t going make them.

  21. Bryan Davis says:

    I’ve had this conversation more than once with friends and family alike. The stigma around real estate investors seems to be that it’s an industry of con artists so it’s up to us to prove that stigma false.

    • Brian Chilcote says:

      I agree with you Bryan, they have to understand we are providing a much needed service.
      (Debt relief, Fast sale, Grief Relief, Repairs)

  22. Brandon Dickman says:

    Very clear I like the knowledge I gain every time I read your articles or blogs. Thank you once again!

  23. Robert Dowling says:

    Does anyone on here actively do wholesaling in ohio? If so, please reply to this. I am in need of desperate help.

  24. Orville Smith says:

    Ron, I just love you!!! Very well spoken!! I have been in retail sales most of my life…flipping? products. Ha! I didn’t realize that buying at dealer cost and marking the price up for my commission & selling to someone at a profit was considered “flipping”. I thought that was just making enough commission to cover my cost of the product and making enough “clear profit” to pay my monthly bills and hopefully “save” a little for a rainy day.
    I also LOVE your statement about “cut them off at the knees” and “whack’em”. We DO have to clear our lives of the negative influences to “get ahead”. Thank you so much for your inspiring teaching!! Now, I think I will follow your example & “flip” my computer off, “flip” my bed covers back, & “flip” off the lights & go to sleep. From one “flipper” to all the other “flippers”…EVERYONE…HAVE A WONDERFUL & SAFE THANKSGIVING!

  25. Wilbert Dorn says:

    Ron you right on. Where would the real estate business be now, without the knowledgeable, honest and but legally creative active investors. They significantly contribute toward helping our economy staying afloat.

  26. Ijaz Mirza says:

    Its not illegal.

  27. Ken Breeze says:

    Ron, I always enjoy you’re no BS attitude and life wisdom. Yes, getting older and not giving a dang about much of the stuff and talk of others who couldn’t help you anyway, helps. I too wish I had the guts when I was 18. Now I’m teaching my 16 year old son to not waste time with dream killers. Life is short and precious. Find the ones who ‘get’ it.

  28. Keith Lanier says:

    What Ron didn’t you, is the BIG boys, or when you money grows up, you can also do flipping with Apartment Complexes, and Commercial buildings, this is where the very BIG paydays comes from…Go article!

  29. Fernando Diaz says:

    Thanks for the article. This good information to share with newbies that keep asking is this legal?

  30. Fernando Diaz says:

    It is unfortunately some owners cannot maintain and upgrade their homes. We need investors to move this inventory. Otherwise, most of our cities would be dumps.