As with any other business, flipping houses involves just buying low, then selling high. Since transactions in real estate can get complicated, the business of real estate investing is misunderstood. And of course, some real estate investors have broken the law, hence ended up in trouble.
So is flipping houses illegal?
First, do not take this article as legal advice; you must always consult your attorney. Real estate investors who get into trouble have broken the law one way or the other.
First, what is the meaning of flipping houses?. Although the definition above means buying low, then selling high, the details of the transaction can vary, leading to misunderstanding. Let us check out each method and find out if it is legal or not.
1) Contract assignment
Contract assignment means you identify a house below market value, put it under contract, then assign that contract for a fee to a wholesale real estate investor or buyer.
In this case you do not actually sell the house; what you sell your right to buy the house.
You walk home with an assignment fee at closing.
This is the simplest method of flipping houses. Note that you never represent anyone, or even own the property at any time during the transaction. You simply put the property under contract, then sell your right in the contract.
2) Simultaneous closing
Simultaneous closing involves putting the house under contract, getting a buyer, buying it, and then selling it to the buyer.
Both transactions occur on the same closing table, one where you buy and one where you sell. So you really own the house for a few minutes just before you sell it.
There are two sets of closing costs and you walk home with the difference between your buying price and the selling price.
3) Buying, fixing then selling
Some people buy a house, fix it then sell it for profit, even though flipping houses does not typically fit this description.
There is nothing wrong with this, just buying low, improving the value then selling high.
What can go wrong in flipping houses?
1) You represent a client without a license
Flipping houses never involves representing a third party in the transaction. You either sell your right to buy the property, or you buy the property, and then sell it for a profit.
A real estate agent conducts the transaction on behalf of a buyer or seller and walks away with a commission. For this, a license is required.
2) Mortgage fraud
Of course it is against the law to commit mortgage fraud. No matter what type of transaction is involved this will certainly get you into trouble.
3) Telling lies
When buying houses from motivated sellers, it is crucial to be very clear and specifically let them know exactly how you are handling the sale. All they need to know is how much they are getting as per your agreement and when the deal will be closed.
I like to go a step further and let them know exactly how Iým handling the transaction, so if there is any delay, they understand the reason why.
As long as you are clear and never misrepresent anything, then you do not have anything to worry about.
Simon Macharia invests in real estate, flipping houses in Dallas Texas. He runs his business from a real estate investing website that also automates his business.
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