Is Flipping Real Estate Illegal?

[Jay Redding]

      The short answer is no, flipping a property—or buying a property and then quickly selling it at a higher price—is far from illegal; in fact,
one could argue that profiting from the responsible prediction of market

trends is the essence of the very capitalism that defines our nation’s
character, and which the laws are designed to preserve.  There
is absolutely nothing wrong with finding and purchasing an investment
property, investing in that property’s value, then selling it to someone

willing to pay more than you did.  That’s simple supply and demand. 
Then why is there so much on the news about real estate investors being
arrested and imprisoned for flipping homes?  Generally speaking,
the headlines are incomplete in that they fail to report that the
investors
were not arrested for actually flipping the home, but rather for some
fraudulent activity during the process which illegally increased the
property’s perceived value. 

      The fraud associated with flipping is most often simple mortgage fraud.  That is, people at different levels of the process collaborate to create

a more valuable picture of the property than its actual value, which
they can then present to the purchaser (who will think the home is worth

more than it actually is).  This can occur at almost any
level—investors,
mortgage brokers, appraisers, loan officers—from anyone who makes
an effort to mislead the purchaser, and it is highly illegal. 
Most commonly, investors cooperate with appraisers to provide
dramatically
increased property appraisals, but this type of fraud manifests in many
other forms as well: writing false w-2 forms, gifting down payments,
fabricating pay stubs, forging credit letters, etc. 

      On the other hand, the set of investors that makes their living by legitimately
“flipping” homes and properties is doing nothing illegal or unethical,
and is in fact doing a great service to the housing market.  They
purchase and invest in a property, either by paying for remodeling and
repairs or by simply riding out an expanding housing market, and then
sell the house for its actual value (as determined by the buyer’s
current demand) for a profit.  The process is only illegal in the
case of mortgage fraud, or some similar process by which the potential
buyer is misled as to the value of the property, thereby inciting him
to overpay.  Those who perpetrate this crime should be, and often
are, imprisoned. 

What do you think? 

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