Flipping

A point on flipping: We have received questions from students as to whether or not flipping is illegal. It is not. What IS illegal is taking a property, getting false appraisals through corrupt appraisers, and over-financing the property with corrupt lenders. Once the property has had tons of cash pulled out, the corrupt group would then walk away and pocket the money. The lender would be left holding the bag. That is not what we are about. Owning a property for a short amount of time and reselling is completely legal, and the basis on which this economy is built. There is nothing wrong with owning something for a brief period, using your skills to find a buyer, and reselling that property. People do this every day in the stock market. Car dealers do it every day with cars that they buy and immediately wholesale. The word flipping has attached to the illegal activities that you have probably read about in your local papers, but owning for a short time, is not and never has been illegal.

If you have neither credit nor cash, and still want to operate on a conventional playing field where you get loans for properties and pay all cash with no “crazy” no money down TV seminar type offers, I have great news for you -- Hard money lenders. Most hard money lenders could care less about you or your credit. They look to the property as their security. If you don’t pay on the loan, they know that they can turn around and sell the property for enough to get their money out. We go into more details on this in the full course. We will give you a system to track these lenders down in your town in our Full Course, will loan based on the property. If you strike a good deal, they will loan 65% of the value of the property in renovated condition.

Thus, if you find a home that is worth $100,000 fixed up, and you can buy it for $60,000, the lender will give you 65% of the fixed up value of the home, or $65,000. $60,000 of that will get you into the property for no money down, and the extra $5,000 can be used for closing costs and/or repairs. You can then flip this property to another investor for cash, or rehab it yourself for maximum profits. The great thing about these loans is that you can typically close within 7 days. The only drawback is higher fees, but let’s face it, a few extra points on the loan to close is still cheaper than having a partner.

You buy a property, you flip it, you profit. Does this require a real estate license? In most cases, the answer is "no". Real estate brokerage is an activity regulated by states on their own terms, thus each state defines which activities require a license. There is a lot of vagueness and ambiguity in some of the state licensing codes, as well as "gray areas", which complicate the matter. Furthermore, if you vary the techniques and your business practices beyond the scope of what I teach in my course, it is not always clear how the state authorities might view your practices. Therefore, this discussion is limited to the simple activity of buying and flipping as follows:

1. Sign a contract with a seller, assign it to a third-party

2. Sign a contract with a seller, sign another one with a third-party, then double close

The large majority of states use the "for another" language in their state licensing statutes. The "for another" language means the law provides a laundry list of activities that require a license if you do it "for another."

Other states that do not use the "for another" language clearly identify specific exemptions in their licensing statutes.

The sale, lease, or rental of real estate by an unlicensed owner of real estate who owns any interest in the real estate if the interest being sold, leased, or rented is identical to the owner's legal interest"

However, you must have an interest in the property before you sell it. In general, a contract to purchase property gives the buyer an equitable interest in the land.

A few states limit the real estate activity of any persons, even if you are acting on your own behalf. SD, MN, WI, MI, MD & MN all have limitations on the number and frequency of real estate transactions you can do before you will need a real estate license. For example, Michigan law limits you to 4 transactions per year, although it is not clear whether using multiple corporate entities will be a workaround.

There's few, if any, reported cases of people being prosecuted anywhere in the country for not having a real estate license. The issue of licensing is more relevant in the enforcement of your profit. For example, if you assign your contract prior to closing and expect the buyer to pay you at closing, he may stiff you and argue "you don't have a license".

The bottom line is that if you don't act like a real estate broker, the state agencies that license brokers will leave you alone. If you use the licensing exemptions to skirt the licensing laws, you will likely hear from the state licensing agencies. It is important that you make it very clear to all parties in the transaction that you are not a broker and are acting on your own behalf.

Flip Strategy #1: Buy, Fix and Flip

Let's start with the most common form - the good, old "fix 'n flip". This process involves buying a property that needs work, fixing it up, then selling on the "retail" market, that is, to a person who will live in the property. This method is tried and true, and works very well. You can easily make $15 - $50k on one deal, depending on your market and how good you are at finding bargains. The danger in fix and flips is either paying too much or underestimating repairs. Be very conservative in your fix-up costs and length of time it may take to resell. Also, make sure you include in your analysis the cost of paying a real estate agent to sell the property.

Flip Strategy #2: Buy, Refinance & Lease/Option

Rather than sell the fixed up property for all cash, sell for terms. Once you have completed the rehab, refinance the property at its new appraised value. If you did the math correctly, you should have little or no money in the deal. Sell the property on a lease with option to buy. The rent payment from your tenant/buyer should cover your mortgage payment (if not, consider an interest-only or adjustable rate loan that is fixed for 3 years). When your tenant exercises his option to purchase, you reap a larger profit, since you don't have to pay a broker's fee. If the tenant exercises his option after 12 months, you benefit from a lower capital gains tax rate.

Flip Strategy #3: Buy & Flip "As Is"

Don't like to do fix-up work? Consider selling the property "as is" as a light fixer upper. If the local real estate market is hot, you should be able to sell the property in poor condition just a little below market. This is especially the case with houses in "transitioning" neighborhoods. Make sure, of course, that you acquire the property sufficiently cheap enough that you can sell it below market quickly and still profit.

Flip Strategy #4: Wholesale

Strategy #1, the fix and flip, is very popular, which means there are a lot of investors looking for rehabs. You can buy the property cheap and sell it for just a few thousand dollars more to another investor without doing any work. You won't make nearly as much as the rehabber, but you will realize your profit quickly.

Flip Strategy #5: Pre-Construction

In very hot real estate markets, prices are appreciating as much as 2% per month. If you time things right, you can put a contract on a pre-construction house or condominium, then flip it to someone else when the development is complete. If it takes 12 months for the development to be complete, and the condo price is $500,000, you could make $100,000 or more in one year! Of course, the opposite is also true - you could end up losing money if the local economy tanks and you end up with a worthless condo that you can't sell for more than you paid. Use this approach very carefully.

Flip Strategy #6: Scouting

The Scout is an information gatherer, so not technically a property flipper. He is the "bird dog" who finds potential deals and sells the information to other investors. Many people get started as a Scout for other investors because it does not take any cash or prior knowledge to look for distressed properties. The Scout finds a property for sale, gathers the necessary information, and then provides this information to investors for a fee. The fee will vary depending on the price of the property and the profit potential. The Scout can expect to make five hundred to one thousand dollars each time he provides information that leads to a purchase by another investor.

Flip Strategy #7: Illegal Flipping

OK, I am not advocating this approach, because it is illegal. Illegal property-flipping schemes work as follows: unscrupulous investors buy cheap, run-down properties in mostly low-income neighborhoods. They do shoddy renovations to the properties and sell them to unsophisticated buyers at inflated prices. In most cases, the investor, appraiser and mortgage broker conspire by submitting fraudulent loan documents and a bogus appraisal. The end result is a buyer that paid too much for a house and cannot afford the loan. Since many of these loans are federally insured, the government authorities have investigated this practice and arrested many of the parties involved. As a result, the public perceives is flipping to be illegal.

The fact is, "flipping" - as I described in the beginning of this article - is not illegal. Loan fraud in the process of flipping is what is illegal, so don't confuse the two. The other six ways to flip are very legal, very ethical and very profitable!