by Dan Krell © 2009
Short sales? Foreclosures? Fugetaboutit! House flipping is the new real estate buzz!
Flipping homes is an investor technique used to quickly sell a home, sometimes rehabilitating the home to current code and standards. Flipping is more prevalent in re-emerging markets (sometimes associated with recessions) because of the real estate investors’ ability to buy homes at wholesale and sell at retail prices. Flipping was also pervasive during the housing boom earlier this decade, when real estate speculators took advantage of the rapidly appreciating market by quickly re-selling homes they purchased almost as soon as they bought them.
Home flipping has been a viable technique included in many real estate investors’ business models. Flipping is not only a means for investors to make money, it has often been a part of neighborhood revitalization. Run down homes, that are often overlooked by home buyers, are made more appealing by modernizing and renovating to code.
Unfortunately, flipping has become synonymous with fraud and scam because of the vilification home flipping received in the mid to late 1990’s (as the result of widespread fraud scams that involved flipped homes). Several cities were known as “ground zero” for flipping scams, Baltimore being one, because of the investors’ ability to purchase homes for very little money.
Although, there is nothing wrong with flipping a home per se; flipping has been rebuked because mortgage fraud was often entwined with the flip in several ways: loan officers falsified income and/or credit information for unqualified home buyers; fraudulent appraisals were used to justify artificially inflated sales prices; and/or “straw buyers” were recruited by the scammers to facilitate the scam. Additionally, flipping scammers often defrauded unknowing home buyers by portraying homes as having renovations, when in fact the renovations were not preformed or of poor quality and not meeting code.
To protect consumers and stem the mounting losses due to illegal flipping, HUD took action. HUD defines “flipping” as, “… a practice whereby a recently acquired property is resold for a considerable profit with an artificially inflated value, often abetted by a lender’s collusion with the appraiser…” (HUD MORTGAGEE LETTER 2003-07). To dissuade the financing of flips, FHA instituted a title seasoning (the time an owner is on title) requirement of at least 90 days; if the sale is between 91 and 180 days, the sales price cannot exceed 100% of the prior sales price.
In the wake of the illegal flipping scams that rocked many Baltimore neighborhoods, then Maryland Attorney General J. Joseph Curran, Jr. launched an initiative to combat deceptive real estate practices that included flipping and predatory lending. The initiative not only sought to prosecute scammers, but to educate home buyers through town hall meetings and a brochure.
The brochure (www.oag.state.md.us/consumer/flipbrochure.pdf) gives five signs that the sales price of the home may not be the value and that sale is a [illegal] flip, including: the seller does not answer questions about price or condition; and, the person “selling” the home is not on title or the home was recently sold.
Since flipping is on the rise, protect yourself by getting all the information. Find out if the seller is being deceptive, as well as how the flip may affect your ability to obtain a mortgage.
This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of December 14, 2009. Copyright © 2009 Dan Krell