A popular practice in real estate is property flipping. Flipping is a legal practice when all aspects of  property condition and value are true and correct. However, flipping can also be an illegal  fraud scheme that may lead to devastating consequences.

Flipping or speculating ? If you want to start getting involved in flipping properties, it is important that you understand the difference between flipping and speculating. Speculators are real estate amateurs who are usually not always successful. They count on the theory that someone who will come along and purchase the property for more than what they paid for it. Flipping involves a different approach. People who flip houses are more conservative and they are more likely to be successful, no matter what the market is like.

Property flipping is when an investor purchases a home then remodels the home and then resells it at a higher price a short time later. For example, you buy a house that needs work for $200,000 in June, you renovate the kitchen and bathrooms, at a cost of $40,000 and then you sell the house three months later (the time it takes to remodel) for a price that is consistent with the market value. This is a legal business transaction and there are many in real estate that make a living flipping properties.

The practice of “flipping” or “wholesaling” real estate has been around for decades. It is more popular in booming markets, where profits are highest. The recent surge in property values has been kind to flippers. However, “flipping” always seems to draw controversy.

The word “flip” means to “turn over”. In real estate, that has come to mean reselling a property quickly, or “turning it over”. Flipping is an easy way to make big profits in a short period of time.

Flipping properties is a great way to make money; however, it takes some work and knowledge. It will take hard work and planning to be successful, but if you are willing to do the work needed, you can definitely be successful in this field of real estate investing.

Ethical property flipping is a perfectly legitimate real estate practice and can be a healthy source of investment. Ethical property flippers make money by investing in significant remodeling such as a roof, plumbing, electrical systems, central air-conditioning, energy efficient appliances, and landscape design. These are all substantial capital improvements. When a flipper makes these types of improvements to a bad looking house in a neighborhood, the fair market resale price will be well above the original purchase price. Profit is made by subtracting the cost of the house and the remodeling from the sales price. An ethical house flipper abides by state laws and professional real estate practices. Ethical property flipping can improve a  neighborhood.
 ”Ethical” flipping can encourage a revitalizing of a previously rundown neighborhood. A rundown house/area attracts the criminal element, which in turn drives out those who would improve the area. This allows for more criminal element, and becomes a vicious cycle. The restoration of a house or neighborhood creates jobs, particularly in construction. The newly remodeled homes will then attract new populations and businesses to a region, encouraging economic growth, plus the higher assessed value of the home brings in more property tax to the local government. This growth to the area reduces the criminal element.

Illegal flipping tend to destroy neighborhoods. These flippers do not follow the laws goverfning real estate. These illegal  flippers buy properties at a low cost, make little or no upgrades to the property and sell the property at a high price. Normally this happens in low income neighborhoods or distressed areas. Illegal flipping typically consists of some type of fraud. Typically the investor, appraiser and mortgage broker are involved. In the end the buyer pays too much for the house.

The impact of illegal property flipping can lead to foreclosures and the abandonment of properties. This leads to the decline of the neighborhood.  The impact that these practices have on neighborhoods is no different than other crimes. Houses end up abandoned, and the City has to  spend more money and resources to respond to other crimes associated with the declining neighborhood. Over time, illegal flipping contributes to an increasing pattern of property value decline. 

As a real estate flipper, take advantage of online  listing tools or contact a real estate agent directly to ask about the listing history on a perspective house. Where the sales price is markedly higher than the list price is cause for concern. Ask more questions and look harder at the appraisal and appraiser. This can save alot of time, money, and frustration.

Trust your instincts: If it doesn’t feel right, don’t do it. If you have already paid a down payment, and then learn that there are significant problems with the house, you should check with a real estate attorney to find out if you can cancel the contract and get your money back. In the end it is even better to lose your down payment than to buy an over priced home or a property in poor condition that could ruin your credit and finances.

Do your homework on the property and take a good hard look at your budget for remodeling. Only you can determine if property flipping is right for you.

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This entry was posted on Tuesday, April 29th, 2008 at 2:38 pm and is filed under flipping. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.