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.
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