There has been a recent media infatuation with the practice of “flipping houses.” This practice, characterized by purchasing real property cheap, fixing it up, and then selling it for a handsome profit, looks like an appealing opportunity to make some quick money with a minimal investment of time and money. However, you are still engaging in a real estate transaction, and this entails all of the usual legal risks and requirements. Therefore, you shouldn’t get into the flipping business without first engaging the counsel of a law firm like Adam Leitman Bailey, P.C., that is experienced in assisting clients with the sale of real estate. Their experience can help you avoid legal pitfalls like the ones below.
One of the most glaring problems that can arise when flipping houses is the anti-flipping rule enforced by the Federal Housing Administration (“FHA”). This rule is motivated by the prevalence of predatory flipping practices wherein sellers and mortgage lenders collude to purchase a house and then artificially inflate its price upon resale, thereby taking advantage of buyers. The FHA seeks to minimize the frequency of such transactions by prohibiting the resale of any house purchased with an FHA loan within 90 days of its original purchase. This means that if you purchase your flip with an FHA-insured loan, then you can’t sell it for at least 90 days.
Moreover, if you want to flip a house purchased with an FHA loan between 91 and 180 days of purchase for a price that is more than 100 percent higher than the price you paid for it, then you will need to obtain additional documentation verifying that the increase in value is genuine and not inflated, and that documentation will need to be approved by the FHA.
Given the above, you may be better off not getting into flipping if you’re going to be using FHA-insured loans to purchase the property.
Very few people, flippers or traditional home buyers, can afford to pay for a house out of pocket. For this reason, you will likely be taking out a mortgage loan to buy your flip with the intention of paying off the loan with the proceeds of the home’s sale. In turn, the person buying the house from you will be taking out their own mortgage to finance their purchase of the property. This creates ample opportunities for you to become the victim of some form of mortgage loan scam.
These scams can take many forms. Never just assume that anyone is being truthful and acting in good faith. Ask for documentation and verify the claims of the buyer, the buyer’s lender, and your own lender. Get referrals from other lenders whom you trust, confirm that all mortgage professionals have valid licenses, and avoid falling for common mortgage scams and gimmicks that could result in your financial ruin. You should have your real estate lawyer review every document before you sign it, and ask them whether a particular mortgage offer is too good to be true – if it’s a scam, they’ve likely seen it before.
Even though you just want to own the house for a short time before turning around and selling it for a profit, you still need to acquire clear and valid title in order to do so. Therefore, its important not to skimp on the title search or skip out on acquiring title insurance. Both of these measures can save you the hassle of buying and fixing up a flip, only to discover that the seller you purchased from didn’t have any title transfer and that you, therefore, have no legal right to sell the property. You can either hire a title company to conduct the search for you, or you can have this work done by your lawyer.
Flipping can indeed be an excellent means of fast money, but it can also a be a trap for the unwary. Don’t let legal technicalities cause you to fall into a money pit – obtain the assistance of experience legal counsel and do your homework before becoming a flipper!