Property flipping, a trend that has people turning a quick profit on homes that may have been either abandoned or foreclosed on, in short, one man’s trash is the next investor’s treasure. The nature of home flipping has been glamorized on many popular television series and is definitely a profitable practice. In short property flipping works like this, an investor or client will purchase a home at a lower amount due to the amount of work it needs to become habitable. The purchaser will then resell the property at a higher price after renovations to gain a considerable profit than they originally invested, (based on current market value). But, is this actually legal?
Indeed, house flipping is both ethical and lawful, unfortunately many times house flipping can become a thorn in one’s side if property representations have been infringed upon. Under ideal circumstances when a property has been accurately represented including value assessment and condition of the home the purchaser will most likely achieve success. Unfortunately, our world is not full of do-gooders and truly honest people. This is why it is important to understand potential obstacles that can materialize.
Mortgage and fraudulent house flipping is an ever increasing industry that can seem attractive and lucrative. Freddiemac.com points out three emerging trends that could leave an investor demanding for more than closure of a property sale.
- Fraud for profit
- Fraud for criminal enterprise
- Fraud for housing or property
So when exactly does property flipping become fraudulent? Faulty appraisals, purely cosmetic renovations and inflated pricing begin the downward spiral into legal problems and never-ending headaches. What appears to be beauty in the eye of the beholder is actually a scam of large proportions. Cosmetic renovations will disguise major problems that could cost upwards of thousands of dollars or worse depreciate the actual value of the home. It is a multi-sided issue that will be recognized as a violation to housing code standards. The problem many have run into after purchasing a fixer upper is being forced to halt potential renovations in order to deal with situations that need to be properly re-constructed, inspected and approved. Not all situations will be fraudulent but it is imperative to ask the right questions and research different avenues if you are new to this type of business.
What should you consider before purchasing a fixer upper?
- Hire your own personal home inspection company, do not rely on a referral unless the source is trusted
- Compare recent sales in neighborhood to ensure maximum profit
- Complete appropriate repairs accurately in the time necessary for profit
- Is the property a prime location for buyers and sellers
- Will you need to invest in professionals to complete repairs
Freddiemac.com reports that one if the latest developments in illegal flipping occurs in the cash-out purchase. What that means is requirements related to asking price and cash back offers will be offered to the buyer only during closing and documents will include addendums to the purchase contract that are unnecessary. Inflated sales pricing can occur when home improvements are exaggerated to make the value of a home seem higher. This example from Freddiemac.com illustrates this idea:
“For example, the seller lists the property for $150,000.” “The buyer/borrower offers $199,000.” “At closing, the seller will receive net proceeds on the $150,000 asking price and the surplus of $49,000 from the loan amount is disbursed to the buyer/borrower at or through closing.”
Cash out fraud can happen anywhere but, “There are two real estate market environments where cash-out purchase fraud is most prevalent,” (FreddieMac.com, 2016).
- Markets where property values have experienced rapid appreciation.
Participants that engage in fraudulent flipping are using the actual property values to increase their profits before the lender can detect the false information
- Properties that have been on the market for an extended period of time which motivated sellers are likely to accept any offer rather than no offer
Beware of modified sales contract that can reflect false information regarding the amount owed by the original borrower.
- Fabricated sources of capital
- Occupancy fraud
In order to proceed with a correct and true sale of a home, be sure to research companies involved. Invest in legal help so that in the event of a fraudulent sale you can ensure you are can be represented and free of liability. Above all, ask questions and cover all bases to enjoy the process of flipping a home.
We hope that this material has provided you with valuable information, and if you are interested in securing accurate documentation or know someone upside down in a fraudulent house flip. You can contact our firm at:
Dodson Legal Group
14850 Montfort Dr., Ste. 165,
Dallas, TX 75254
Toll Free: 800-769-9249