Flipping houses is also regularly known wholesaling houses. Simply put, it means acquiring a property at a lower price and selling it for a higher price to make a profit.
Just like any other business, flipping houses is just buying low, then selling high. Since real estate transactions can be complicated, the real estate investing business is misunderstood. Of course, some real estate investors have clearly broken the law and ended up in trouble.
So is it legal to flip houses?
First, do not take this article as legal advice; you must always consult your attorney. Real estate investors who get into trouble break the law one way or the other.
First you must understand what flipping houses means. Although the definition above means buying low, then selling high, the details of the transaction can vary, leading to misunderstanding. Let us explore the legality of each method.
1) Contract assignment
Contract assignment means you identify a house below market value, put it under contract, then assign that contract for a fee to a wholesale real estate investor or buyer.
In this case you simply you simply sell your right to buy the house to the wholesale buyer but you do not actually sell the house.
You get an assignment fee at closing.
This is the simplest method of flipping houses. Note that you never own the property at any time during the transaction, and you never represent anyone in the transaction. You simply put the property under contract, then sell your right in the contract.
2) Simultaneous closing
In simultaneous closing, you put a house under contract, get a wholesale buyer, buy it, and then sell the house to the wholesale buyer.
Both transactions occur on the same closing table, one where you buy and one where you sell. So in reality you own the house shortly before you sell it.
There are two sets of closing costs and you walk home with the difference between your buying price and the selling price.
3) Buying, fixing then selling
Even though flipping houses is not typically described this way, some people buy a house, fix it then sell it for profit.
There is nothing wrong with this, just buying low, improving the value then selling high.
What can go wrong in flipping houses?
1) You conduct the transaction on behalf of a client with no license
Flipping houses never involves representing a third party in the transaction. You either sell your right to buy the property, or you buy the property, and then sell it for a profit.
A real estate agent conducts the transaction on behalf of a buyer or seller and walks away with a commission. You must have a license for this.
2) Mortgage fraud
Of course it is against the law to commit mortgage fraud. No matter what type of transaction is involved this will certainly get you into trouble.
3) Not representing facts honestly
When buying houses from motivated sellers, it is crucial to be very clear and specifically let them know exactly how you are handling the sale. All they need to know is how much they are getting as per your agreement and when the deal will be closed.
I like to go a step further and let them know exactly how I�m handling the transaction, so if there is any delay, they understand the reason why.
As long as you are clear and never misrepresent anything, then you do not have anything to worry about.
Simon Macharia invests in real estate, flipping houses in Dallas Texas. He runs his business from a real estate investing website that also automates his business.