Legal Definitions - flipping

"Flipping" in real estate refers to the practice of purchasing a property with the intention of quickly reselling it for a profit. This strategy can be legitimate when value is added through improvements, or it can be illegal when the intent is to inflate the price fraudulently without significant enhancements.

When done legitimately, flipping involves an investor buying an undervalued property, making substantial renovations or repairs to increase its market appeal and value, and then selling it relatively quickly for a higher price. The profit comes from the added value created by the improvements and the efficiency of the renovation process.

Illegal property flipping, on the other hand, involves purchasing a property and then reselling it rapidly at a significantly inflated price, often with little to no actual improvements. This typically involves deceptive practices, such as using fraudulent appraisals, misrepresenting the property's condition, or colluding with others to artificially inflate the sale price, often to defraud lenders or unsuspecting buyers. The goal is to generate a quick, substantial profit based on a superficial price increase rather than genuine added value.

• Example 1 (Legitimate Flipping):

  An experienced contractor purchases a neglected, outdated bungalow in a desirable neighborhood for $300,000. Over four months, they completely gut and remodel the kitchen and bathrooms, replace the aging HVAC system, install new energy-efficient windows, and refresh the landscaping. After investing $75,000 in these significant upgrades, they list the house for $450,000 and quickly receive an offer, making a profit based on the substantial value added.

  This illustrates legitimate flipping because the contractor made significant, value-adding improvements that genuinely enhanced the property's appeal and market worth, justifying the higher resale price.

• Example 2 (Illegal Flipping - Fraudulent Appraisal):

  A real estate agent and an appraiser conspire to purchase a commercial storefront for $200,000. Without making any substantial renovations, they arrange for the appraiser to create a falsified report valuing the property at $500,000. They then quickly sell the property to an unsuspecting buyer who secures a mortgage based on this inflated appraisal, allowing the agent and appraiser to pocket the $300,000 difference.

  This is an example of illegal flipping because the property's price was artificially inflated through a fraudulent appraisal, not through genuine improvements. The intent was to deceive a lender and buyer to profit from the inflated value, which constitutes mortgage fraud.

• Example 3 (Illegal Flipping - Misrepresentation of Condition):

  An investor buys a multi-unit apartment building for $1.2 million, knowing it has severe foundational issues, a leaking roof, and outdated electrical wiring that would cost hundreds of thousands to repair. Instead of fixing these critical problems, they apply a fresh coat of paint, stage the units with new furniture, and quickly relist the property for $1.8 million. They intentionally omit any mention of the major structural and system defects in disclosures to potential buyers, hoping to sell it quickly before the issues are discovered during due diligence.

  This demonstrates illegal flipping because the seller made only superficial cosmetic changes while actively concealing major, costly defects. By misrepresenting the property's true condition and value to achieve a quick, inflated profit, they engaged in a deceptive and illegal practice.