Legal Issues In Flipping Houses

Published: 21st June 2010
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Most people refer to flipping houses as wholesaling houses. It simply means acquiring a property at a lower price and selling it for a higher price to make a profit.



Flipping houses involves buying low, then selling high, just like any other business. The business of real estate investing gets misunderstood due to the fact that transactions in real estate can get complicated. And of course, some real estate investors have not been honest, hence ended up in trouble.



So is it illegal to flip houses?



First, do not take this article as legal advice; you must always consult your attorney. Real estate investors who get into legal trouble usually break the law one way or the other.



First, what does flipping houses mean?. 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, what you sell your right to buy the house, but you do not actually sell the house.



You go home with an assignment fee at closing.



This is the simplest method of flipping houses. Note that you do not represent anyone, or even own the property at any time during the transaction. You simply put the property under contract, then sell your right in the contract.



2) Simultaneous closing

Simultaneous closing involves putting the house under contract, identifying a wholesale buyer, buying it, and then selling the house to the buyer.



Both transactions occur on the same closing table, one where you buy and one where you sell. So you just own the house for a few minutes 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 does not typically fit this description, 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 represent a third party without a 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 to do 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 real estate investing business from a real estate investing website from http://www.Realestateinvestorswebsites.Net

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