When is Flipping Illegal?  
by John Occhi REALTOR  
Realtor Consultant to Foreclosure Investors  

The press can be such a pain in the rear end - all they want to do is sell newspapers and commercials on the networks.  This is why they are constantly on the look-out for any story they can twist and get people excited about nothing.  In my opinion, this is how they are helping to ruin the real estate perception - especially the perception of the big bad ugly real estate investors.

The press is constantly looking to report negative news about real estate.  It seems like they have found their own niche market lately whenever they report on ‘flipping' and how they so cleverly associate it with real estate fraud.  Today not only does a large percentage of the public believe that ‘flipping' is illegal bus so do many professional real estate agents, brokers and mortgage lenders.  There are even escrow companies and Title companies that will not have anything to do with a "flip"!

Flipping is technically nothing more than a double close.  An investor uses his resources to locate a deal below fair market value and then sells for close to the current fair market value of the real estate for sale.  A "flipping" investor is nothing more than a middle man.

A double-close is just that - it is two closes that happen back-to-back when the cash needed to close the second escrow actually is used to pay the first escrow - leaving a profit for the ‘flipping' investor of the real estate.  The escrows are both conducted in escrow and the Title Company insures the transaction as being a clean one.

There is nothing illegal about flipping - it has been going on for well over 100 years!

So Why all the Bad Press?

Because the press can find a grain of truth and run with it - blowing everything out of proportion and can easily manipulate the truth to fit it's own agenda - sell more newspapers and network advertising!

What is referred to as ‘flipping' by the press is actually mortgage fraud and has absolutely nothing to do with actual flipping of properties.  In the illegal scheme what happens is that an unscrupulous investor will buy a run down undesirable property and make some sub-standard shoddy repairs.  This scenario plays itself out over-and-over again in low-income and minority neighborhoods.  Once the second-rate work is done, the corrupt investor will locate an unsophisticated buyer to pay more for the home than what it is worth.

On top of it all there is often a conspiracy between the reckless investor, the mortgage lender and the appraiser.  Fraudulent documents are generally created and a bogus appraisal is generated and submitted. 

This leaves the borrower with an inferior home that he owes more on than what it is worth.  On top of it all, loan amounts are often elevated to include bogus closing costs and loan fees.

Many of these loans are federally insured - either through the FHA or VA.  So when the homeowner defaults the watchful eyes of the government are connecting the dots and easily identifying the culprits - as they should.  Today, the federal prisons are filing up rapidly with convicted mortgage fraud felons. 

So What is the Deal with "Seasoning"?

Many mortgage lenders are gun shy because they have been victimized by this type of predatory behavior - often time with losses in the millions of dollars.  Today, many have a policy that will prevent a buyers loan from funding if the property being purchased has been owned by the seller for less than 6 months. This is their way of protecting themselves from what might end up being a ‘fishy' deal.

Lender Policy is Not the Law

Just because a lender has a policy against certain issues and incorporate them into their underwriting  guidelines DOES NOT MAKE IT ILLEGAL!  It is just an internal policy that dictates how this lender wants to conduct their business...that is unless if you read the paper or watch network news.

Hoping to make your California Real Estate Investment...
A Pleasant and Profitable Experience,

John Occhi, Hemet CA REALTOR 

Realtor Consultant to Foreclosure Investors
Mission Grove Realty