Real estate flipping: lucrative and legal

"Flipping can be a very lucrative pursuit. We are not talking about flapjacks here, but real estate," says Judon Fambrough, attorney with the Real Estate Center at Texas A&M University.

Flipping refers to the practice of finding a property that is for sale - usually priced below-market - and then selling it soon after it is bought for a quick profit.

The most cost-effective way to flip property does not involve closing and taking possession of the property. Those who use flipping as a way to make money often assign or sell their sales contract to another party for cash or trade. An assignment is a transfer or grant of all the seller's rights, title and interest in property or in a contract.

Fambrough provided this illustration: Jones is well-paid executive who owns a second home on a lake. But when the firm she works for merges with another, she is suddenly without a job. Jones decides the smart thing to do is to sell her lakefront home and use the money to live on while she searches for another job. She prices the property at $200,000, which is less than market value, for a quick sale.

Brown learns that she is selling and makes an offer. He signs a sales contract agreeing to purchase the property at $200,000. Actually, Brown has no intention of fishing, boating or even living on the property. He hopes that Smith, an investor who specializes in recreational properties, will take the property off his hands.

Sure enough, Smith is very interested in the property. In exchange for assigning the sales contract to him, Smith gives Brown $20,000. Smith, not Brown, purchases the lakefront property.

"This type of flipping is smart," says Fambrough, "because the person who sells the contract pays no closing costs."

As a general rule, Texas views all contracts as assignable, just as all property is transferable. But there are a few limitations. Here are some points to be aware of.

• Contracts providing extension of credit, such as owner-financed transactions, cannot be assigned because the seller is depending on a particular buyer's creditworthiness. Likewise, contracts that depend on character, skill and confidence cannot be assigned.
• Any contract may be made assignable by its terms. An owner-financed sales contract, which is otherwise nonassignable, can be assigned if the language in the agreement so states.
• Contracts can be made nonassignable by their terms too. Language in a contract that forbids assignments is strictly enforced. An attempt to assign the contract renders the assignment void, the underlying contract terminates and the person attempting the assignment forfeits all rights in the contract.
• Financing options may be limited. The Department of Housing and Urban Development issued a ruling limiting, to some degree, the financing of flipped property. If the seller of a single-family residence purchased the house within the past 90 days, the buyer is usually ineligible for Federal Housing Administration (FHA) financing.