Flipping Real Estate - Illegal?
I found great interest in the question posed by Coleman Beeler of Fort Dix, NJ in the October 2003 issue of "Money" magazine.
Coleman asked, "Is flipping real estate illegal?"
Here's "Money's" response:
Regulations have recently been enacted by the Federal Housing Authority (FHA) to prevent the activity known as predatory flipping, which typically occurs in low-income urban centers. (The FHA insures 15% of all mortgages and virtually all mortgages to low-income buyers.)
Predatory flipping occurs when newly purchased run-down houses are appraised at well above fair market value and resold for high profits, sometimes to fictitious or ineligible buyers (persons claiming inflated incomes or fake credit ratings).
Although the seller makes a profit, the property is often subject to foreclosure when the buyer can't make the mortgage payments or simply doesn't exist. In that case, insurers like the FHA must cover the bank's losses when it is forced to sell the property.
As of June 2, the FHA no longer provides insurance for houses resold within 90 days of purchase. New FHA rules dictate that only individuals who are named on the official record of ownership, such as deed or title can legally sell the property. And any house sold again within 91 days to six months requires a new appraisal.
No, but you are guilty of reductio ad absurdum!
A correct use of Reductio ad absurdum, would be:
– If that's so, then I'm a monkey's uncle.
– If that is true, then pigs can fly.
– If he did that, then I'm the Shah of Persia.
I don't think my circumstance was absurd. I still want to know if that would make me a victim or not
If you took that TV to an "unbiased" TV appraiser, paid him to do his job, and HE told you that it was worth $1000, then you bought it based on his "unbiased opinion" I would say that you were in fact victimized. (And the TV appraiser would get a kickback of $200 from the guy that sold you the TV).
THAT is often the trademark of Predatory flipping.
I think it happens less these days than it did 10 and 20 years ago, but it still happens.
That said, when someone buys a house they know how much the monthly payments are going to be and they should know what they can and can not afford (as should the underwriters.). I think it's a poor excuse for a foreclosure, but it happens.
But, as we all know, value is far less objective than an appraiser would make you think.
If I'm unsophisticated, and I buy a home that has had its price artificially inflated, I'm a victim. And likely, I'm soon out of a home.
Not true. If you buy a house, and don't make the payments, your not a victim...possibly ignorant, but not a victim. If you buy a house above market value, make the payments like your supposed to, your still not a victim.
I agree that it's unethical and illegal, but you have to hold someone accountable for agreeing to make payments no matter what the initial cost is.
This is an age-old question, and your view is one that legislators and courts [i][b]formerly[/b][/i] held. In one of the landmark cases on the regulation of ghetto merchants (rent to own places, etc.), the dissent rightly pointed out that regardless of the sharp terms on which a washer and dryer were sold, the low-income buyer may be taking in neighbors laundry and [i][b]making[/b][/i] money on the deal.
For the court's majority, though, that reason was deemed outweighed by public policy of putting a stop to the crooks.
And so I call these people victims not becuase they would be considered such in a libertarian atmosphere, but because our laws now demand a higher standard from the sellers. Under the law as it now stands, the buyer is a victim.
It has less to do with whether the buyer makes timely payments and more to do with the options remaining to the buyer if he can't. Where the buyer has been ripped off on the selling price ... the options are gone.
Fla:
So if I go to Bestbuy and buy a TV for $1000, and then go to Circuit City and see the same TV on sale for $300 I am a victim?
No, but you are guilty of reductio ad absurdum!
If you took that TV to an "unbiased" TV appraiser, paid him to do his job, and HE told you that it was worth $1000, then you bought it based on his "unbiased opinion" I would say that you were in fact victimized. (And the TV appraiser would get a kickback of $200 from the guy that sold you the TV).
THAT is often the trademark of Predatory flipping.
I think it happens less these days than it did 10 and 20 years ago, but it still happens.
That said, when someone buys a house they know how much the monthly payments are going to be and they should know what they can and can not afford (as should the underwriters.). I think it's a poor excuse for a foreclosure, but it happens.
But, as we all know, value is far less objective than an appraiser would make you think.
That is an interesting reponse. But still as long as people realize that flipping is not illegal.
To quote others on this site:
"There are no laws or pending laws that restricting your ability to resell a property. .
HUD regulations, however, require that the seller must be the title holder of record for at least 90 days before a buyer can use an FHA loan to finance the purchase.
If the title has been "seasoned" less than 90 days, FHA is barred from making a loan on the property. If the title has been "seasoned" more than 90 days but less than one year, then an FHA loan is possible but the seller will have to justify his profit. After one year of title seasoning, all the FHA lending restrictions are removed.
The FHA loan moratorium is only 90 days. There is no anti-flip law. You are free to legally flip your property with only one day on title.
The regulations only apply to FHA loans."
Thanks for the post 64Ford,
The Solutions Kid
I didn't read through everyone's comments, but I was wondering if this effects one's ablity to "buy and sell" using an assignment (i.e. Kevin and or assigns...) Is that what this article is talking about or is it somtething totally different? I don't know because I'm a new guy and no one has ever explained the diferences to me (if there are any). just thought I would ask!!!
Having previously worked for 6 years in the mortgage business, I am still confused that this could really be an issue with VA and FHA loans. Any loan I did had to meet strict VA / FHA guidelines. Our head Underwriter had to be an FHA / VA approved underwriter! She would never approve a loan if the appraisal values were out of line!!!
I think Sheakespear was right all along
" Much to do about nothing"
Rand
I think it depends on where you are. There are major cities that are hotbeds of this sort of nefarious activity. Various parties collude to transfer a property or group of properties several times, with values being inflated each time. At the end of the day, some schmuck is sold the property at too high a price, he or she doesn't make the payments, and the FHA/VA/FannieMae/FreddieMac is the proud owner of a $50k property they hold $100k worth of paper on. The other dollars are gone ... and it's time for the FBI!
There needs to be a name like "daisy chaining" for this sort of thing ... legitimate "flipping" is being tarnished.
Of course, if you "flip" legally, and everyone else thinks it's illegal, they won't compete with you! But you won't be able to discuss your work at cocktail parties.
flacorp, In response to your comment regarding my post ......
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by flacorps on Monday, October 13
I think it depends on where you are. There are major cities that are hotbeds of this sort of nefarious activity. Various parties collude to transfer a property or group of properties several times, with values being inflated each time. At the end of the day, some schmuck is sold the property at too high a price, he or she doesn't make the payments, and the FHA/VA/FannieMae/FreddieMac is the proud owner of a $50k property they hold $100k worth of paper on. The other dollars are gone ... and it's time for the FBI!
There needs to be a name like "daisy chaining" for this sort of thing ... legitimate "flipping" is being tarnished.
Of course, if you "flip" legally, and everyone else thinks it's illegal, they won't compete with you! But you won't be able to discuss your work at cocktail parties.
___________________________________
flacorp.....
I worked in the Sacramento area and once again I have to say that the "FHA/ VA Approved" underwriters have to answer for the approval on the appraised values and loan package. I don't say that this isn't happening, but underwriters don't like to lose their "approved standing" and not likely to just push through loans without the package being a solid deal.
I know things slip by sometimes but this seems to be made out like its an epidemic.
I think what really drives the laws etc. is, that it just makes for good press for certain politicians.......
thanks,
Rand
Just wanted to reiterate that the statement made by 64Ford is correct as it pertains to FHA insured loans only. Majority of loans are not fha insured though. Fannie and Freddie Mac lenders preferred underwriting guidelines require a 12 month seasoning of title. There are lenders who do not sell their notes to Fannie nor Freddie who will finance after a six month seasoning of title.
It's important to note that in this article it's talking about "PREDATORY flipping" based on INFLATED appraisals. That's buying a $100K house (FMV $100K) Talking an appraiser into appraising it for $140K, and then convincing someone that they should pay $140K for a $100K house. That is PREDATORY flipping.
On the other hand, when you find a $100K house that has a seller in a bind because he no one will buy his house and you can do him a favor and buy it for $60K, get an unbaised appraisal of $100K and sell it for $100K, then that is both ethical and legal.
Is HUD really concerned about the home owner from "preditory" flipping practices or are they more concerned about trying to cut down on those people who are using schemes which leaves HUD holding the bag. Really now, how much can flipping be impacting the overall real estate market? It can't possible be that much.
From what I know, HUD only insures for about 85% of the appraised value and the lender will get paid regardless. From this I have to assume that the lender and borrower would have to be in collusion in order to pull this off, along with a phony appraisal.
So, the only thing I can see gained from all of this is that HUD or FHA are buying time to verify who these wrongdoers might be by requiring accurate RE appraisals.
If I'm unsophisticated, and I buy a home that has had its price artificially inflated, I'm a victim. And likely, I'm soon out of a home. HUD is left holding the bag, and has less money to guarantee other loans to other deserving homeowners.
Some intermediate borrowers will be in collusion during the predatory flipping process. The last one probably won't be. He's a patsy. The appraiser may not catch the fact that it's going on. Especially if there's more than one group operating in the neighborhood.
Miami has had problems with this in new condo buildings at the higher end. Sell 'em around in circles and try to fleece some South Americans who will buy the property sight unseen. Fortunately, Miami keeps building more and bigger facilities for their federal courts, federal prosecutors, and a nice big federal lockup.
If I'm unsophisticated, and I buy a home that has had its price artificially inflated, I'm a victim. And likely, I'm soon out of a home.
Not true. If you buy a house, and don't make the payments, your not a victim...possibly ignorant, but not a victim. If you buy a house above market value, make the payments like your supposed to, your still not a victim.
I agree that it's unethical and illegal, but you have to hold someone accountable for agreeing to make payments no matter what the initial cost is.
I didn't read through everyone's comments, but I was wondering if this effects one's ablity to "buy and sell" using an assignment (i.e. Kevin and or assigns...) Is that what this article is talking about or is it somtething totally different? I don't know because I'm a new guy and no one has ever explained the diferences to me (if there are any). just thought I would ask!!!
Doesn't everyone get that the buck stops with the "FHA/VA approved Underwriters". They are not in the habit of jeopardizing their status with FHA/VA
They approve or disapprove the loan based on borrowers application and its verification through their loan processor and based on the FHA/VA approved appraisers... Period.
Its not a perfect world so stuff happens.. but there are stop gaps already in play to make sure values are not way out of line...
my last .02-cents
Rand
In my experience, reductio ad absurdum is taking someone's argument to an illogical extreme. For instance, if someone supports lower taxes to improve the economy you might say "let's make 'em zero and watch the economy really take off!"
If BB and CC are $700 apart on a TV price, one can assume that since neither is in the business of excessive markups, that one of the prices is due to an honest mistake or that the lower-priced one is scratch'n'dent, open box, etc. Therefore the buyer isn't a victim.
I don't understand why its so hard to fathom that if market participants have been colluding to create an apparent rise in values where none actually exists, the innocent purchaser who comes along and buys into it isn't a victim. He is. Where the previous transactions aren't arm's length with some value added at each stop, it's "the long con".
Now if the first buyer cleans up the title, the second buyer rehabs the property, the third buyer buys wholesale and sells retail ... there is of course no crime. But if it's just flipped around in a circle by people provably conspiring ... somebody ought to go to Eglin.