Proceed With Caution
When 'Flipping' Property

Question: I see tons of literature on "flipping" property. But I have also noticed that some people have gone to court for flipping scams. Is there an ethical way to flip property? Are there any laws dealing with flipping?

-- Derrick, Houston

Derrick: I am glad you asked these questions. Flipping is the hottest word in the real-estate field today. It essentially means tying up a property, then quickly reselling it for a profit, often before you actually take ownership. The key is finding a seller willing and able to sell you a property for below (hopefully far below) market price. If you can find such a rare specimen, then it is only reasonable that in today's hot market you should be able to find someone else who is willing to pay full price. You transfer your right-to-purchase to the new buyer and pocket the sometimes-sizeable difference. Any good real-estate agent can show you the mechanics.

The problem, of course, is finding a seller foolish enough to sell for a below-market price at a time when there are multiple offers on homes in many markets. A few years ago, before sellers realized the market was hot, you might find a few who were willing to take a lower price. But today, this is like looking for a needle in a haystack.

Legal and ethical problems usually occur in two areas. First, when a flipper uses undue influence to coerce a seller to take a lower price. This can happen, for example, when the seller is older or perhaps doesn't speak English fluently and is unable to fully comprehend what the real prices are. Second, legal problems can occur when flippers, frustrated at not being able to find a gullible seller, manufacture one. They may pay full price for the property, then jack up the price to a level well above market and, with the aid of a friendly lender/appraiser, sell to a buyer who doesn't know any better.

As I said, both of these practices are unethical and are possibly illegal. The second method got widespread attention in recent months when some properties were over-financed using government-insured loans and the unsuspecting buyers, often poor, minority families, discovered upon moving in that they couldn't handle the payments. They were forced to let the properties go into foreclosure. The government had to take the properties back, and wasn't at all happy about that.

In short, flipping has both a good side and a dark side. As you suggest, the dark side is starting to get out of control. As an aside, when a major publisher recently asked me to write a book on how everyone can flip properties, I turned the offer down. As you suggest, there is just too much hanky-panky going on out there.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent books are "How to Get Started in Real Estate Investing" and "How to Buy a Home When You Can't Afford It" (McGraw-Hill, 2002).

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