The Flip Side of Real Estate

Q: Friends tell me that flipping real estate is a fast, easy way to make money in real estate. What is flipping and how do I get involved?

A: In the broadest and most positive sense of the word, flipping refers to buying and profitably selling real estate in a short period of time. Historically, and in the view of the Internal Revenue Service (IRS), this activity is properly defined as real estate dealing.

Properly understood and legitimately pursued, there is nothing illegal or tainted about buying wholesale anything of value for resale at a markup, or ‘retail.’ It’s the American (Capitalist) Way! And the application of this business strategy to real estate is obvious.

Real estate dealers seek out under valued real estate, including properties of every description, from single family homes to apartment buildings, strip shopping centers, or even vacant land. The defining characteristic is: can the property be resold readily at a profit? Should the predicted resale horizon stretch to many months or years, the property might be more properly viewed as a speculative investment rather than a dealer opportunity.

Similarly, in the event the property requires substantial improvement to accomplish a profitable resale, the activity is better understood as a rehab or conversion. A rehabber who buys a distressed property or foreclosure in need of major repairs, and in fact performs that work prior to resale–even in a relatively short period of time–is not dealing as such. The rehabber is restoring value through his efforts, profiting as much through astute rehabilitation of the property as from the initial benefit of ‘buying right.’

The professional rehabber is often confused with dealers and, merely due to his very efficiency in performing the necessary rehabilitation in a short period of time, sometimes accused of ‘flipping.’ This confusion is not to be taken lightly and, if not corrected, may lead to lost sales and profits.

The problem arises from the fact the mortgage industry is presently experiencing a rising tide of fraudulent mortgage applications instigated by unethical real estate dealers, acting in collusion with dishonest mortgage brokers and appraisers. Working together, these opportunists contrive to inflate the market value of the prospective lender’s collateral in order to sell at often an extraordinary profit to a ‘straw buyer’ or, even worse, an unsuspecting first time home buyer.

One of the danger signs signaling a potential attempt to execute a fraudulent real estate sale is short term ownership on the part of the seller. Perfectly executed, the dealer’s purchase and resale (the ‘flip’) are accomplished within days or weeks; examples are cited of flips completed within hours! The result for the lender is a new loan made to a borrower with little capacity or intention to pay, on a piece of property worth substantially less then the presumed market value. The new loan is headed toward default and foreclosure.

This is a situation where nomenclature is everything. Whatever the word ‘flipping’ may once have meant for those promoting legitimate real estate dealing, it may be time to pick a more appropriate or accurate term. No matter the cachet attached to the term ‘flipping,’ the implication one is a street smart wheeler dealer in real estate, neither the legitimate dealer nor the professional rehabber wants to be associated today with flipping.

As with most business enterprises, profitable opportunities abound for those who play by the rules. Both legitimate dealers and responsible rehabbers work to buy advantageously–at ‘wholesale,’ as it were–and aspire to no more than to sell at ‘retail,’ the Fair Market Value.