Flipping

For other uses, see Flip (disambiguation).

Not to be confused with Flippin (disambiguation).

Flipping is a term used primarily in the United States to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. Though flipping can apply to any asset, the term is most often applied to real estate and initial public offerings.

The term "flipping" is frequently used both as a descriptive term for schemes involving market manipulation and other illegal conduct and as a derogatory term for legal real estate investing strategies that are perceived by some to be unethical or socially destructive. The latter usage is typically contested by those who believe the strategies in question are ethical and socially beneficial or neutral.

In the United Kingdom the term is used to describe a technique whereby Members of Parliament were found to be switching their second home between several houses, which had the effect of allowing them to maximize their taxpayer funded allowances.^[1]

Types of flipping

Assign a Contract with No Risk Flipping

Profits are gained by obtaining a contract to purchase from the seller and then selling the house for more than the purchase price to another party prior to closing. The contract is assigned and the flipper keeps the difference in price. The contract usually includes the right to access the property and an "Escape Clause" allowing cancellation.

In many cases, if a second buyer is not found prior to the closing date, the flipper cancels the contract relying on the contract language to allow return of their escrow. Because this practice requires little or no money to be secured in escrow, (which is refundable under contract terms) and the flipper never intends to actually purchase the property; this practice is often advertised as "No Money and No Risk" by small and large Real Estate Coaching Companies.

This practice sometimes uses fraudulent misrepresentations in obtaining the contract as there is often no benefit to the seller. In order to obtain said contract, the flipper must fabricate a scenario the seller will accept as to the terms and conditions in the contract. Sellers would also have a hard time determining anything out of the ordinary had occurred.

Multiple investor flipping

Under the multiple investor flip, one investor purchases a property at below-market value, assigns or sells it quickly to a second investor, who subsequently sells it to the final consumer, closer to market value.

Real estate flipping

Profits from flipping real estate come from either buying low and selling high (often in a rapidly-rising market), or buying a house that needs repair and fixing it up before reselling.

Under the "fix and flip" scenario, an investor or flipper will purchase a house at a relatively low price (often deeply discounted from the house's market value). The discount may be due to the house's condition (e.g., the house needs major renovations and/or repairs) or due to the owner(s) needing to sell a house quickly (e.g., relocation, divorce, pending foreclosure). The investor will (usually) then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price (closer to market value).

Website flipping

Website flipping is not unlike house flipping in real estate and is becoming more and more popular as savvy investors look for profitable markets such as e-business, where margins are traditionally very high. The general idea is to buy a website below market value, and sell it for more than you originally paid. This strategy can be done in the short, medium and long-term and usually involves a period of adding value. Be it through further marketing, optimisation of current strategies, monetization or a combination of each - these are all important parts of the strategy.^[2]

Website flipping refers to the process of creating a website based upon any service or a group of services. The service provider can be some one who is a freelancer or who can actually do the actual work. The seller gets the money from the buyer and then transfers the domain of the website to the buyer after receiving payment. In this way, one can own a website easily as well as the seller can earn well with just 2-3 hours of work.

Second home flipping

In the UK, Members of Parliament are given an allowance to maintain an extra home in London allowing them to live closer to the Houses of Parliament during the working week. Certain costs for this second home can be claimed and are thus partly funded by the taxpayer. Subsequently a MP can nominate any of their properties as the second home, called "flipping", and by nominating each as a second home can obtain further allowances. In some cases, MPs can simultaneously declare one home as their primary residence (for tax purposes) and as their second residence (for expense purposes). Following publication of the MPs expenses scandal on May 15, 2009 the practice ended.^[3]

Effects

Bubbles

Flipping bubbles have historically ended in disaster, such as during the Florida land boom of the 1920s.^[4]

In the 2000s, relaxed federal borrowing standards (which included the abilities for a subprime borrower to receive a loan, and for a borrower to purchase a home with little or no money down) may have led directly to a boom in demand for houses, thereby affecting the supply. Since it was easier to borrow, many investors snapped up investment homes without having to put money down. Additionally, since so many investors were purchasing homes, this left even fewer homes available to be purchased by owner-occupants. Since the ones that were placed back on the market by flippers were priced higher than before the flip, buyers again had even less money to put down. This resulted in a continuing circle until finally the bubble burst in 2008 and borrowing standards began returning to normal, leaving the housing market to bottom out before it begins to steadily correct itself.

Flipping was so popular in the United States that many DIY television programs like A&E's Flip This House detailed the process.

The other significant adverse financial aspect of the mentality of flipping is when interest rates increase. The resulting lack of sales, and major price depreciations (often far below) their previous increases, results in a flood of properties on the market at one time, not selling due to lack of buyers, causing a meltdown of a local market and potentially the economy as a whole.

Further information: United States housing bubble

Rejuvenation and gentrification

"Rational" flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood, but rising property values can also be seen in a negative light, termed gentrification.

Under the broken windows theory, an unkept house/area attracts a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on in a vicious downward cycle. The restoration creates jobs, particularly in construction, for locals and generates more sales (and sales taxes) to local vendors (initially those involved in selling construction materials). The newly remodelled homes will then attract new populations and businesses to a region, encouraging more economic development, plus the remodelled homes' higher assessed values brings more property tax revenues to local governments, allowing for more improvements to the area and driving out the criminal element.

As flipping occurs more frequently in a community, the total cost of living there can rise substantially, eventually forcing current residents to relocate, specifically less affluent younger and older people. On a small scale, flippers can cause distress and disturbance to their immediate neighbors by performing lengthy renovations. Flippers commonly have no interest in neighborhood integration,^{[citation needed]} which may cause tensions with long-term residents. During the real estate bubble, flipping and gentrification both have been linked to the mass migration of people to California, where high real estate prices and ample jobs attracted wealth seekers.^{[citation needed]} In response, many native Californians were forced to migrate to the less expensive areas of surrounding states such as Arizona, Nevada, Texas, Oregon and Washington.^{[citation needed]} This migration of Californians caused further gentrification in the areas that they had moved to en masse. Areas such as Phoenix, Arizona and Las Vegas which were once very inexpensive to live in prior to the real estate bubble are now quite expensive, although prices have dropped significantly since 2006.

Property values

After a renovation, the house itself will be in better condition and last longer, and can be sold at a higher price, thus increasing its property tax assessed value, plus increased sales for goods and services related to property improvement and the related increase in sales taxes. Neighbors can also benefit by having nicer homes in the neighborhood, thereby increasing their own home values.

Regulations

In 2006, the Department of Housing and Urban Development created regulations regarding predatory flipping within Federal Housing Administration (FHA) single-family mortgage insurance. The time requirement for owning a property was greater than 90 days between purchase and sale dates to qualify for FHA-insured mortgage financing.^[5] This requirement was greatly relaxed in January 2010, and the 90-day holding period was all but eliminated.^[6]

Illegal activity

Flipping can sometimes also be a criminal scheme. Illegal property flipping is a fraud-for-profit scheme whereby recently acquired real property is resold for a considerable profit with an artificially inflated value. The real property is resold within a short time frame, often after making only cosmetic improvements to the real property. Illegal property flipping often involves collusion between a real estate appraiser, a mortgage originator and a closing agent. The cooperation of a real estate appraiser is necessary since a false and artificially inflated appraisal report is required. The buyer (ultimate borrower) may or may not be aware of the situation. This type of fraud is one of the most costly for lenders because the loss is always large.

The following is an example of an illegal property flip: A buyer contracts to purchase a property in his name for $30,000. Before closing the deal, he draws up a second contract to sell the property to a co-conspirator at $70,000 — a price substantially higher than market value. He seeks a loan for a second contract through a mortgage lender or a mortgage broker and submits an application. A real estate appraiser inflates the value of the property, enough to justify the loan, and is paid triple the usual fee (although many times inexperienced or incompetent appraisers are unwittingly caught in the scheme through pressure and intimidation from the scammers). A mortgage lender approves the application and releases the $70,000. Next, the contracts for the property are closed either simultaneously or within a short time from each other. The originator of the scheme takes the $70,000, pays off the $30,000 and divides the remaining $40,000 between himself and any other plotters — usually the mortgage broker or loan officer and sometimes the second buyer. The lender ends up with a 100% or greater loan to value mortgage. That buyer makes a few payments on the property, then defaults and allows it to go into foreclosure. Finally, the lender learns that the property doesn’t even cover the loan value.

In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP), which governs real estate appraisal, and Fannie Mae, which oversees the secondary residential mortgage market, have enacted practices to detect illegal flipping schemes.

Flipping in television

• Bravo's Million Dollar Listing
• Bravo's Flipping Out
• TLC's The Adam Carolla Project
• TLC and Channel 4's Property Ladder
• A&E Network's Flip This House
• TLC's Flip That House
• TLC's The Real Estate Pros

See also

• Housing bubble
• United States housing bubble
• IPO pricing
• Phillip E. Hill, Sr.

Notes

References

1. ^ "Cabinet ministers have made tens of thousands 'flipping' their homes". Daily Mail. http://www.dailymail.co.uk/news/article-1179291/MPs-expenses-How-Cabinet-ministers-tens-thousands-flipping-homes.html. Retrieved 2009-05-08. 
2. ^ "3 Tips in Profiting with Domain Names". eDomaining. http://edomaining.com/2011/10/3-tips-profit-domain-names/. Retrieved 8 October 2011. 
3. ^ "How the Telegraph investigation exposed the MPs' expenses scandal day by day". London: Daily Telegraph. May 15, 2009. http://www.telegraph.co.uk/news/newstopics/mps-expenses/5324582/How-the-Telegraph-investigation-exposed-the-MPs-expenses-scandal-day-by-day.html. Retrieved 2010-05-07. 
4. ^ Crashes: The Florida Real Estate Craze
5. ^ Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs; Additional Exceptions to Time Restriction on Sales | Federal Register Environmental Documents | USEPA
6. ^ HUD Press Release, January 15 2010.

Published articles

• Mann, Ted (September 30, 2006). "Risky Business". Scarsdale Magazine. http://www.lohud.com/apps/pbcs.dll/article?AID=/20060930/CUSTOM05/609270442/1204.  -- about real-estate flippers in suburban New York.
• "Property flipping as neighborhood destablization versus short term real estate investment (STREI) as community reinvestment: A case study of Buffalo, NY". http://gradworks.umi.com/14/44/1444023.html. 
• "Huffington Post Investigative Fund". http://www.huffingtonpost.com/amanda-zamora/victim-of-a-real-estate-s_b_447640.html. 
• "FBI-Property Flipping Data base". http://foia.fbi.gov/property_flipping.htm. 

Books

• Bronchick, William; Dahlstrom, Robert. Flipping Properties: Generate Instant Cash Profits in Real Estate. 
• Berges, Steve (2004). The Complete Guide to Flipping Properties. John Wiley & Sons. ISBN 978-0471463313. 
• Weiss, Mark B.. Real Estate Flipping: Grow Rich Buying and Selling Property. 
• Hamilton, Gene; Hamilton, Katie. Fix It and Flip It: How to Make Money Rehabbing Real Estate for Profit.