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Flipping is a term used to describe purchasing a revenue-generating asset and quickly reselling (or "flipping") it for profit. Within the real estate industry, the term is used by investors to describe the process of buying, rehabbing, and selling properties for profit. In 2017, 207,088 houses or condos were flipped in the US, an 11-year high. In the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
, "flipping" is used to describe a technique whereby
Members of Parliament A member of parliament (MP) is the representative in parliament of the people who live in their electoral district. In many countries with bicameral parliaments, this term refers only to members of the lower house since upper house members of ...
were found to be switching their second home between several houses, which had the effect of allowing them to maximize their taxpayer funded allowances.


Types


Wholesaling and assigning a contract

Wholesalers make a profit by signing a contract to purchase a property from a seller and then entering into an agreement with a third party to sell their role of buyer in the contract to an end buyer. All rights to the original purchase contract are assigned to the new buyer and the new buyer pays an "assignment fee" to the wholesaler in order to gain all rights to purchase the property at the original purchase price. The original purchase contract usually has an "inspection period" which allows the original buyer to back out of the contract and not close on it if they do not find a buyer to assign their contract to. Many wholesalers have no intention of actually purchasing the property and simply use wholesaling as a tool to locate properties for other investors. The general process of wholesaling real estate is as follows: # Establish a wholesaling business entity. It is possible to be a wholesaler without a legal business entity (i.e. as an individual or working under a DBA). However, the majority of real estate wholesalers form a limited liability corporation (LLC) or C- or S-corporation for tax and liability protection purposes. # Find undervalued properties to wholesale. This can be done using online advertising, direct mail, personal networking and canvassing neighborhoods. Wholesalers often work together to source properties, as well. # Sign a
purchase and sale agreement A purchase and sale agreement (PSA) is an agreement between a buyer and a seller of real estate property, company stock, or other assets. The person, company, or other legal entity In law, a legal person is any person or 'thing' (less ambig ...
with the property owner, often with a wholesaling or assignment clause of some form to allow assignment of the contract to an end buyer. # Assign the purchase agreement to a buyer or another wholesaler for a fee. The buyer or new wholesaler pays the original wholesaler a negotiated fee to purchase the right to buy the property from the seller at or above the stated price in the purchase agreement. This right is transferred to the buyer or new wholesaler via an assignment agreement, which is typically embedded in the purchase agreement. In many cases, if another buyer is not found before the end of the inspection period, the wholesaler cancels the original purchase contract (through its cancellation clause) and gets back the deposit. Wholesaling requires little or no money to be secured in
escrow An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
, and in most cases, the wholesaler never intends to actually purchase the property. The practice of wholesaling is often advertised as "no money down and no risk" by many real estate coaching companies and infomercials since the actual deposit can be as little as $10 and often even the deposit can be returned if the wholesaler cancels the contract before the end of the inspection period. Some people are of the opinion that wholesaling is fraudulent misrepresentation since the wholesaler does not actually intend to close on the property themselves. However, in the United States wholesaling is perfectly legal and most real estate contracts allow the buyer an inspection period and any amount of deposit that buyer and seller agree to. Wholesaling in property is no different from wholesaling in any other industry. In a successful transaction the seller is often unaware that original buyer is not purchasing the property. In some cases, wholesalers actually purchase the property for cash and then resell the property to their end buyer in a second closing. This practice is considered more costly since the buyer is paying closing costs to purchase the property and to resell the property. However many people consider double closing to be more ethical. In cases where there are substantial profits from reselling it often makes sense for the wholesaler to pay for two closing costs (double closing) to avoid requesting a large assignment fee from their buyer.


Cash home buyer

A cash home buyer is a person or company who can buy a property without a mortgage or loan. A cash home buyer will pay cash for a house. Cash home buyers are a specific type of real estate investor or real estate entrepreneur (see real estate investing). When they purchase a house money (cash) is transferred directly from them to the seller. This transfer typically goes through a third-party title company. These companies provide protection to both the seller and buyer in the transaction which includes providing title insurance. Cash buyers specialize in buying property fast. Typically they advertise that they will buy the house fast, as-is, and pay all fees and commissions. Cash home buyers can be divided into local cash home buyers, regional, and national companies. The process of selling one's house for cash typically will follow this order. # Contact a cash buyer (typically email or phone). # They will want information regarding the condition of the property to be sold. # They will run comps to determine comparables. # The buyer will want to verify the condition of the house with a home inspection. # Before or after the inspection the buyer will send the seller their cash offer AKA a real estate contract. # If the terms of the contract are agreeable to both the buyer and seller then title work will be completed. # The final step is closing (real estate). To find a legitimate cash home buyer one can use a search engine, using search keywords such as "we buy houses", "sell my house fast", "stop foreclosure" "cash home buyers" or "sell my house for cash". Sellers should complete
due diligence Due diligence is the investigation or exercise of care that a reasonable business or person is normally expected to take before entering into an agreement or contract with another party or an act with a certain standard of care. It can be a ...
before selecting a buyer. Cash home buyers are different from real estate agents. However, a cash home buyer may also be a real estate agent. Cash home buyers may also refer to themselves as real estate consultants or real estate developers. Cash home buyers are often called cash house buyers.


Real estate consultant

A cash home buyer will often be referred to as a real estate consultant. Various real estate investors or real estate entrepreneurs may also refer to themselves as real estate consultants.


Real estate wholesaler versus cash home buyer

A real estate wholesaler sells the purchase contract/purchase agreement to a third party. Therefore a wholesaler does not buy the property. This is not to be confused with a cash home buyer despite the process being very similar. A cash home buyer will sign a purchase contract and close on the property. In other words, cash home buyers sign contracts to buy houses and close on them. Wholesalers sign contracts to buy houses, assign the contract to someone else, and therefore do not buy houses.


Wholesaling a property multiple times

It is not uncommon for a property to be assigned multiple times and for a few wholesalers to make money in a transaction from the seller to the end buyer. The original wholesaler enters into a contract to purchase a property and then assigns or sells their rights to that contract to another investor. That investor then assigns their rights to said contract to a third investor and so forth. In many cases wholesalers work together ensuring that all parties get paid on a transaction. This practice is often frowned upon in the real estate community since it seems unethical or illegal. In practice there is nothing illegal about wholesaling or assigning rights to a purchase contract even if it is multiple times. It is important to understand that the reason there is an opportunity to wholesale is because the original seller is selling the property for substantially less than market value. This usually occurs when either the property or the seller is in distress. Examples of distress could be a property damaged by fire, flood, hurricane or a homeowner that is facing foreclosure and is about to lose their home and is selling it for substantially less than fair market value. The practice of buying real estate at substantially below market value is called Distressed Real Estate Investing or Wholesale Real Estate Investing hence the term "wholesaler".


Real estate flipping

Profits from flipping
real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more genera ...
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 it for a profit ("fix and flip"). Under the "fix and flip" scenario, an investor or flipper will purchase a property at a discount price. The discount may be because of: * the property's condition (e.g., the house needs major renovation and/or repairs which the owner either does not want, or cannot afford, to do), or * the owner(s) needing to sell a property quickly (e.g., relocation, divorce, pending foreclosure). The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price. The "fix and flip" scenario is profitable to investors because the average homebuyer lacks the time and funds to repairs and renovations, so they look for a property that is ready to move into. Also, most traditional mortgage lenders require the home to be habitable with no significant repairs.


Second home flipping

In the UK,
Members of Parliament A member of parliament (MP) is the representative in parliament of the people who live in their electoral district. In many countries with bicameral parliaments, this term refers only to members of the lower house since upper house members of ...
with constituencies outside of London are given an allowance to maintain an extra home in London allowing them to live closer to the
Houses of Parliament The Palace of Westminster serves as the meeting place for both the House of Commons and the House of Lords, the two houses of the Parliament of the United Kingdom. Informally known as the Houses of Parliament, the Palace lies on the north ban ...
during the working week. Certain costs for this second home can be claimed and are thus partly funded by the taxpayer. MPs can nominate any of their other properties as the second home, which has tax advantages for not being their primary residence and can lead to additional allowances. "Flipping" occurs when the nominated second and primary dwellings are frequently changed, particularly during the parliamentary recess. The dwelling may in fact be rented out for profit but still receive the allowances. In some circumstances, MPs can simultaneously declare one home to be both their primary residence (for tax purposes) and their second residence (for expenses purposes). The practice ended on 15 May 2009 following publication of the Disclosure of expenses of Members of the United Kingdom Parliament after a public scandal.


Car flipping

Similar to real estate flipping, car flipping is the process of buying automobiles at a low price and reselling them at a higher price for profit. A car flipper will identify reasonably priced vehicles that can be sold at a higher price after reconditioning and marketing to a larger market. In the United States, car flipping can be a hobby for car enthusiasts, or a primary business in the form of state licensed car dealers. Flipping cars is legal if the vehicles are titled in the person's name or processed through a state licensed dealership. Many states have laws and regulation limiting the number of vehicles a person can flip within each year unless they are a dealer or associate. This number varies from state to state, from 2 to 10. Car flipping has a larger market and requires less investment than flipping real estate.


Product flipping

Just like real estate flipping and car flipping, all consumer products can be flipped. Product flipping entails buying products at a low price and selling it at a higher price for profit. Products can be new or used items. Many times, product flippers buy products at dollar stores, thrift stores, garage sales and estate auctions and resell them at a higher price on online marketplaces or locally. Compared to real estate flipping and car flipping, product flipping requires much lower capital to get started and thus sellers take on much less risk. Due to lower profit margins, product flippers often employ various tricks that other kinds of flippers do not have to worry about. These tricks include utilizing coupons and cash back rebates as well as finding creative ways of saving on shipping. Common products that are flipped for profit are clothes,
mobile phone A mobile phone, cellular phone, cell phone, cellphone, handphone, hand phone or pocket phone, sometimes shortened to simply mobile, cell, or just phone, is a portable telephone that can make and receive calls over a radio frequency link whi ...
, books, and coins. Other less common products that are flipped are digital in nature such as
Bitcoin Bitcoin (abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
, websites and gaming accounts.


Effects


Bubbles

A spate of flipping often creates an
economic bubble An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
which then bursts, such as during the
Florida land boom of the 1920s The Florida land boom of the 1920s was Florida's first real estate bubble. This pioneering era of Florida land speculation lasted from 1924 to 1926 and attracted investors from all over the nation. The land boom left behind entirely new, planned ...
. In the 2000s, relaxed federal borrowing standards (including
subprime lending In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpri ...
that allowed a borrower to purchase a home with little or no money down) may have led directly to a boom in demand for houses. Because it was easy to borrow, many investors bought homes as property speculation with no intent to live in them. Since the demand outstripped the supply, prices rose, giving a short-term profit. This resulted in an inflationary spiral until the bubble burst in 2008 and borrowing standards became stricter, leaving the housing market to bottom out. Flipping was so popular in the United States that many
DIY "Do it yourself" ("DIY") is the method of building, modifying, or repairing things by oneself without the direct aid of professionals or certified experts. Academic research has described DIY as behaviors where "individuals use raw and sem ...
television programs like
A&E Network A&E is an American basic cable network, the flagship television property of A&E Networks. The network was originally founded in 1984 as the Arts & Entertainment Network, initially focusing on fine arts, documentaries, dramas, and educational ent ...
's '' Flip This House'' detailed the process. Flipping becomes less desirable when interest rates are high and so demand is lower. The resulting lack of sales, and major price cuts, results in a flood of properties on the market at one time, resulting in an excess of supply to demand.


Rejuvenation and gentrification

"Rational" flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood, a process known as
gentrification Gentrification is the process of changing the character of a neighborhood through the influx of more affluent residents and businesses. It is a common and controversial topic in urban politics and planning. Gentrification often increases the ...
, which increases property values but can cause a population shift. Under the
broken windows Broken may refer to: Literature * ''Broken'' (Armstrong novel), a 2006 novel by Kelley Armstrong in the ''Women of the Otherworld'' series * ''Broken'' (Slaughter novel), a 2010 novel by Karin Slaughter Music Albums * ''Broken (And Oth ...
theory, an unkempt house or area attracts a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on in a spiral. Restoration creates jobs, particularly in construction, and generates more sales (and sales taxes) for local vendors and suppliers. The renovated homes attract new populations and businesses to a region, encouraging more economic development; their higher assessed values brings more
property tax A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inher ...
revenue to local governments, allowing for more improvements and more policing. When flipping occurs frequently in a community, the
total cost of ownership Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs of a product or service. It is a management accounting concept that can be used in full cost accounting or even ecolog ...
can rise substantially, eventually forcing current residents to relocate, specifically poorer young and old people. On a small scale, flippers can cause distress and disturbance to their immediate neighbors by performing lengthy renovations. Flippers often have no interest in neighborhood integration, which may cause tension with long-term residents. During the real estate bubble of the 2000s, flipping and gentrification were both linked to the mass migration of people to California, where high real estate prices and ample jobs attracted wealth seekers. In response, many native Californians were forced to migrate to the less expensive areas of states such as Arizona, Nevada, Texas, Oregon and Washington. This migration of Californians caused further gentrification in the areas that they had moved to in large numbers. Areas such as
Phoenix, Arizona Phoenix ( ; nv, Hoozdo; es, Fénix or , yuf-x-wal, Banyà:nyuwá) is the List of capitals in the United States, capital and List of cities and towns in Arizona#List of cities and towns, most populous city of the U.S. state of Arizona, with 1 ...
, and
Las Vegas Valley The Las Vegas Valley is a major metropolitan area in the southern part of the U.S. state of Nevada, and the second largest in the Southwestern United States. The state's largest urban agglomeration, the Las Vegas Metropolitan Statistical Area i ...
became much more expensive, although property prices dropped significantly after 2006. In 2020 the emphasis on house flipping shifted to the Midwest, where Greater Cleveland became one of the most lucrative places in the country to own rentals and flip homes. A typical project in the area, as in other areas in the Great Lakes region, pays back twice the cost of the purchased structure. Investors from California have been steered by advisors from the
Sun Belt The Sun Belt is a region of the United States generally considered to stretch across the Southeast and Southwest. Another rough definition of the region is the area south of the 36th parallel. Several climates can be found in the region — d ...
to northeastern Ohio. In 2019 the median flip home was bought for $60,000 and sold for $124,000. 100% margins were also endemic to Akron, Ohio; Pittsburgh; and South Bend, Indiana.


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 more attractive homes in the neighborhood, thereby increasing the value of their own homes.


Regulations

In 2006, the US 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. This requirement was greatly relaxed in January 2010, and the 90-day holding period was all but eliminated.


Illegal activity

Flipping can sometimes also be a criminal scheme. Illegal property flipping is a
fraud In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right. Fraud can violate civil law (e.g., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compen ...
whereby recently acquired property is resold for a considerable profit with an artificially inflated value, typically in order to defraud a lender into lending more than the true value of the property or defraud a buyer into paying a higher price than should be necessary. The property is quickly resold after making few, or only cosmetic, improvements. 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 to get a false, artificially inflated, appraisal report. The buyer may or may not be aware of the situation. This type of fraud is one of the most costly for lenders. Renovating distressed or abandoned properties was sometimes linked to malicious and unscrupulous acts in the post
housing bubble A housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. Firs ...
era. As a result, "flipping" was frequently used both as a descriptive term for schemes involving
market manipulation In economics and finance, market manipulation is a type of market abuse where there is a deliberate attempt to interfere with the free and fair operation of the market; the most blatant of cases involve creating false or misleading appearances ...
or 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 term has a more positive connotation these days with the popularity of television shows like ''Flip or Flop'' and ''Flip That House.'' In the United States, the
Uniform Standards of Professional Appraisal Practice Uniform Standards of Professional Appraisal Practice (USPAP) can be considered the quality control standards applicable for real property, personal property, intangible assets, and business valuation Business valuation is a process and a set of proc ...
(USPAP) governs
real estate appraisal Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value for real property (usually market value). Real estate transactions often require appraisals because they occur infrequently and every pr ...
and
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
, oversees the secondary residential
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...
market. Both have practices to detect illegal flipping schemes. The term "flip" is also used in relation to certain types of
scam A confidence trick is an attempt to defraud a person or group after first gaining their trust. Confidence tricks exploit victims using their credulity, naïveté, compassion, vanity, confidence, irresponsibility, and greed. Researchers hav ...
s, known as "money flip" or "cash flip". In such a scam, the scammer instructs the intended victim to send a certain amount of money, usually via wire transfer, with the promise they can quickly "flip" the money for a larger amount, typically about ten times as much. After the victim has wired the money, the scammer simply keeps the money, cutting off all further contact.


In television

In July 2012, business network
CNBC CNBC (formerly Consumer News and Business Channel) is an American basic cable business news channel. It provides business news programming on weekdays from 5:00 a.m. to 7:00 p.m., Eastern Time, while broadcasting talk s ...
green-lit several pilots for
reality television Reality television is a genre of television programming that documents purportedly unscripted real-life situations, often starring unfamiliar people rather than professional actors. Reality television emerged as a distinct genre in the early 1 ...
series focusing on house flipping. The following is a list of several house-flipping shows: * Bravo's '' Interior Therapy with Jeff Lewis'' * Bravo's ''
Million Dollar Listing ''Million Dollar Listing'' is an American reality television series franchise on the Bravo network. Each show chronicles the professional and personal lives of real estate agents based in a major American city as they sell high-end properties, giv ...
'' and ''
Million Dollar Listing New York ''Million Dollar Listing New York'' is an American reality television series that premiered on Bravo on March 7, 2012. The show follows the lives of several luxury real estate agents as they represent property owners in New York's five boroughs ...
'' * Bravo's '' Flipping Out'' * TLC's '' The Adam Carolla Project'' * TLC and
Channel 4 Channel 4 is a British free-to-air public broadcast television network operated by the state-owned Channel Four Television Corporation. It began its transmission on 2 November 1982 and was established to provide a fourth television service ...
's ''
Property Ladder The term property ladder, widely used in the United Kingdom, describes the relative differences in constant terms from cheaper to more expensive housing. According to this metaphor, an individual or a family can progress by stages from more aff ...
'' * TLC's '' Flip That House'' * TLC's '' The Real Estate Pros'' * A&E's '' Flip This House'' * A&E's '' Flipped Off'' * A&E's '' Flipping Vegas'', '' Flipping Boston'', '' Flipping San Diego'', and '' Flipping Miami'' *
HGTV HGTV (an initialism for Home & Garden Television) is an American pay television channel owned by Warner Bros. Discovery. The network primarily broadcasts reality programming related to home improvement and real estate. As of February 2015, app ...
's '' Flip or Flop'' * Spike's '' Flip Men'' * DIY Network's '' The Vanilla Ice Project'' *
BBC One BBC One is a British free-to-air public broadcast television network owned and operated by the BBC. It is the corporation's flagship network and is known for broadcasting mainstream programming, which includes BBC News television bulletins, ...
's ''
Homes Under the Hammer ''Homes Under the Hammer'' is a British factual renovation and auction television series that is screened on BBC One as part of the morning schedule. The series has been running since 17 November 2003, and is currently presented by Martin Rob ...
'' * W's ''
Masters of Flip ''Masters of Flip'' is a Canadian home renovation reality television series, which premiered in 2015 on W."Canadian country musicians look to real estate". ''Telegraph-Journal'', May 8, 2015. The series centres on Dave and Kortney Wilson, a then ...
'' *
HGTV Canada HGTV is a Canadian English-language Category A cable and satellite specialty channel owned as a joint venture between Corus Entertainment (which serves as managing partner and owns 80.24% majority control through licensee HGTV Canada, Inc.) and ...
's '' Holmes and Holmes''


See also

*
Creative financing Creative may refer to: *Creativity, phenomenon whereby something new and valuable is created * "Creative" (song), a 2008 song by Leon Jackson * Creative class, a proposed socioeconomic class * Creative destruction, an economic term * Creative dir ...
* IPO pricing – factor potentially relevant in flipping stock shares * Phillip E. Hill Sr. – ringleader of large mortgage fraud scheme * Real estate investing *
Speculation In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.) Many ...
*
United States housing bubble The 2000s United States housing bubble was a real-estate bubble affecting over half of the U.S. states. It was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reac ...


References


Sources


Published articles

* —about real-estate flippers in suburban New York. * * *


Books

* * * * * * * * {{Authority control Investment Real estate terminology United States housing bubble