The day HUD released FR (Final Rule)-4615 Prohibition of Property Flipping, “flip” became a four-letter word. Utter the F word at a real estate conference or seminar, and you’re liable to be spending your lunch break at a cozy table for one. After all, flipping real estate is unethical, and according to the government flipping is illegal … or is it?
To you and your real estate colleagues, “flip” may very well be a four-letter word, but to the hundreds of thousands of people who tune in to reality TV shows, like Flip This House and Flip That House, flipping is a shrewd and honorable way to earn a buck in real estate.
So, who’s right? Both of you. Real estate flipping has a double meaning, a split personality, a sunny and a sinister side. Criminals practice flipping to artificially inflate home values and sell overpriced homes to ill-informed buyers. Or they cash out the inflated equity, sticking the lender with the bill and leaving a legacy of foreclosures and vacancies. The dark side of flipping destroys credit ratings, raises interest rates, and ruins neighborhoods. Over the long haul, it threatens to squash the American dream of home ownership. It is unethical, immoral, and illegal.
Flipping the right way, however, is a perfectly legitimate strategy for making money in real estate. You buy a property below market value, fix it up (or not), and sell it for more than you invested in it. Do it well, and you can earn a handsome profit. Make a serious blunder, and you suffer a loss. This fix-it-and-flip-it approach has a positive effect on the real estate market. It increases property values, improves neighborhoods, and provides quality housing for those who need it. It’s the American way — capitalism at work.
As a real estate professional, you should know the two sides of flipping. Understand the dark side, so you can spot the warning signs of a scam and prevent yourself and your clients from becoming unwitting accomplices. Know the positive side, so you can educate your clients and assist them in flipping properties the right way.
You might be a little reluctant at first to work with investors who flip real estate. After all, they’re the consummate do-it-yourself-ers, often trying to slash the costs of real estate commissions by buying and selling FSBO. Shunning this potentially lucrative segment of the market, however, is ultimately self-defeating.
By reaching out to investors who flip properties the right way, you can develop mutually beneficial long-term relationships. Remember that flippers buy and sell properties, giving you the opportunity to profit from both transactions — you can sell it to them and sell it for them. Do a good job on the first transaction, and you’ll be first in line for a shot at the next transaction.
To team up with flippers, learn their business and the challenges they face. Accommodate them. Serve their needs. Contact investor and landlord associations. Attend their meetings, seminars, and workshops. I’ve even led long caravans of investors on day trips to look at properties, maximizing both my time and their enthusiasm. By improving the health and vitality of their business, you prove yourself to be an indispensable component of their success. In the process, you might just discover that you’ve tapped into an endless stream of revenue.