How Does House Flipping Work

2010 January 5

House flipping is simply a investor purchases a property at below-market value and quickly sell it hoping to turn a profit. Profits from flipping real estate come from either buying low and selling high in a rapidly-rising market, or buying a house that needs repair and fixing it up.

House flipping bubbles have historically ended in disaster, such as during the Florida land boom of the 1920s. In the 2000s, relaxed federal borrowing standards may have led directly to a housing boom. Lax lending standards 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.

Since it was easier to borrow, many investors snapped up investment homes without having to put money down. Homes that were placed back on the market by house flippers were priced higher, buyers had to borrow more money. This resulted in a continuing circle until finally the housing bubble burst in 2008.

Home Renovation

Often times, house flippers will buy a house at a considerable discount from market value due to the house’s bad condition. The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a price nearer to full market value.

After a renovation, the house itself will be in better condition 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.

Investor Flippers Scheme Illegal Activity

Flipping can sometimes also be a criminal scheme. During the housing boom, house flippers got a bad reputation, because some appraisers, mortgage brokers and agents were participating with flippers in unethical property flipping.

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 scheme often involves collusion between a real estate appraiser, a mortgage originator and a closing agent. The real estate appraiser makes false and artificially inflated appraisal report. The mortgage broker packaged the loan relying on stated income or falsifying documents, and the transaction closed. This type of fraud is one of the most costly for lenders. Lenders have tightened standards for loans and appraisals. Mortgage fraud is closely monitored by the FBI.

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