Flipping
Encyclopedia
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 offering
s.
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.
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.
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 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.
Following publication of the MPs expenses scandal on May 15, 2009 the practice ended.
.
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.
.
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, 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. 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. 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.
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.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
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
Real estate
In general use, esp. North American, 'real estate' is taken to mean "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; an item of real property; buildings or...
and initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
s.
The term "flipping" is frequently used both as a descriptive term for schemes involving market manipulation
Market manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
and other illegal conduct and as a derogatory term for legal real estate investing
Real estate investing
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate for profit. Improvement of realty property as part of a real estate investment strategy is generally considered to be a sub-specialty of real estate investing called real estate development...
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
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
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.
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.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.
Bubbles
Flipping bubbles have historically ended in disaster, such as during the Florida land boom of the 1920sFlorida land boom of the 1920s
The Florida land boom of the 1920s was Florida's first real estate bubble, which burst in 1925, leaving behind entire new cities and the remains of failed development projects such as Aladdin City in south Miami-Dade County and Isola di Lolando in north Biscayne Bay...
.
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
A&E Network
The A&E Network is a United States-based cable and satellite television network with headquarters in New York City and offices in Atlanta, Chicago, Detroit, London, Los Angeles and Stamford. A&E also airs in Canada and Latin America. Initially named the Arts & Entertainment Network, A&E launched...
'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.
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 gentrificationGentrification
Gentrification and urban gentrification refer to the changes that result when wealthier people acquire or rent property in low income and working class communities. Urban gentrification is associated with movement. Consequent to gentrification, the average income increases and average family size...
.
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
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
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, 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. 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. This migration of Californians caused further gentrification in the areas that they had moved to en masse. Areas such as Phoenix, Arizona
Phoenix, Arizona
Phoenix is the capital, and largest city, of the U.S. state of Arizona, as well as the sixth most populated city in the United States. Phoenix is home to 1,445,632 people according to the official 2010 U.S. Census Bureau data...
and Las Vegas
Las Vegas metropolitan area
The Las Vegas Valley is the heart of the Las Vegas-Paradise, NV MSA also known as the Las Vegas–Paradise–Henderson MSA which includes all of Clark County, Nevada, and is a metropolitan area in the southern part of the U.S. state of Nevada. The Valley is defined by the Las Vegas Valley landform, a ...
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. 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-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
Uniform Standards of Professional Appraisal Practice
Uniform Standards of Professional Appraisal Practice, commonly referred to by the acronym USPAP, can be considered the quality control standards applicable for real property, personal property, intangibles, and business valuation appraisal analysis and reports in the United States and its territories...
(USPAP), which governs real estate appraisal
Real estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
, and Fannie Mae, which oversees the secondary residential mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
market, have enacted practices to detect illegal flipping schemes.
Flipping in television
- Bravo's Million Dollar ListingMillion Dollar ListingMillion Dollar Listing is an American reality series that first aired on the Bravo television network. The show follows real estate agents based in Hollywood and Malibu, California selling high-end properties. The series, presented in one-hour episodes, gives viewers an inside look at the world of...
- Bravo's Flipping OutFlipping OutFlipping Out is a reality television series that debuted on July 31, 2007 on Bravo in the United States and HGTV in Canada. Subsequently, it debuted on cable network Arena in Australia on September 4, 2009. For the first season it also re-aired on sister network CNBC...
- TLCTLC (TV channel)TLC is an American cable TV specialty channel which initially focused on educational content. Since 1991 TLC has been owned by Discovery Communications, the same company that operates the Discovery Channel, Animal Planet and The Science Channel, as well as other learning-themed networks...
's The Adam Carolla ProjectThe Adam Carolla ProjectThe Adam Carolla Project, which aired Tuesday nights at 10 p.m. ET/PT on TLC, was a home improvement show featuring the comedian Adam Carolla. Before gaining celebrity on Loveline and The Man Show, Carolla worked as a carpenter for several years... - TLC and Channel 4Channel 4Channel 4 is a British public-service television broadcaster which began working on 2 November 1982. Although largely commercially self-funded, it is ultimately publicly owned; originally a subsidiary of the Independent Broadcasting Authority , the station is now owned and operated by the Channel...
's Property LadderProperty Ladder (TV series)Property Ladder is the name of two television shows from the United Kingdom and United States where first-time property or real-estate developers purchase houses , renovate them, and attempt to sell them for a profit. Their efforts are the featured bit of the show... - A&E NetworkA&E NetworkThe A&E Network is a United States-based cable and satellite television network with headquarters in New York City and offices in Atlanta, Chicago, Detroit, London, Los Angeles and Stamford. A&E also airs in Canada and Latin America. Initially named the Arts & Entertainment Network, A&E launched...
's Flip This HouseFlip This House (TV series)Flip This House is an American television series that airs on the A&E television network. Each episode spotlights the purchase and renovation of a single unit... - TLC's Flip That HouseFlip That House (TV series)Flip That House is an American anthology series created by the Discovery Home Channel and now also airing on TLC. Each episode shows a different individual in the process of flipping a house...
- TLC's The Real Estate ProsThe Real Estate ProsThe Real Estate Pros is a television series which airs on the TLC network. Each episode stars Richard C. Davis and his crew from Trademark Properties of Charleston, South Carolina as they purchase and renovate a piece of real estate...
See also
- Housing bubble
- United States housing bubbleUnited States housing bubbleThe United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...
- IPO pricing
- Phillip E. Hill, Sr.Phillip E. Hill, Sr.Phillip E. Hill, Sr. was the ringleader of the largest mortgage fraud scheme ever prosecuted in the State of Georgia. Hill was found guilty of 168 counts of fraud and money laundering on March 14, 2007 in the Northern District of Georgia. On September 21, 2007, U.S. District Judge Thomas W....