3 Legal Risks of House Flipping
The American public has been so inundated with house-flipping television entertainment that you almost feel silly if you're not currently in the market for a cheap home to quickly renovate and put back up for sale.
But, like all get-rich-quick schemes, flipping a house comes with quite a few legal risks. Here are the top three you should be concerned about.
1. FHA Re-Selling Restrictions
The Federal Housing Administration provides mortgage insurance on loans made approved lenders, the largest such insurer of mortgages in the world. But the FHA also places certain restrictions on the mortgages it will insure, thus limiting the frequency with which a home can be bought and resold. Known as the "anti-flipping rule, the FHA requires FHA mortgage borrowers to wait a minimum of 90 days before selling the property:
"Property flipping is a practice whereby a property is resold a short period of time after it is purchased by the seller for a considerable profit with an artificially inflated value, often abetted by a lender's collusion with the appraiser. FHA's policy prohibiting property flipping eliminates the most egregious examples of predatory flips of properties within the FHA mortgage insurance programs."
So you should know going in that if you're using an FHA-insured loan to buy your house (and you probably are), you can't resell it for 90 days. Additionally, any resale between 91 and 180 days where the new price exceeds the previous price by more than 100 percent or more will require additional documentation for the FHA validating the property's increase in value.
2. Mortgage Loan Fraud
Most people can't afford to buy homes with cash, which means involving banks and other lenders in order to provide financing to purchase the home. For those interested in flipping homes, this could result in you taking out a mortgage to initially purchase the home, and the next buyer similarly acquiring a mortgage to buy the home from you. And this makes the house-flipping market ripe for mortgage loan fraud.
While you, as a borrower, need to be truthful with your lender when taking out a mortgage for a home, you also have to ensure the lender is being forthright. Get referrals for real estate and mortgage professionals and check their state and local licenses. Steer clear of "No Money Down" loans and other gimmicks that could be hiding unfavorable interest rates and terms. And don't be persuaded into making false statements, to real estate agents, mortgage brokers, or anyone else involved in the transaction. And be on the lookout for common home equity scams.
3. Title Concerns
Between bank foreclosures and homeowners falling on desperate times, it came seem like there are a lot of cheap properties available. But, between lenders and borrowers and real estate agents and everyone else, it can be difficult to determine who actually owns the home your looking to flip, and, therefore, who can legally sell it to you. That's where title insurance comes in handy. Title insurance can verify that you are acquiring clear title to the property in order to purchase and then resell it.
While flipping a house may look easy on TV, it can be a legally complicated procedure in real life. Talk to an experienced real estate attorney if you're thinking about flipping a house
- Browse Real Estate Lawyers by Location (FindLaw's Lawyer Directory
- The New Rules of House Flipping (Reuters)
- Can You Sell a Home If You Still Owe on Your Mortgage? (FindLaw's Law and Daily Life)
- Seller's Rights When Selling a House (FindLaw's Law and Daily Life)
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