Over the years, the term “flipping a property” has developed several different interpretations by the real estate investment community.  Believe it or not, it is not illegal to flip a property.  What is illegal, is the fraud which is usually associated with this type of transaction.

First, we should define various types of “flipping”.

Flipping the Property: This is where a person purchases a property, puts no or minimal amount of work into it, and re-sells it for a profit within a very short period of time.

Flipping the Contract: Also known as a “contract assignment” or “wholesaling”,  this is where a Buyer under a contract to purchase property sells his/her right to purchase to another person.

Turning the Property: Also known  as “rehabbing the property” or “renovating the property”, this is where a person purchases a distressed property, invests a significant amount of time and money into rehabilitating the property and re-sells it at market value.

The threshold established for whether or not the transaction is legal is determined by the reasonableness of the original purchase price and the final sales price.  The foundation of the American economic system is the ability to “buy low and sell high”.  But where are the limits on this?  If you are taking advantage of someone else’s unfortunate circumstances to convince him to sell you the property for less than they could get otherwise, it is considered fraud.  If you convince an unsophisticated buyer to pay more for a property than you know it is worth, it is considered fraud.  When “flipping a contract”, it is considered fraud against the Seller if you contract to purchase the property at what you indicate as fair market value and then sell your rights under the contract to a third party for a significant profit, without the Seller’s knowledge.

A rule of thumb that can be used to determine the reasonableness of your transaction is to consider the following:  If someone files a lawsuit against me, can I justify to the judge (and will he accept the argument) that the amount I purchased the property for and the amount I sold it for were reasonable under the circumstances?