Property flipping is a practice whereby a property is resold a short period of time after it was purchased by the seller for considerable profit with an artificially inflated value, often abetted by a lender‘s collusion with the appraiser.
Property flipping becomes illegal or predatory when an immediate resale is accompanied by acts of occupancy misrepresentation, appraisals with inflated property values and other misleading information. The term property flip refers to a transaction in which a property is purchased and quickly resold for a significant profit. A large increase in property value coupled with a short time period between transactions may indicate the property is being flipped.
Properties targeted for property flips generally include properties that can be acquired at lower prices than other properties in the same neighborhood and often include real estate owned (REO) properties, properties subject to a ―short sale‖, other distressed properties or newly constructed properties where the builder or developer must liquidate housing inventory quickly.
A property involved in a flip may be resold on the same day or within days, weeks, or months of the purchase.
Property flips are not inherently illegal and not all transactions involving a rapid purchase and resale are improper. Some property flips are acceptable transactions. Some indications of property flip transactions that may be legitimate are included in the grid shown below.
Double escrows, also called assignment of contracts are not eligible. The seller must hold title to the property and be reflected as the owner on the title commitment.
Documentation must be provided showing the seller is the owner of record prior to the date of execution on sales contract by the buyer. Chain of title performed by the title company must also be reviewed for compliance. Appraisals must also be reviewed to ensure the name of the seller listed agrees with the purchase agreement. Based on when the seller purchased the subject property, unless it qualifies for one of the exceptions, determines the disposition of the property based on the information below.
VA Loans and Property Flipping
The following property flipping guidelines apply to VA loans.
VA loans being sold in 90 days or less from the date the seller acquired the property will typically require lender approval and may be subject to further conditions.
When calculating the time frame from the time the seller purchased the property and the date the property is sold:
- The notary date used on the deed when the seller purchased the subject property is used for the seller‘s purchase date; and
- The date the purchase agreement was executed by all parties is used for the resell date.
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