Buying real estate at a low price and then selling again a short time later after repairs have been made is a totally legal business venture and real estate investors do it all the time, making a tidy income in the process. Unfortunately, there are unscrupulous people out there who take advantage of short sale flipping by practicing unethical and totally illegal acts in order to make a profit. If you are looking to invest in property that can be bought at a low price and resold later at a much higher price, here is some advice to keep you on the right side of the law.
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Artificial Inflation Is Illegal
Residential real estate is most often the object of scrutiny when investigating illegal short sale flipping. Perhaps the most common illegal activity when flipping a property for a profit is in artificially inflating the value of the home. Sometimes this means that the home was appraised at a much higher value than its actual worth and of course this means that the appraiser had knowledge of the intent to mislead the buyer.
How Property Values Are Artificially Inflated
One of the ways in which a property is artificially inflated is to claim that repairs were made when, in fact, nothing structural was completed and the only ‘repairs’ were minor cosmetic ‘fixes.’ For example, a home was purchased that is in need of major repairs to the roof. Instead of making the necessary repairs to ensure the roof won’t leak and that any rotten timber is replaced, only roof tiles were replaced giving the appearance of being repaired. Had the roof truly been repaired, the value of the house would have risen accordingly and there would have been nothing illegal or unethical about a significant markup in the resale price. However, since the repairs were only cosmetic, the amount above the home’s value is totally unjustified.
A Look at Justifiable Rises in Asking Price
Flipping for profit is justified when the investor actually completes the necessary work to justify the rise in price. Using the example of rotten timbers in the roof let’s look at a South Dakota investor who hires only reputable Sioux Falls roofing contractors to complete the necessary repairs. The roof would be guaranteed for at least ten years and the new appraisal at a higher value would be totally justified. Of note here would be the fact that the home couldn’t possibly be flipped within hours of being purchased because those repairs would take time.
Beware of buying a property on a short sale and reselling it for a considerably higher price, often within hours or days. This is not legitimate flipping and can leave you subject to serious legal consequences. The bottom line is that there are laws and guidelines to follow when buying investment properties to flip for a profit. That home must be treated in the same way as any other real estate transaction. Falsifying any information whatsoever when buying and then reselling that property is not only unethical but illegal. If you are in the real estate investment market to turn a profit, do so ethically and you will never be in danger of facing legal issues down the road.