Is Flipping Illegal?November 24th, 2009This is a common question I get from new investors. They have usually been told this from a friend or worse a realtor. The answer is no, it is not illegal, as long as you do it correctly.

In New York, and I suspect in every state, it is illegal to sell a property you do not own for a fee if you are not a licensed realtor. Realtors who work with the public need to be trained and licensed on the laws of disclosure and the ethics of the real estate business in order to protect the public. So, if you do not own the property and you try to sell it, you must be a licensed realtor.

But wait, isn’t that what a flipper is doing?

No – because it depends on what the flipper is trying to sell. Typically most sales of a single family home sell the entire interest in the property know as “fee simple”. (An old English term whose origins would take up too much time.) When a person says you do not own the house, they usually mean you do not have a fee simple interest in the home; however, any interest in real property can be sold.

The amazing thing about real estate is that is can be divided in so many ways. Think about a typical house. If it is rented, that renter has a leasehold interest in the house. You may have inherited the home and your brother owns half the house, which is a common interest that can be sold. Con Edison may have the right to run a power line through your property, which is an easement interest that can be sold. None of these parties “own” the home in the way you think of when someone says they own a home but each interest has a value and can be sold. (The lease may prevent your tenant from transferring his lease to another but that is a contract issue not something that is against the law).

So what interest does a flipper have? A typical flipper gets a contract to buy a property and then either assigns a contract to another investor or sells through a double closing. In either case, when the flipper is marketing the property, he only has a contractual interest. This is interest is called a contract vendee. You are selling your right to buy the property. You are not a realtor but an owner of an interest (the contract) in the property.

www.DavidParkerEsq.com Free Consultation @ 914-862-0580

Let’s take an example.

I negotiate a 10 year option to buy a piece of property for $100,000. Nine years go by and the property is worth $500,000. That option is now worth a lot more than $100,000. Someone might pay you $400,000 in order to assign the option over to them and allow them to purchase the property. When you sell you are selling your option to purchase the property to another for value. This example has the same legal basis as when you take a one year option and are able to flip a property in six months time.

Likewise if I have a contract to purchase a property, I can assign that contract and receive and compensation for the assignment. I am not selling the property, I am selling my interest in the property (my contract).

There may be additional disclosure rules for realtors or banks that you need to be aware of when flipping but flipping when done properly is not illegal.

About David Parker

In 15 years of legal practice, David Parker has worked on a variety of corporate, real estate and business legal matters. Having also held non-legal positions in business, he is able to think outside the box and provide you with service that will enhance your goals.

He has handled leasing for office and retail landlords and tenants, joint venture agreements, financing and confidentiality agreements. In addition, he represents real estate developers and investors in all aspects of their real estate work.

www.DavidParkerEsq.com Free Consultation @ 914-862-0580