When the words "flipping" and "fraud" are mentioned, my mind drifts off to visions of scandalous actions. However in reference to real estate some view the terms as being synonymous with one and other, I would like to point out what they actually are. "Flipping" is basically the idea behind buying something cheap, fixing it up so that it is nicer then it was when you originally bought it, and selling it to someone else for more then you originally paid for it, thus generating a profit. In more complex terms what this is, is the free market exchange of goods and services for valuable consideration or capitalism at work.

An example of flipping would be purchasing a house in need of work for $150,000 in May, renovate the kitchen and bathrooms, and landscape the yard at a cost of $30,000. After renovations, in July (assuming it took 2 months to complete renovations) the house is sold for a price that reflects market value. Keep in mind that you've spent $150,000 buying the house and $30,000 fixing it up, thus leaving you $180,000 behind. Selling the house for $180,000 would allow you to break even, meaning that you just busted your tail fixing up a place for no financial gain (which of course would be foolish). Since you are in this to turn a profit and to get paid for the hard work you put in, look for a price that reflects market value, but also is generous enough to give your checking account a feeling of satisfaction.

Another example of flipping would be if I owned a Best Buy or Circuit City retail electronics store, I would be "flipping" everything from satellite radios, computers, Mp3 players, to televisions and movies to my customers. Businesses flip goods and services to us that we (consumers), in turn, pay for; the profit received is ethical... Even though it feels that the prices we pay for goods and services makes us feel like we are getting robbed ($4.15 national gas price average) we still fork over the money.

One more example: pawn shops. Take in an object, the buyers take it off your hands for a price much less then what you paid for it, then they turn around and sell it for even more, thus creating a profit and "flipping" your item.
With corruption becoming a major player in the real estate game, the question of "when does flipping property become fraudulent?" remains. Property flipping becomes illegal and a fraud for profit scheme when a home is purchased and resold within a short period of time at an artificially inflated value. The flip typically involves a fraudulent appraisal, which may indicate that renovations were made to the home, when in fact, there were none or the renovations consisted only of minor cosmetic improvements.

Note to flippers, if you are going to renovate, take the time to actually do some work and improve the house, and perhaps change it around completely. A little extra work knocking out a wall is easier then trying to escape from Alcatraz.

Another form of illegal flipping is a cash-out purchase. For example, the seller lists the property for $100,000. The buyer/ borrower offers $150,000. At closing, the seller will receive net proceeds on the $100,000 asking price and the surplus of $50,000 form the loan amount is disbursed to the buyer/borrower at or through closing. This would be a route to avoid at all costs, more often then not, these types of loans end up as first payment or early payment defaults and most likely end in foreclosure. Not the storybook ending we all hope for.

Simply put, real estate "flipping" becomes fraud when loan fraud is involved. What happens is that the resale relies on inflated appraisals, fake documents...general dishonesty, and sales tend to ‘straw' buyers who represent original sellers, or ‘phantom' second loans. There is nothing wrong with buying a home, fixing it so that its condition is better then when you originally bought it, and reselling it for more money. If your buyer wants to pay you substantially more then markets value, and they have the means to pay you, it is there choice to do so.

The word "flipping" in real estate has been entrenched so deep in American culture that the term illegal flipping is what people are referring to when they mean mortgage fraud. This is a sad disservice to a word of honest, ethical real estate investors who "flip" for a living. As a result, the media has given real estate investors a bad named because they are not focusing on the real problem' the real problem with illegal flipping is when investors, mortgage brokers, loan officers, appraisers, etc. collude to create (i.e., fabricate) a better picture of a buyer's loan package to a lender than that which actually exists - they simply lie.

Honest flipping can be defined simply as capitalism. For example, take into consideration the Nintendo Wii game phenomenon. When the latest Wii game becomes available (for example Wii Fit, the Wii exercise game...Yes, an exercise video game.) people will pay large, fanatic sums of money to purchase on launch day. When the Nintendo Wii released, Best Buy sold them for $250. Of course the demand outweighed the initial supply meaning that only a small amount of people could actually purchase one the day it released (I was not one of the lucky ones). As a result, a large number of those who were fortunate enough to get one were not even interested in keeping it. Instead they immediately posted the item on nifty little online auction websites. Namely, eBay. Now on launch day when stores were selling the consoles for $250, those who were able to purchase the Wii systems were able to simultaneously "flip" their systems online and see anywhere form 2-500% profit returns on them with consoles running at a selling rate of $1000 to $5000.

What this goes to say is that "flipping" is not an illegal activity. While the practices behind what some flippers do can definitely be considered as illegal, the majority of flipping we see is completely legal and is a product of capitalism. Despite the negative views of the media, the truth is that real estate investors who engage in the legitimate business of "flipping" houses are actually playing a key, under- appreciated role in stimulating our economy. They should not aggregate into the category of "unethical" or "illegal" just because they invest in quick-turn real estate.

In closing, if you buy a house below market value and ethically sell it for a higher price while making a profit, you are conducting a legitimate business, thriving during this recession and providing a valuable economic service. Like the quest to purchase a Nintendo Wii, simply going out and flipping a house isn't easy right of the bat, however a little extra give up front always pays off in the long run.