It’s a term you hear more often these days, property flipping. The word often has negative connotations associated with it due to the resulting inflated house prices and the opportunity for fraudsters, but what is it, and is it legal?
Property flipping is the act of buying cheap property and selling it again to make a profit. In most cases, it’s totally legal and a legitimate way to make a living. In some instances, flipping involves fraud and underhand schemes which make it very much illegal.
Let’s explore how millions of people stay on the right side of the law when flipping property versus what to watch out for to make sure you’re not one of the unlucky ones who ends up falling foul of this money-making tactic.
Legitimate Ways to Flip Property
Whether working on your own or as part of a larger corporation, you can make money from property flipping while keeping to the rule books. Here are the most common ways and what to consider when pursuing them.
Making Improvements
Buying a run-down property and improving it before selling it for a profit is one of the mainstream methods of property flipping. But what exactly is involved with it and how do you begin?
As the absolute starting point, work out your budget. You need to buy the property in the first place, including stamp duty, legal fees and estate agent fees. On top of this, factor in the cost of carrying out improvements and the turnaround timeframe.
Then, you need to plan the work. In an ideal world, you’d carry out all the renovations yourself. But this isn’t always feasible. Some situations call for expertise, knowledge and skill you just may not possess, so contact the relevant tradesmen for quotes and timescales before deciding on your next course of action.
Finally, when everything is complete, it’s time to sell. We advise making the place look homely to attract interest and to help potential buyers envision themselves living there.
Estate agents can advise on the best price to market the property at, but it’s worth seeking a few different opinions to ensure you get the pricing right. If you go too high, you risk not getting enough interest on your property. Too low, and you’re missing out on valuable profits.
As a Business or an Individual
Both individuals and companies can flip houses to make money, but you have to pay tax either way. If you’re interested in property flipping as a job and decide to set up a limited company, you’ll need to pay corporate taxes.
If you’re keeping it as a hobby alongside your main job, you’ll still need to pay income tax on any earnings. You won’t pay capital gains tax, as property isn’t viewed as an investment by HMRC.
Factor taxes in when looking at your budgets and deciding if the property is worth flipping or if it’s going to flop.
What to be Wary of When Property Flipping
Aside from the obvious financial risks involved with property flipping, there are other legal matters to keep in mind. As with all large transactions, you want to protect yourself and any money you’ve invested from potential fraud.
Mortgage Loan Fraud
Mortgage loan fraud is highly illegal and takes many shapes. In some cases, it involves two or more parties colluding together to artificially inflate the price of a property so they benefit financially from it. In others, it can involve identity theft, leaving innocent parties clueless about what’s happening.
Numerous parties can be involved by omitting details on loan application forms, deliberately entering false information or by obscuring the full facts for their own gains. It can even be as straightforward as a fraudulent appraiser giving the property a much higher value than it’s worth to help a fake buyer secure a bigger mortgage loan.
Non-Existant Renovations
Another way to work the fraudulent property flipping market is for a buyer to buy a property and sell it on for an inflated price despite not carrying out the work they said they would. The main way this happens is for a duplicitous appraiser to be in on the fraud scheme and give the house a falsely high value.
Reducing the Risk
If you want to get into property flipping, there are steps you can take to minimise the risk of falling foul to fraud.
It’s safest to work with a reputable estate agent and ensure all communication occurs via their office. If anyone refuses to work with you through the office, isn’t connected to an agency or asks you to sign documents without giving you a chance to read through them first, exercise caution. These are all red flags that something isn’t as it seems.
The same principles apply to taking out a mortgage. If you need a mortgage for the purchase, ensure you go directly to the lender or do your research into finding a suitable broker. Thoroughly check all paperwork and question if any details are missing or inaccurate.
I’m a Victim of Illegal Flipping. What Should I do?
If you’ve suffered from the fallout of illegal property flipping, it’s a scary and stressful time. It often leads to individuals being out of pocket or even facing legal action against them. Luckily, there are organisations out there that can help to set the record straight and possibly recoup any losses.
Firstly, if you’re in the UK, you need to contact Action Fraud to report any fraudulent activity. They can advise further on the next steps you should take.
Another option, which involves cost but gets results, is to seek help from a financial consultant. They’re able to carry out an investigation to see if any illegal activity has taken place. The process involves checking documentation, analysing transactions and cross-checking cash flow, along with any other necessary means.
If you find yourself facing legal action, it’s worth seeking a solicitor who specialises in mortgage fraud. They have the relevant knowledge and expertise to protect your rights and to help recover any losses you’ve experienced as a result of fraud.