I believe that real estate investing is a business that's both vital and necessary for a healthy, thriving national economy. However it seems in recent years it's also an industry that's often better known for unscrupulous investors, shady deals and fraudulent activity rather than the economic value real estate investing brings.
The image we see painted by the media is all too often than of the slum lord keeping his deprived tenants under this thumb as he gets rich off their misery. Or it's the fast talking mogul spinning his crooked web of house flipping schemes, taking advantage of little old ladies and making heaps of cash from stealing houses from people.
While these images are far too sensationalized by the media, it saddens me to admit that there is often an unfortunate truth behind them. Even for real estate investors with a high moral fiber, it can become far too tempting at times to "fib" on the details to get a deal closed - especially when the solutions that are presented to you are limited and the stakes or potential profits are high.
It's not easy to say "no" to something that seems so little, when so much is on the line. But be careful, because what seems like so little could decay your moral fiber, and very well put you in prison to boot.
How Do You Look In Orange?
Orange jumpsuits, that is. As in, what they wear in prison.
Let's not mince words over this. What we're talking about here is loan fraud. And many would be successful investors have been wooed by how easy it can be to fall into, thus turning into crooked investors have now committed loan fraud.
Flipping houses is not illegal or immoral. This issue has been addressed numerous times by me and others in the real estate investing industry.
But real estate flipping real estate absolutely becomes illegal when loan fraud is involved. Typically this is because the resale of the house being flipped relies on inflated appraisals, fake documents, sales to "straw" buyers who represent original sellers, or "phantom" second loans.
And this is exactly the type of activity that can (and rightfully should) land you in the orange jumpsuit, my friend.
But My Loan Guy Told Me It Was Ok!
This problem has been compounded by the fact that many times when just beginning in real estate investing, "newbies" don't even realize they're committing fraud. Someone else - typically a trusted authority figure - walks you right through the process.
They have done it so often that they tell you, "Oh, trust me, this is ok. We do it all the time. Don't worry about a thing, it's just 'understood' in the industry that this is ok..."
And as a lamb to the slaughter, you offer your moral fiber and your future to be sacrificed. It may not seem like too big a deal at the time, but believe me, it is.
Common Ways You Can Commit Fraud
Telling a lender that you are buying a home for personal use as opposed to an investment so that you can get a lower interest rate or qualify for a higher loan to value is fraud.
Giving a buyer a couple thousand dollars so that they have enough funds for a down payment and not disclosing it to the lender is fraud.
Marking up a purchase contract so the seller can give money back to you at settlement for repairs, and not disclosing it to the lender is fraud.
These are just a few scenarios that you will encounter regularly.
If The Loan Guys Says It's OK, Why Isn't It?
When a mortgage broker or lender says it's OK to do something that feels shady, chances are high that they won't be the lender who ultimately funds the deal and collects the payments.
For example, I've been told before by some lenders that I can give my buyers the money for their down payment when flipping houses. I just need to have my buyer find a relative of theirs to sign a "gift letter" stating that the relative really gave them the money.
Can you believe it? The lender told me that!
Often a particularly aggressive lender or originator will simply manufacture the needed paper trails simply so they can close the deal and package the loan in a pool of loans, which is then sold to another lender.
Then the lender who buys the loan pool is ultimately the one who must collect the payments and bears the ultimate risk of dealing with the borrowers if the loan defaults.
All of this is completely transparent to the investor selling the property and therefore breaking a few rules seems really harmless, especially when the initial broker or lender says it's ok to do.
However, many times the investor isn't being told the whole story. If they were, I suspect that many more deals would fall apart due to rehabbers backing out.
As it is, the investor flipping the house gets a bad rap when, in most cases, it's actually the lenders and mortgage brokers who do most of the damage by facilitating fraudulent transactions.
I once sat across the table from a loan officer who asked me to sign a "gift letter" for a buyer. I made it quite clear that since I didn't give the buyer any funds to purchase, I wasn't going to sign the letter. The loan officer's exact words to me were,
"If you sign this letter, we'll settle next week and you'll walk away with $15,000 on this thing. If you don't, this deal goes bust."
The Right Way Or The Highway
I chose to let the deal go bust. If I can't flip homes the right way, I would rather not do it at all. You should have the same approach.
Now, I'm not saying that all mortgage brokers and lenders are committing fraud and that investors are never guilty. Please don't interpret it that way.
But I want to make these common pitfalls as clear as possible to "newbies" just beginning in the flipping homes business - those who don't have experience yet, but would like to do the right thing.
When inexperienced in any field, it is often easy for us to be led astray and do unethical things by accident simply because an authority figure confidently eased our concerns.
Honestly, it's sometimes very hard to do the right thing, especially when no one is looking. I'm not superhuman. Temptation is a common denominator for all of us, especially when the dollar signs are big. And they can be in this business.
But that's what flipping houses with integrity is all about ― doing the right thing even when no one is looking. And trust me, in the long run, doing the right thing ALWAYS pays off.
About The Author: W. Steve Cook
Since 1998 Steve Cook has been actively flipping houses as a full time, Baltimore-area real estate investor and has taught thousands of his students how to follow successfully in his footsteps.
Steve's specialty is his "flipping homes 1-2 punch", a proven system of real estate investing that powerfully combines wholesaling and rehabbing houses.
Also the founder of "The Flipping Homes 2.0 Community", Steve is dedicated to helping others in this thriving online community succeed through understanding and aggressively applying his time-tested, step-by-step approach to flipping real estate.
Get FREE weekly real estate investing tips from Steve Cook and other house flipping experts at http://FlippingHomes.com
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