If you define flipping as buying a dilapidated property, completely renovating it, and then reselling it, then such a noble act as turning a neighborhood eyesore into a beautiful home is hardly an ethical question.
Flipping is legal, but is it ethical?
However, if you define flipping as getting properties under contract, and then–without ever making any improvements whatsoever, re-selling the property to another buyer, then an ethical issue exists that is rarely talked about or mentioned.
Usually, the more common question investors ask is, Is flipping houses illegal? As attorney Bill Bronchick explains in this article, it is not. Flipping houses is perfectly legal as long as there is no fraud involved.
There are plenty of actions out that are legal, but may be unethical. Law and ethics can be two very different things. So is flipping houses ethical?
What’s the Potential Ethical Issue with Flipping?
Sometimes the only reason flippers are able to get a property under contract for a very low price is because the owner doesn’t know any better or has an inaccurate understanding of what the value of their property really is.
Are you operating at the highest ethical level if you are getting a seller to agree to a very cheap price for their property when you know in your heart that they are unaware or misinformed as to the actual market value?
This is an ethical issue that exists below the surface of this business that investors should evaluate when embarking on flipping houses. The reality is that homeowners can simply call up a real estate agent, and if that agent markets the property on the MLS properly, most sellers can get in the ballpark of the market value for their property.
There is a reason why banks require that their REOs be listed on the MLS by a real estate agent. Banks want to get top dollar for their foreclosures!
There are two schools of thought, two sides to this issue.
Side # 1 – A Deal Is a Deal
Some investors take the stance that, if the seller is happy with what I’ve offered, then a deal is a deal.
Certainly that is a valid point. Think of all those eBay entrepreneurs out there who buy items from Craigslist sellers and then turn around and sell for far more on eBay. Anyone internet savvy enough to post something to Craigslist could certainly have put it on eBay. What’s wrong with finding a Craigslist deal and selling it on eBay for more? A deal is a deal, right?
Therefore, how is it unethical if the seller is satisfied with the sales price you have negotiated with them? What does it matter if you sell it for more, if they got what they wanted?
Side # 2 – Give the Seller Their Options
Other investors think, If I know that this seller could simply put this property on the MLS and make an extra $10,000 more than selling it to me, then I need to at least share the options the seller has, so that they can make an informed decision.
These two opposing views also bring forth practical issues to flipping that can be argued on both sides as well.
The drawback of not educating the seller of all of their options, such as putting the property on the MLS with an agent, is that after the contract is signed, they may begin asking friends and family about their decision. Soon the seller may realize, even before you’ve closed, that they are selling their property for far less than they should.
Their next move will be to try to get out of their contract with you by any means necessary (legal or otherwise). When people think someone is taking advantage of them (or they’re not getting their “fair share”), they go to great lengths to get things straightened out.
Yet, by educating a seller on how they can possibly get more for their property than you are offering, you may lose the deal altogether.
Proponents of educating property owners of their options would argue that some sellers actually appreciate the information and still end up selling to you to avoid any future hassles dealing with real estate agents or showing the property. They would be far less likely to back out of the deal. Or, even if they decided to work with someone else, they might so appreciate your helpful advice that they refer other business to you.
Which side of the argument are you on? Please add your comments below and tell us: What’s your stance on the flipping ethical issue?
Don’t really know how flipping works. Do most people who flip houses not let the seller list the house in the MLS?
If the seller lists on the MLS he will be competing with 200 other houses and you will probably lose the deal to one of 20 different people. If it is just with you, that’s the only house you want to sell, which is better for the seller.
This is wonderful. My heart has always wanted to be a blessing to the seller also. I haven’t started this business yet; but have read from different investors.. Thank you for honesty.Sellers should be able to trust us, Treat people thee way you want to be treated.THANK YOU.. THANK YOU, I WAS BEGINNING TO WONDER DOES ANYBODY REALLY CARE ABOUT HELPING OTHERS ALSO.
I’m of the opinion that the sell should be given all the options available to him.
I’m from South Africa and by freely giving advice iv found that it has resulted in many referrals.
Real estate is about people and building relationships as you go along…enjoy the journey
Hey Ishaan i see this post is from 4 years ago but im hopeful.
im also south african and I need some help, seems that this sort of business is not even known off here and you my only hope.
please email me or contact me on whats app
tladiike@gmail.com
081 722 2774
I have been in the seller’s shoes and also the buyer’s shoes. Sometimes when one is trying to sell a property for 3 years with NO offers, any offer even a low one is GREAT.
trying to sell a property for 3 years with NO offers – EVEN WITH FULL MLS LISTING
Read more: https://www.creonline.com/blog/is-flipping-houses-ethical/#ixzz2IiSWNotS
Flipping houses is no different than a store owner finding the best deals he can from a supplier and selling them to someone else for a profit. These houses are your inventory. You take the time to find them and to also find potential buyers. The buyers could take the same amount of time and sell the house to you. this is just your business. Everyone has the same opportunity to put that house under contract. You may even be getting the end buyer a better deal than he would have negotiated himself. Many times a house if flipped for less than the listed price. If someone on your buuers list wants to look for a house they have the same opportunity as you do. If they rely on your expertise than it is very fair. When a store owner ships on consignment isn’t that a flip?
In everything we do we should look for the win-win situation. I have to sleep at night and at some point face God with my decisions so I always let people know they have options. I let them explore what that may mean in a dollar amount but I do tell them they may do better by doing x,y, or z. I have only lost one deal that way and all the others trusted me because of my honesty.
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There is a value added in finding, valuation and negotiation and marketing of an ownership interest. I don’t know what is fair value ? Having the seller commit to selling on the MLS for 6 months through a realtor can sometime cause more harm than allowing a fast cash close. I Rehabbers and distressed owners need deals as solution and some don’t mind seeing you do well. Unlike the gurus, there is never a great margin available that is involved. If there was I can see how your conscience would tend to bother you. Good people appreciate your work as a “flipper” ….
Most serious investors screen out the sellers to only deal with motivated sellers. The motivated ones need something done today, not tomorrow. My screening process lets them know that if they have time to wait out the market, then hire an agent. But if they need something done today, I can probably help. They know I am in this business to make a profit and that I can’t buy every house on the market. I buy houses with problems and solve the problems in order to make that profit. I have systems in place that a regular person doesn’t. Now that screening is done when sellers contact me first.
Some investors may make the first contact with sellers and I would think most investors would use some sort of way to weed out the unmotivated ones. FSBOs have already made the decision to sell by owner instead of hiring an agent so, who are we to question their decision? The agents need to be working the FSBOs to get listings more than investors trying to convert FSBOs into listings for agents.
I think the main thing for brand new investors is to NOT act like an agent. Sellers are not hiring you to help them and some people don’t know the difference. So if a seller is thinking you are an agent, then make sure and let them know you are NOT an agent that can help them sell their house. You are a professional buyer who buys houses for profit by solving problems. If you flip or assign the contract for a profit, then you have the contacts and “know how” to do that. Its no different from agents who get listings and sell them in one day because they know of buyers who will take it immediately. That happens alot with “cream of the crop” REOs in big cities. Realtors don’t tell the banks “This particular property will go fast, you don’t need to list this one with me, just call the investors yourself so you can save a commission”
Now some investors are also agents but at that point, those investors/agents know they need special disclosures and how to disclose and handle the situation properly.
I guess the main thing is to make sure sellers know that you are not helping them other than that you are an investor who buys properties for a profit. If you don’t hide that, then your profit is ethical no mater how much or how fast you make it.
As long as everything is disclosed it is ethical. It helps the buyer, the investor and mostly the seller. In most cases the seller can’t afford repairs and would be stuck with the house and in worse of a position.
Buying forclosures, then listing with an agent solves the problem for me. Selling without an agent has become more difficult now that the law requires the deed to have printed (on the front) the last closing agent, the compensation, and the tax assessment. It takes a lot less work to find out what a property sold for last.
I am reminded of what Dan Doran said when responding to claims that real estate flippers are vultures: If it weren’t for vultures, we’d be up to our eyeballs in rotting, stinking carcasses. Vultures don’t kill anything; they just clean up the messes created by others [like the housing market crisis created by politicians forcing banks to loosen up on lending requirements], and perform a very important function. The bald eagle, the symbol of our country, spends about 60% of its time as a vulture, eating carrion. We should be proud to be called vultures. The unethical parasites are the politicians and bureaucrats who need to see themselves as “helping” people, no matter how much damage they do. As H.L. Mencken said, from the man who wants/needs to help you, run like hell. Thank you for the opportunity to rant!
There are two terms that we use and it sounds like they are being used inter-changably here. Wholesaling is when you buy a house and before taking possession or closing, sell it to someone else. You did no work to the house, just found it, put it under contract, and found a new Ca$h buyer. I think of flipping a house as buying a house that needs work, buying it for less than the asking price (to allow for the repairs that need to be made and a little profit), then fixing the house up and “flipping” it. I think the “unethical” part comes when the “flipper” does NOT do a good job repairing the house for resale, and leaves lots of additional work for the new (end) buyer to handle. We purchased a home from a “flipper” and found after the fact that he had not done many things that “should have been done” to the house before putting someone new into the home. I agree with the folks who say they have to be able to sleep at night and answer to the higher power for their actions. Definitely do unto others as you would have done to you. Stay ethical!!
I split the middle. I truly believe you have to create a win/win situation or you will ultimately have a
lose/lose deal. I believe in given the seller their options, however, I also let them know that just by listing a property on the MLS with an agent doesn’t mean you’ll get asking price or even the price the buyer pays after the agent’s commission.
What we’re really talking about here is wholesaling, not flipping. Traditional flipping is just as described above, – “If you define flipping as buying a dilapidated property, completely renovating it, and then reselling it, then such a noble act as turning a neighborhood eyesore into a beautiful home is hardly an ethical question.” – however, wholesaling on the other hand is where the ethical questions come in.
I try to think of things in the positive light of the seller. My job as a wholesaler is to match a buyer with a seller… period. While doing this, you have to create the win/win deal. It helps if you know what your buyers are looking for and why your sellers are selling. I don’t ever suggest you mislead a seller. Tell them what your plans are and tell them what their options are. The value you’re really creating is time.
The seller may want or even need a quick sale in exchange for a lower price depending on their motives. The buyer (cash investor) doesn’t have the time to follow every lead. Your job as a successful wholesaler is to be the match maker and there is absolutely nothing wrong (IMO) with getting paid for not only your time but also your ability to create that win/win deal.
I believe flipping is and should be considered ethical as long as the proper disclosures are included and you are doing a service to the Seller by ensuring they do understand all their options. They will appreciate that from you and build credibility. On the other hand, in the state that I live in (Oregon), the regs and agents see it different. To them it is more about putting properties under contract and selling properties you do not actually own as well as selling real estate without a license. It is a huge problem here. Read the ORS laws for Oregon, they are brutal!
If you are a wholesaler and have found a motivated seller, and you know that you have a super deal for your investor. Why not make your offer a little higher if you know the seller has no idea of the value of their house. That way the seller wins, your investor wins, and you win as well.
Flipping houses is as ethical as the person doing the flipping, just like selling cars, donuts, or anything else. It can be done honestly, or not. I like to think most investors or flippers are doing it honestly. Most people I know doing it are solving problems for people for a living. It’s a great feeling.
When I make an offer to buy the seller is free to accept or reject that offer. No one holds a gun to their head. There is nothing unethical when we consider the seller is in control of saying yes or no.
Of course it is ethical.. In this market, in order to flip, you pretty much MUST add value in order to be able to flip. You are taking a distressed sale and making it conventional. You are taking a non-financable property and allowing it to qualify for conventional/FHA/VA financing. You are taking a dated house/kitchen/bathroom and making them modern and then allowing the end buyer to pay for these remodels with their loan money. All of these and more add value wich is your profit.
One aspect of this scenario that your article ignores is the cost of listing on the MLS. If the seller retains an agent to get an additional $10,000 in sales price, but ends up paying a $15,000 commission, they’re actually worse off.
As an investor and a realtor I typically discuss the situation then the options with the seller. Is foreclosure looming, how much repair does it need, can another buyer get financing, etc? Then let the seller decide. I’ve had it go all three ways (ie; buy direct, list it on the MLS, lose the deal altogether). I sleep fine at night. In fact most buyers thank me dozens of times for relieving them of their burden:)
I wholesale a good number of properties every year and I have yet to have someone question my ethics while doing so. I’m very upfront with the sellers and to be honest most of them know they can get more out of the property if they really wanted to deal with it. Truth be told, when you call an investor out to your home to look at it you have already accepted the fact you’re not getting a retail price for it. I make sure of that on the initial call, I’m not going to waste my time or theirs if I’m just going to get an earful when I tell them what my offer is.
It’s my experience that there are 2 levels of home buyers….retail and investors. Retail buyers are very picky but will pay full price if they like it. One the flip side, most investors are going to have somewhat the same offer…everyone has their buy formula and they differ a little bit but nothing huge by any means. So, if they want to deal with picky buyers verbally destroying their house and showing it over and over again over 6 months. They can certainly do that, I’ve even encouraged them to do so in the past…and still bought the house from them. The other option is to just sell it the way it is, not put any work into it, and getting it off your plate. Is there a difference in price, of course there is…the question the seller needs to ask themselves (and one I remind them of) is whether or not that discount is worth the time, convenience, and peace of mind knowing it’s done and they don’t have to deal with it anymore.
I haven’t found many buyers that fall into the middle of those two….most sellers are selling ‘as is’ in hopes of finding the guy who wants to buy it, fix it up and then live in it. Obviously this would be a great buyer for them but the plain fact is, it’s going to take forever to find them. I remind them of that as well…
So, truthfully, I don’t see any ethical issue at all. As someone mentioned above – it’s the seller that has all the power and the one making the decision….no one is putting the proverbial gun to their head.
Once I have a property under contract I will turn around and start calling my cash buyer list the second I’m walking out the door. Just closed on one last Friday…purchased it for $58,500 – sold it 2 hours later for $69,900….never took title, only went in the thing twice and the best part is…the seller is happy as he got what him and I agreed on, the end buyer is happy as he’s going to make a pretty penny on the rehab and obviously I’m happy as I walked out with a $10,000 check and I put maybe 5 hours of work into it.
I’m of the school of thought that says an able-bodied, mentally stable adult can do their own due diligence. They’re selling a HOUSE. Common sense should tell them to do all they can to get the most from the sale. Whether they know they can get a better deal or not is none of my business. Some may back out of the contract after finding out they can get more money elsewhere. That’s fine. It’s their prerogative. But I won’t feelbad about making a low offer & getting a GREAT deal just because that person missed their opportunity to sell higher.
I have an issue with some people contacting me wanting to buy my house and get upset when I tell them it is not for sale. I fought for three years with my ex to get the house back and I have every intention of dying here.
This influx of informercial salesmen has created a monster in my opinion. If my house does not have a “For Sale” sign out front it is not for sale. And even though my contact information is obtained through public information, unsolicited contact to me reeks of stalking.
Just my opinion as I get at least one of these calls a month.