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, 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?