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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.

Here's a question: Is flipping properties for profit fraud?

March 1, 2013

HousingWire executive editor Jacob Gaffney managed to stir up quite a firestorm yesterday in discussing the most recent Bloomberg BusinessWeek housing cover -- with an assertion in his own commentary that flipping homes might be considered "fraudulent" activity.

His original comments -- later amended to clarify that he was referring to a lender's viewpoint -- made it into some commentary over at Yahoo!'s Lookout blog yesterday, driving some impassioned comments on our website as well as emails to our editorial team. 

Reader reaction was all over the map, as is common for heated issues of any sort, but the most impassioned responses were from property flippers themselves. A sampling of this sort of reaction we received (from a reader email):

How is flipping fraud? Is anyone forced to buy homes or properties? I purchased a property that was fixed up and resold. I took the risk and through hard work was able to turn a profit. I just purchased a home that was in horrible shape and spent loads of money and time into getting it into rentable condition. The property was purchased for 34K and I put another 20K into it, not including my time. I could sell it for at least 150K. Is that fraud?

It's an interesting question, actually. Is it fraud?

Say an investor snaps up a home at $30k, invests $20k along with sweat and hard work in repairs and then turns around and sells it for $150k.

Is it reasonable to then ask why the home was available at just $30k to begin with, if all it took to sell it at $150k was $20k in repairs? If the property was bank-owned, did the bank and associated investors just get taken for a ride?

How much profit is acceptable when an investor buys a property and rehabs it for a flip, before we start to think someone might have gotten a raw deal?

Or is property flipping simply a case of finders-keepers, losers-weepers? Is this simply legitimate American know-how meeting up with incredible opportunity? Do investors buying and rehabbing properties fill a vital role in the U.S. housing market?

I don't claim to know the answers to these questions, but I do know this: these are all questions we should at least be willing to ask.

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