House flipping is a popular investment strategy for folks who are willing to put in some sweat equity to turn a profit. There are, however, many legal issues you should be aware of before flipping a house. You'll want to discuss the following four issues with a real estate lawyer.
Loan Restrictions on Reselling
One of the biggest potential problems that can appear during a flip is a restriction on resale. This usually occurs when a buyer uses a particular type of loan aimed at providing greater access to housing. For example, FHA loans generally prevent borrowers from flipping their houses before the loan has been paid in full. That applies even if the proceeds of the sale would easily pay off the loan. Before you use a loan to purchase a house for flipping, talk with a real estate attorney and a loan officer about the potential restrictions.
It can take a title a while to clear, and you should be very careful about marketing a house before you're legally able to sell it. A title may be delayed simply due to paperwork and processing issues. Unfortunately, the delay might also happen because of an outstanding lien. You may need to hire a real estate lawyer to help you remedy the title situation before you move ahead with the flip.
All buyers have to be careful about the representations they make regarding properties. However, flippers need to be extra vigilant because they almost always perform renovations to the houses they're selling. Do not assume anything based on the simple fact that you saw the work done. Ask a home inspector to look at the house and verify that everything is as expected. If there is a problem, you'll either have to fix it before you list the property or include the issue in the disclosures you make with the sale.
Investment Rules and Tax Laws
When you invest in properties for profit, there are limitations on how you can use them. This is especially the case if you're flipping a house that you may also have used as a residence and claiming it on your taxes. It's wise to try to segregate houses you're investing in for flipping from anything you might use personally. In addition to hiring a real estate attorney, you may also want to incorporate a business to handle the investment side of the equation.
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