One of the more profitable ways to make money in real estate is to become a house flipper. You buy a fixer-upper for cheap, renovate it, and sell it for a healthy 20% to 30% profit.
But it’s hard to justify buying a property to flip when many still can’t afford their first house. With the current housing situation being that 65% of American houses are rented, you can’t help but wonder — is house flipping ethical?
Take a look at arguments for and against house flipping, and decide for yourself.
Why Some Home Buyers Consider House Flipping Unethical
Potential home buyers often bring up these arguments against flipping homes.
House Flipping Increases Local Housing Prices
A common argument against house flippers is that they don’t care about the local community.
They buy run-down houses in expensive neighborhoods because they’re a good deal, only to resell them.
This inadvertently causes gentrification, a process in which existing residents are driven out of their community by rich folks. They can no longer afford to live in the area they once called home as property taxes and mortgages skyrocket.
New businesses open up, causing old stores, barbershops, and restaurants to run out of business. Longtime residents are forced to move out, and the community wanes and eventually disappears.
House Flippers Only Do Cheap Fixes
The sole focus of a house flipper is to maximize profits, which is why they must keep repairs cheap.
The more they spend on renovations, the less money they’ll make — it’s really as simple as that.
That’s why many of them perform band-aid fixes wherever possible, leading to drooping ceilings, power surges, and leaking pipes.
This is especially common when they pay contractors per project instead of per hour. They aim to finish the house quickly and move on to the next gig instead of ensuring everything goes smoothly.
As for home appliances and furniture, particularly deceptive house flippers go to the junkyard to get those items or buy the cheapest model. They do this to get a better deal by saying it’s a furnished house.
Some House Flippers Are Fraudsters
Another popular notion against house flippers is that many are scammers who’ll deceive you to extract every penny from you. While this, of course, doesn’t apply to every flipper, there is a seed of truth here.
Some lie about the condition of the house, hide major repairs behind a pretty coat of paint and artificially inflate the listing price through appraisal fraud. This is done with the help of a fraudulent appraiser who’s in on the scam and gets a cut.
Another concern is the type of home buyers these house flippers target. Many are cash-strapped individuals. House flippers use that to their advantage and offer to refinance loans with high interest rates and get even more money from the deal.
Investors aren’t safe from scammers, either. They might get promised excellent returns on their investment, only to discover that the house they’re buying isn’t even for sale or is in horrible condition.
House Flippers Utilize Contingencies to Avoid Subpar Deals
A common strategy when flipping houses is to include an inspection contingency clause in the offer.
The clause is a get-out-of-jail-free card that allows the house flipper to back out of a deal that isn’t as good as they initially thought.
Now, there’s nothing wrong with doing this if the house flipper discovers additional damages on the property they’re about to buy. A $30,000 repair can be the difference between making a healthy profit and losing everything.
But that’s not what this is about.
This argument is against the thousands of house flippers who claim that the deal is contingent on the inspection from their business partner.
The only issue is that their partner is actually a relative or friend who’s there to save the house flipper if they change their mind for no good reason.
House Flippers Take Advantage of the Elderly
Some older people aren’t aware of the extent of inflation and how much the housing market has shifted over the past few decades. They might think that their $40,000 house from 1975 is now worth $400,000, when in reality, it may be closer to $600,000.
And with such a rapidly changing market, who could even blame them?
Unless they’re downsizing with the help of a real estate agent, they’re prone to signing a poor deal with a house flipper.
Of course, these people will eventually learn that they got scammed. They’ll talk to their friends and relatives about the deal and mention the number. But because the sales contract includes an “all sales are final” policy, they can’t do anything about it.
The slippery house flipper will get away with the deal and get encouraged to do it again.
The Counterargument: Why House Flipping Is a Legitimate Business
Here’s what those in favor of house flipping have to say about the business model.
House Flipping Is a Legitimate Investment Business
Most house flippers don’t have enough cash to buy houses, which is why they rely on investors.
It’s a typical real estate investing strategy where the house flipper aims to keep everyone happy while making a profit through clever decision-making.
Closing a deal where house flipping investors or the home buyers aren’t happy will tarnish the house flipper’s reputation. They won’t find a new real estate investor and will run out of business. In a way, the model itself can keep house flippers ethical.
House Flippers Increase a Neighborhood’s Value
The counterargument to house flipping causing gentrification is that they’re not a city planner interested in reshaping a neighborhood. They only want to make a house look tidy and sell it for a profit.
This can increase the value of the neighborhood in general, as everybody wants to be surrounded by high-quality homes.
The previously run-down house that the local kids spray painted turns into a gorgeous homestead with the help of a skilled house flipper.
House Flippers Get Better Deals on Renovations
After a couple of years in the industry, a house flipper will have a firm grasp on the local real estate market.
They’ll know who the best contractors are for which job, and they tend to work with the same few construction workers. These long-term business relationships allow them to get the most cost-effective renovations in order.
And if a house flipper buys materials from the same supplier, they can negotiate excellent deals, allowing them to save thousands of dollars in renovations. While this helps the flipper make a profit, it can also tie into the quality of the renovations. Using a team you can trust increases the chances of genuinely improving the quality of a home.
House Flippers Have a Low Impact on Housing Market Prices
House flipping is a billion-dollar industry — we can’t argue with that. At the same time, the real estate market size sits at well over 2.5 trillion.
House flippers hardly make a dent in housing prices compared to corporate and private real estate equity investors.
Another factor is how long house flippers hold on their investment. The goal is to flip houses in a short time frame, typically under a year, and the average house flipper only sells about two to six properties per year.
Compare that to real estate investors who utilize a buy-and-hold strategy that only causes the housing prices to grow, and you can see that house flippers have a much smaller impact on housing rates.
Renovations Save Home Buyers From Stressful Projects
House flippers are renovation experts; they have to be if they want to make a profit.
In addition to getting lower prices and better quotes from contractors, they save home buyers from the stress and time investment associated with renovations and repairs. And they won’t get price-gouged because their job is to know how much things cost.
When the house flipper is done, the house is ready to be furnished and moved in.
How to Ensure Your House Flipping Business Is Ethical
If you want to become a house flipper, here are some tips to help you make sure your conduct remains ethical and moral:
- Be transparent and honest: Your potential home buyers shouldn’t have to guess who you are. Introduce yourself as a professional house flipper and explain what changes you’ve made. If something wasn’t inspected or needs to be fixed, let them know.
- Honor your deals: Don’t back out of a deal you’ve signed unless you have a legitimate reason. If you didn’t do enough research before buying, learn from your mistakes and take note for future purchases.
- Build a reputation: A positive reputation with everyone you meet is essential. If you run into dishonest individuals, they won’t be able to tarnish your reputation.
- Offer fair deals: If a seller undervalues their property, it’s a good idea to tell them the true market value and suggest consulting with real estate agents. Many will appreciate the honesty, honor the deal anyway, and even refer your services to others.
Is House Flipping Ethical: Conclusion
House flipping can be an ethical business strategy that benefits everyone involved. If the flipper is honest, knows the real estate market, and has a strong network, they can make a profit without resorting to shady tactics.
It’s also important to acknowledge that some fraudsters disguise themselves as house flippers with the goal of making quick money. Thankfully, these individuals are an exception and should be treated as such.
