There's a lot of confusion these days about the legality of property "flipping."
Property flipping is, generally speaking, a perfectly permissible practice. The classic scenario is when a buyer purchases a property below market value, usually because the home needs quite a bit of work or because it was sold pursuant to a short sale or foreclosure. The buyer then makes repairs and sells the property...typically after a short amount of time...for a significant profit, much closer to the actual market value.
However, illegal (criminal) property flipping is also on the rise. Depending on how prosecutors charge the offense, perpetrators subject themselves to state or federal prison sentences and substantial fines.
To clarify when flipping houses is legal versus illegal, our California real estate fraud defense attorneys1 have prepared the following article. Specifically, we will address
If, after reading this article, you would like more information, we invite you to contact us at Shouse Law Group.
Let's start off with an example.
Bob agrees to purchase a home for $100,000. But before closing the deal, he teams up with a co-conspirator, Jim, who agrees to purchase the same property for $160,000...a price which is much higher than its current market value.
Bob seeks a loan for the second deal from a different lender. He finds a real estate appraiser who...for three times his normal fee...agrees to overestimate the property's value in order to justify the loan amount. The lender approves the loan and releases the $160,000. Bob then pays off the $100,000 loan and he and Jim split the remaining $60,000. Jim defaults on the loan, the property goes into foreclosure and Jim walks away with $30,000. The lender finds out the truth about the property's value and can't possibly recoup its money.
Simply put, this type of "flipping" is a crime because it violates California's fraud laws. In fact, it is sometimes referred to as mortgage fraud or loan fraud.
Now, let's change some of the facts.
Let's say that instead of teaming up with Jim, Bob found an unsophisticated and unsuspecting buyer to purchase the property at an inflated price. This may or may not qualify as illegal property flipping.
If the buyer simply hasn't done his homework and is willing to pay the asking price for the property, Bob hasn't done anything wrong.
If, however, Bob enlisted the help of an appraiser or mortgage broker to provide a fraudulent appraisal or fraudulent loan documents in order to justify the inflated asking price, he has committed the illegal form of property flipping.
The bottom line is that if fraud is in anyway involved with the "flip" of the property, the conduct is illegal and may be punished as a crime.
There are a number of individuals who may be involved in an illegal property flipping scam. These may include (but are not limited to):
- property buyers (who buy with the intent to flip the property),
- "straw buyers"...that is, people who agree to purchase a property in name only, without any intention of actually making payments on the property (these individuals may also be prosecuted for participation in a straw buyer scheme),
- real estate brokers / agents who are "in" on the scam,
- real estate appraisers (who base their appraisals on home improvements that haven't been made or on minor cosmetic improvements that are listed as major renovations),
- mortgage brokers (who process and file fraudulent loan documents and who...depending on the circumstances...could also be charged with a predatory lending scheme), and
- anyone else willing to draft or forge fake documents to make the sale appear legitimate.
Fortunately there are a variety of legal defenses that a California real estate fraud defense lawyer could present on your behalf; the most important of which is that you didn't have fraudulent intent.
If, for example, you can demonstrate that your sale was simply a savvy business move (that didn't involve any fraud) or that the appraisal you provided was based on factors that you had reason to believe were legitimately true, then you could be acquitted of this crime.
As Riverside criminal defense attorney Michael Scafiddi2 explains, "Because there is a fine line between legal property flipping and illegal / criminal property flipping, it is critical to seek representation from a lawyer who is experienced with California's real estate fraud laws. An attorney who is skilled in this area knows how to present your case in a favorable light so that any allegations of fraud are successfully defeated."
Illegal property flipping is not a crime that is specifically prohibited by any one law. Instead, it is prohibited under a variety of laws...laws that the prosecutor will evaluate to determine which are the most applicable to the facts of your case.
The most common crimes that are charged in connection with a California illegal property flipping scheme include (but are not limited to):
- Mail fraud
Mail fraud is a federal crime. Essentially, you commit mail fraud anytime you use the mail to commit any type of fraud. If convicted, you face a federal prison sentence of up to 30 years and a maximum $1,000,000 fine.3
- Wire fraud
Wire fraud is also a federal crime. You commit this crime when you use interstate wire communications facilities (that is, the phone lines, the Internet, etc.) to perpetrate a fraud. If convicted, you face the same penalties listed above under mail fraud.4
- Penal Code 487 PC grand theft
You violate Penal Code 487 PC California's grand theft law anytime you permanently deprive another person or entity of money or property worth more than $950. This offense is what's known as a wobbler.
A "wobbler" is a crime that prosecutors can file as either a misdemeanor or a felony, depending on
- the facts of the case, and
- your criminal history.
If convicted of grand theft as a felony, you face 16 months, or two or three years in the state prison and a maximum $10,000 fine. If convicted of the misdemeanor, you face up to one year in a county jail and a maximum $1,000 fine.5
In addition to the penalties noted above...and to any other penalties that might be imposed with a conviction for this offense...a conviction for involvement in a California illegal property flipping scam subjects you to
- an additional and consecutive one-to-four years in the state prison if you deprive the lender of more than $65,000,6
- an additional and consecutive one-to-five years in the state prison and either a maximum $500,000 fine or double the amount of the fraud, whichever is greater, if you deprive the lender of more than $100,000 and you were convicted of two or more felonies involving fraud in the same criminal proceeding (∗this penalty...known as the aggravated white collar crime enhancement...may even be imposed on top of the additional one-to-four years that is added on by the punishment just referenced above),7 and
- professional discipline if you hold a California professional license (given that criminal convictions can affect professional licenses...especially when the crime is classified as a crime of moral turpitude which is typically the case with fraud offenses).8
Call us for help...
If you or loved one is charged with illegal house flipping and you are looking to hire an attorney for representation, we invite you to contact us at Shouse Law Group. We can provide a free consultation in office or by phone. We have local offices in Los Angeles, the San Fernando Valley, Pasadena, Long Beach, Orange County, Ventura, San Bernardino, Rancho Cucamonga, Riverside, San Diego, Sacramento, Oakland, San Francisco, San Jose and throughout California.
Additionally, our Las Vegas Nevada criminal defense attorneys are available to answer any questions about Nevada's mortgage fraud laws. To learn more about Nevada property flipping laws, go to our page on Nevada property flipping laws. For more information, we invite you to contact our local attorneys at one of our Nevada law offices, located in Reno and Las Vegas.9
1Our California fraud defense attorneys have local Los Angeles law offices in Beverly Hills, Burbank, Glendale, Lancaster, Long Beach, Los Angeles, Pasadena, Pomona, Torrance, Van Nuys, West Covina, and Whittier. We have additional law offices conveniently located throughout the state in Orange County, San Diego, Riverside, San Bernardino, Ventura, San Jose, Oakland, the San Francisco Bay area, and several nearby cities. For help with your illegal property flipping charges, please contact us at Shouse Law Group for a free consultation.
2Riverside criminal defense attorney Michael Scafiddi uses his former experience as an Ontario Police Officer to represent clients throughout the Inland Empire including San Bernardino, Riverside, Rancho Cucamonga, Hemet, Banning, Fontana, Joshua Tree, Barstow, Palm Springs and Victorville.
3U.S. Code Title 18 Part 1 Chapter 63 Section 1341 -- Mail fraud. ("Whoever, having devised or intending to devise any scheme or artifice to defraud [such as an illegal property flipping scheme], or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, or to sell, dispose of, loan, exchange, alter, give away, distribute, supply, or furnish or procure for unlawful use any counterfeit or spurious coin, obligation, security, or other article, or anything represented to be or intimated or held out to be such counterfeit or spurious article, for the purpose of executing such scheme or artifice or attempting so to do, places in any post office or authorized depository for mail matter, any matter or thing whatever to be sent or delivered by the Postal Service, or deposits or causes to be deposited any matter or thing whatever to be sent or delivered by any private or commercial interstate carrier, or takes or receives therefrom, any such matter or thing, or knowingly causes to be delivered by mail or such carrier according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.")
4U.S. Code Title 18 Part 1 Chapter 63 Section 1343 -- Wire fraud. ("Whoever, having devised or intending to devise any scheme or artifice to defraud [such as an illegal property flipping scheme], or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises, transmits or causes to be transmitted by means of wire, radio, or television communication in interstate or foreign commerce, any writings, signs, signals, pictures, or sounds for the purpose of executing such scheme or artifice, shall be fined under this title or imprisoned not more than 20 years, or both. If the violation occurs in relation to, or involving any benefit authorized, transported, transmitted, transferred, disbursed, or paid in connection with, a presidentially declared major disaster or emergency (as those terms are defined in section 102 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122)), or affects a financial institution, such person shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.")
5California Penal Code 489 PC -- Grand theft, punishment. ("Grand theft is punishable as follows: (a) When the grand theft involves the theft of a firearm, by imprisonment in the state prison for 16 months, 2, or 3 years. (b) In all other cases, by imprisonment in a county jail not exceeding one year or in the state prison.")
See also Penal Code 18 PC -- Punishment for felony not otherwise prescribed; alternate sentence to county jail. ("Except in cases where a different punishment is prescribed by any law of this state, every offense declared to be a felony, or to be punishable by imprisonment in a state prison, is punishable by imprisonment in any of the state prisons for 16 months, or two or three years; provided, however, every offense which is prescribed by any law of the state to be a felony punishable by imprisonment in any of the state prisons or by a fine, but without an alternate sentence to the county jail, may be punishable by imprisonment in the county jail not exceeding one year or by a fine, or by both.")
See also Penal Code 672 PC -- Offenses for which no fine prescribed; fine authorized in addition to imprisonment. ("Upon a conviction for any crime punishable by imprisonment in any jail or prison, in relation to which no fine is herein prescribed, the court may impose a fine on the offender not exceeding one thousand dollars ($1,000) in cases of misdemeanors or ten thousand dollars ($10,000) in cases of felonies, in addition to the imprisonment prescribed.")
6California Penal Code 12022.6 -- Taking, damaging or destruction of property; commission of felony; additional punishment. ("(a) When any person takes, damages, or destroys any property in the commission or attempted commission of a felony [such as illegal property flipping], with the intent to cause that taking, damage, or destruction, the court shall impose an additional term as follows: (1) If the loss exceeds sixty-five thousand dollars ($65,000), the court, in addition and consecutive to the punishment prescribed for the felony or attempted felony of which the defendant has been convicted, shall impose an additional term of one year. (2) If the loss exceeds two hundred thousand dollars ($200,000), the court, in addition and consecutive to the punishment prescribed for the felony or attempted felony of which the defendant has been convicted, shall impose an additional term of two years. (3) If the loss exceeds one million three hundred thousand dollars ($1,300,000), the court, in addition and consecutive to the punishment prescribed for the felony or attempted felony of which the defendant has been convicted, shall impose an additional term of three years. (4) If the loss exceeds three million two hundred thousand dollars ($3,200,000), the court, in addition and consecutive to the punishment prescribed for the felony or attempted felony of which the defendant has been convicted, shall impose an additional term of four years. (b) In any accusatory pleading involving multiple charges of taking, damage, or destruction, the additional terms provided in this section may be imposed if the aggregate losses to the victims from all felonies exceed the amounts specified in this section and arise from a common scheme or plan. All pleadings under this section shall remain subject to the rules of joinder and severance stated in Section 954. (c) The additional terms provided in this section shall not be imposed unless the facts of the taking, damage, or destruction in excess of the amounts provided in this section are charged in the accusatory pleading and admitted or found to be true by the trier of fact. (d) This section applies to, but is not limited to, property taken, damaged, or destroyed in violation of Section 502 or subdivision (b) of Section 502.7. This section shall also apply to applicable prosecutions for a violation of Section 350, 653h, 653s, or 653w. (e) For the purposes of this section, the term "loss" has the following meanings: (1) When counterfeit items of computer software are manufactured or possessed for sale, the "loss" from the counterfeiting of those items shall be equivalent to the retail price or fair market value of the true items that are counterfeited. (2) When counterfeited but unassembled components of computer software packages are recovered, including, but not limited to, counterfeited computer diskettes, instruction manuals, or licensing envelopes, the "loss" from the counterfeiting of those components of computer software packages shall be equivalent to the retail price or fair market value of the number of completed computer software packages that could have been made from those components. (f) It is the intent of the Legislature that the provisions of this section be reviewed within 10 years to consider the effects of inflation on the additional terms imposed. For that reason this section shall remain in effect only until January 1, 2018, and as of that date is repealed unless a later enacted statute, which is enacted before January 1, 2018, deletes or extends that date.")
7California Penal Code 186.11 PC - Aggravated white collar crime enhancement.
8To learn more about how criminal convictions...such as illegal property flipping can affect professional licenses...please visit our pages on professional license issues (which are organized by individual professions).
9Please feel free to contact our Nevada criminal defense attorneys Michael Becker and Neil Shouse for any questions relating to Nevada's mortgage fraud laws. Our Nevada law offices are located in Reno and Las Vegas.