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Vol. 2006-12 December, 2006

Real Property, "Flipping"

Purchases and sales of real property ("real estate") have been the subject of legislative enactments and judicial review, in light of many complaints of predatory lending and questionable sales to unsophisticated purchasers as potential investors.

In one recent case considered by the Court of Appeals:
".{3} The complaint defined flipping as the practice of purchasing real estate and then selling it within a short period of time. Appellant asserted that flipping is illegal when the sale occurs at a substantially higher price, based in part upon an inflated appraisal. According to appellant, in a typical scenario, an individual (the flipper) contracts to purchase real estate in his or a co-conspirator's name. Without obtaining title to the property, the flipper then contracts to sell the property to a third person at a substantially higher price than that specified in the first purchase agreement. The financing for both transactions is typically provided by the flipping victim as the flipper rarely advances any money to fund the process once the sale is consummated. To ensure financing can be obtained, the flipper arranges, either directly or through a loan officer, to obtain an inflated appraisal on the property, thus justifying the inflated purchase price. Once the sale is consummated, the flipper walks away with a profit equal to the difference between the price for which he contracted to purchase the real estate and the price at which he sold it to the innocent third party. The appraiser, lender, and title/escrow company have received payment for their services and the innocent third party is stuck with real estate that is worth substantially less than the price he or she paid for it and a corresponding excessive debt obligation. Wenner v. Midland Title Security, 2004-Ohio-3989.

Predatory lending practices are unlawful, and "flipping" under certain factual history, may also be unlawful under the individual states' consumer protection laws. However, purchasers are required to exercise due diligence in verifying the value and integrity of proposed property purchases, without permitting themselves to become prey to such practices.
Another Court held:
"{ 22}.Ohio has addressed "willful blindness" as long ago as Woodworth v. Paige (1855), 5 Ohio St. 70, where the court examined a transfer of property for any evidence that the grantee knew or should have known of an existing dower interest or whether he was a bona fine purchaser without notice. Quoting Jones v. Smith, 1 Hare 43, the court held, "`If there is no fraudulent turning away from a knowledge of the facts which the res gestae would suggest to a prudent mind; if mere want of caution, as distinguished from fraudulent and willful blindness, is all that can be imputed to the purchaser, then the doctrine of constructive notice will not apply -- then the purchaser will in equity be considered, as in fact he is, a bona fide purchaser without notice.'" Id. at 76. Mere "`vague reports from persons not interested in the property, will not affect the purchaser's conscience.'" Id. at 76, quoting Sugden on Vendors, 1040. Childs v. Charske, 129 Ohio Misc.2d 50, 2004-Ohio-7331

Remember Those Burma Shave Signs?
In the 1930's and '40's, before there were interstates, Burma Shave signs would be posted all over the countryside in farm fields. They were small red signs with white letters; five signs, about 100 feet apart, each containing 1 line of a 4 line couplet.and the obligatory 5th sign advertising Burma Shave, a popular shaving cream. Here is one of those memorable signs:
Burma Shave

AUTHOR / EDITOR: J. NORMAN STARK is an Attorney-at-Law, a Registered Architect, (AIA, NCARB) Registered Landscape Architect, Interior Designer, Planner and Senior Appraiser (ASA), admitted to practice law before the Bar of Ohio, the US District Courts, Ohio and Illinois (Central Dist.), the US Court of Appeals, and the United States Supreme Court. He is a Mediator, Arbitrator and Litigator with experience in Business, Construction Law, and Public Works, and with additional experience in Real Estate, Construction Attorney (Legal Project and Crisis Management), and as an Expert Witness (Forensic Architect). His office is in Cleveland, Ohio.

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