Real Estate Flipping
Real estate flipping is one of the most popular practices associated within the real estate industry these days. So popular in fact, that a number of television shows were created to document the new found excitement of this relatively old practice. HGTV created a show called “Designed to Sell”, while A&E got in on the action with “Flip This House”. A number of other shows also surfaced, glamorizing the practice further.
Flipping refers to the act of buying a property, making quick and often vast improvements, and then selling it for a profit. The key is to sell the property for more than the original purchase price and any incurred costs involved in the restoration and subsequent resale of the property.
Property flipping has been around for years, practiced by real estate investors and common people, including my father, who would buy and sell property at a modest return. However, in recent years low interest rates and surging home prices made flipping extremely profitable to anyone involved. It’s popularity also surged, making it a considerable aspect of pop-culture and a detriment to the U.S. economy.
So much so that the recent explosion of property flipping has led to urban gentrification in many communities in the United States. When interest rates were extremely low a few years back, a large number of real estate investors stormed into less-than-favorable communities and bought up cheap and run down properties. After quickly refurbishing them, they flipped them at a much higher sales price, causing a spike in local rents, displacing the struggling members of these communities.
The total cost of living had become too high for many inhabitants who had little choice but to relocate to other lower-income communities. And this was the start of a vicious cycle that infected new communities that these new inhabitants would soon call home.
We see examples of it today if we look at oversold regions such as Las Vegas, Nevada who have seen an unprecedented rise in home prices, and a subsequent bust.
But the problem can’t be blamed on the general public who simply want to finance a home. I have friends who moved out of Los Angeles after coming to the realization that home ownership there was simply out of reach. Unfortunately, their migration to Texas will lead to further gentrification in those communities.
Property flipping is so out of hand that the Department of Housing and Urban Development has regulated the time requirement for owning a property to greater than 90 days between purchase price and sales date to qualify for FHA-insured mortgage financing. While this measure is helpful, it won’t do enough to curb property flipping, especially with all the specialty lenders that have surfaced during the housing boom that create workarounds for all these new regulations.
These days, everyone seems to want to get in on real estate flipping because the media makes it seem so easy. But now that the housing market has cooled off, it’s not the best time to get into flipping. At least not in certain oversold markets like Los Angeles, Las Vegas and New York. If you watch the flipping shows on television you’ll get an idea of what housing markets they are targeting. This could be a good indicator of what’s still hot, and what’s not.
The only real positive in property flipping is the increase in local construction jobs and a decrease in crime in the newly refurbished communities. But the displacement of low-income residents and the impact on our economy is too significant to ignore. Most real estate professionals now recommend homeowners stay in their new home at least 3 years before they turn around and sell. Perhaps patience is a virtue after all, at least in the current market.
