House flipping makes a comeback
A different breed of flipper is hunting out deals at foreclosure auctions and trying to turn them – and turn a profit.
With house flipping making a comeback, more and more bidders are flocking to public auctions of foreclosed homes such as this one in San Mateo, Calif., where more than 487 homes were on the block for a five-day event earlier in the year. © Justin Sullivan/Getty Images
Four years after the collapse of the U.S. housing bubble, flipping homes is back in fashion.
Jon Mirmelli, a Phoenix real-estate investor, learned late on the morning of Sept. 28 that a never-occupied custom house on the northern fringes of Scottsdale, Ariz., was going up for auction around noon the same day. The six-bedroom home, built on a three-acre desert plot, has a kitchen with two dishwashers, four ovens, "antibacterial" copper sinks, and a master "spa" bathroom with space for a flat-screen TV visible from the tub.
The minimum bid, as set by a unit of Citigroup Inc., which had a $1.3 million mortgage on the home, was $379,900. After several minutes of bidding among investors and their representatives, some wearing shorts and flip-flops, Mirmelli won the home for $486,300. A week later, he agreed to sell it for $690,000 to a woman who moved in this month.
During the housing boom, millions of Americans tried to make money by buying and then quickly reselling new houses and condominiums. That kind of flipping stopped several years ago, as home sales stalled amid a surge in foreclosures and curtailed lending.
Now, a different breed of flipper is proliferating: one who seeks bargains at foreclosure auctions. Unlike the boom-time flippers, the latest generation needs cold cash, lots of local-market knowledge and strong nerves.
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Investors compete mostly with other full-time professionals who monitor foreclosure auctions at county courthouses across the country. The bidders often haven't had a chance to inspect the property or determine whether it's occupied by tenants, who may be hard to evict.
Sometimes "you have half an hour to make a half-million-dollar decision," says Damon Lines, an executive at PostedProperties.com, a Phoenix company that provides information to foreclosure investors and bids on their behalf. "That's something most people can't or aren't willing to do."
- Video: Is house flipping back?
In the states where home prices have fallen the most, many local real-estate markets are dominated by foreclosed property, dragging down the value of neighboring homes. Barclays Capital estimates that banks and mortgage investors have 639,000 foreclosed homes for sale across the U.S., largely concentrated in Florida, California, Arizona and Nevada. That's equivalent to more than 10% of expected U.S. home sales this year.
Flippers swoop in at public auctions of foreclosed homes, known as trustee or sheriff sales. In many states, the lender sets the minimum bid, and takes possession of the property only if no one bids more. In the past, the minimum generally was about equal to the mortgage balance due. But in today's market, in which the value of many homes has dropped far below the loan balance, lenders wouldn't attract investors if they set the minimum at that level.
So lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession.
Sean O'Toole, chief executive officer of ForeclosureRadar.com, a research firm, estimates that in November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami.
The advantage of such an outcome for the bank is that it gets money for the property right away, even if it isn't enough to cover the loan balance due. The bank doesn't need to make repairs to the home, cover the taxes and insurance, or pay real-estate agent commissions.
The risk for banks is that if they set the minimum bid too low, the home might end up selling for much less than they could reap if they took ownership of it and sold it themselves. But with 7.5 million U.S. households behind on their mortgage payments or in foreclosure, many lenders are overwhelmed. They're negotiating with distressed borrowers and figuring out how to sell the growing supply of foreclosed homes.
"The banks are so screwed up," says Mirmelli, the Phoenix investor, that they don't always have a clear idea of the value of the property they are foreclosing on.
To help them set the minimum bid, banks often consult with local real-estate agents and use software that estimates housing values. American Home Mortgage Servicing Inc., which collects payments and handles foreclosures on behalf of banks and loan investors, uses a formula designed to "achieve a fair value for the property and induce third-party bidders," says Christine Sullivan, a spokeswoman for the Coppell, Texas-based firm.
American Home starts with a broker's estimate and subtracts the expected costs of taking ownership of the house and selling it. The minimum bid is above the net proceeds American Homes believes it could get by acquiring and selling the property itself, she says.
Outside the Maricopa County court building in downtown Phoenix, trustees -- companies that are hired to handle foreclosure auctions -- offer as many as 600 or 700 houses every weekday. A typical auction lasts only a few minutes. On a recent afternoon, a few dozen bidders and onlookers were clustered around a trustee employee seated on a lawn chair conducting auctions. He kept track of the bids on a laptop computer perched on one knee.
Many of the bidders are regulars at the sale, bidding for themselves or on behalf of investor clients. "We're all kind of like a little dysfunctional family," says Steve Mutsaers, a representative of PostedProperties, who was wearing black sunglasses, a white polo shirt and gray plaid shorts. During the summer, Mutsaers says, he wears a sombrero to cope with temperatures well above 100 degrees.
People who attend trustee sales here and in other foreclosure hot spots around the nation say the auctions have recently been attracting more bidders. "Properties are getting bid up," says Hal Feinberg, a Phoenix property investor. "You can still get good deals, but you've got to be more patient than you were a year ago." He and other investors in the Phoenix area say they have been flipping a lot of the homes they buy to Canadians taking advantage of a weak U.S. dollar.
I don't claim to know it all, but I do have a background in trading and a couple of degrees, and yes I do have a bias about markets. One can always learn more, and one can even have a legitimate argument as to whether my beliefs about markets are absolutely correct. But what I can't do is argue with someone knows SO MUCH less than they think they do, about a subject that is as complex as this one.
I think you asked people to educate themselves earlier. You also asked at one point that people not bring capitalism versus ?? into the argument. But capitalism and an understanding of markets is all you talk about ( the understanding part you might lack).
Under our system, the one that many americans believe in, free markets and yes speculators serve a valid function. They take on risk and in so doing participate in our "price discovery" process. Without speculators, who would step in when psychology and market dynamics in an highly illiquid market take hold ? Would you have prices free fall far beyond a prices where investors believe profits could be turned ? Do you really lack clue to that degree ?
I can't continue this. I only added here in case anyone really is learning anything here. But as you said, all would do well to educate themselves.
@you must be kidding, you say "Flippers by definition "flip." For every house they buy, they sell one. SO they don't effect supply or demand in even the medium term." That's a classic definition for a modern speculator. They don't affect supply and demand but they cause the price to rise. That increase in price is their profit. They don't create any goods but they profit from existing goods. Most other businesses create goods (i.e. the airline industry, the oil industry, even the banking industry when they provide loans). Speculators only speculate, buy, jack up the price, artificially raise the short-term price and force everyone else to buy at that inflated price. If a house is passed on to more than one speculator, the price can readily increase 5-folds or even 100-folds. Speculators are only concerned with short term profits but the long term effects of their speculation often cost more to the economy as a whole. They typically results in bubbles. When a home builder builds a home, he increases the supply side, which as a result drops the price even they are usually careful not to reach that point. So, they are in the legitimate business of building and selling homes. They create an actual good, which they purchase in parts and resale as a completely built home on a lot size, city address, road, park, etc.
When you argue against flippers, you are arguing that those profits should have entirely accrued to buyers who were going to live in them ( how about landlords ? should they be allowed to participate ?).
The prices would still have reflected the hyper easy credit and "liar loans" and so on anyway, and the longer term changes in supply/demand that they caused. Normally the risk involved in "flipping" would keep it to an appropriate level. These were rare circumstances that (in hindsight) make it appear that the flippers were a major cause. But it's the environment that made flipping seem so low risk that was the problem.
Did flippers sometimes beat out a family to a good deal ? Of course. Is this a valid argument that flipping caused the bubble in any way. No.
One of the great problems is the banks. Instead of going to auction, there are many cases where banks could simply work with the existing owners to bring the mortgage down to current value and let the owner stay in the home. However, many banks will not work with an owner, perhaps because they feel the owner should be liable for the mortgage they set up,; or because they wish to go after the owner for the shortfall between the mortgage and the sales price. But this shortfall is very unlikely to be recovered.
The Feds could easily set up a thoughtful program whereby the existing homeowner gets to bid the house in at the current value, instead of being wiped out in an auction. Maybe there would be a small additional premium paid by the Feds in the form of a second mortgage that the homeowner could owe, so that the bank get something above its foreclosure price, the owner gets to retain their home, and the feds make a loan that makes this all workable.
For example, in the case of the $1.3M mortgage that went for $389,000, and then was flipped for $689,000, the homeowner could pay the bank, say $450,000, borrowing $50-60,000 from the Feds and owing the bank $380-390 on the new first mortgage. Dealing with the owner is a win for everyone, and the Feds help keep people in their houses instead of Wall Street in business. There would be a new industry and certainly some complications; but at least the goal would be to help one person at a time save their homes; rather than see the profit go to speculators (which is still better than leaving vacant houses on the market and continuing deterioration).
Get someone who understands the real estate markets to work on this program and it could help a lot of people.
I suppose if you saw a house burning down, you would think that the firemen caused it.
Even if the scholars at USA Today agree with you, that's not a valid argument.
Short term capital gains are taxed at regular income rates!
198 properties sold from 2000 to 2008
Average hold 23.67 months
Average Gross profit 1165%
Monthly Gross Average Profit 49.2%
I think many in here come out phrasing this problem as a capitalist vs. non-capitalist battle. That's very simplistic and simply not the case. Please make your cases by sticking to a single topic. If I said the lakers are better than the bulls. I'd hope that everyone would be comparing the lakers to the bulls, not the miami dolphins, red skins and braves. Yes, there are all sports but the topic is very specific here.
So the question is, did flipping homes cause the bubble? The simple answer is yes but it wasn't the only cause of the problem.
The other cause was mortgage derivatives being traded on secret markets in Wall Street. This second recognized cause was bad because it flourished on new pools of mortgages (similar to a ponzy schemes that requires new pools of investors). The more they were, the more the trading volume, which resulted in more bettings. That's in part why banks decided to relax the lending practices so that more people could get a mortgage (so, it's not merely due to the impetus of government trying to share an "American Dream" like some here claimed; the greedy banks saw the color green behind every move they made). Then came the unethical behaviors of some because the drive was to get more mortgages as opposed to more good mortgages. But then again, that's another topic and it's not what we're talking about.
Please do your homework and look at any reputable newspaper around the time of the collapse and practically each and everyone of them, whether liberal or conversative leaning, admit that flipping was part of the problem. It's a fact. FHA took its measure to cut out flippers from loans that they insure. It shocks me that many are in here making circular arguments or flat out evading the topic to talk about other things. Flippers cause home prices to rise significantly faster than wages. In the short term, it does seem harmful because a select few of us can still afford the homes but in the long haul, many people can't keep up with the artificially inflated prices. And what happens next is that the pools of new qualified buyers slowly dries out. Then you have homes sitting in the market at prices that the average income in the neighborhood cannot afford. FYI, the newly published median income per person in the U.S. is only $32K. The median income per family last year was around $52K. Try buying a house at that price. The reason why the last bubble was so severe is that while most people were priced out of conventional 30-yr mortgages, the banks allowed them to pay interest only (again, that's because of the derivatives market that I mentioned above, not because of a government order; btw, banks don't take orders from the government otherwise they would lending today and modifying loans; banks do and have always done what good for their bottom line). Typical home buyers can't compete with flippers because flippers pay cold cash without any pre-conditions whereas the typical homebuyers loan approval process alone can take 30 days plus a home inspection. As such, the flipper would win anytime and would reset the bar much higher than the typical homebuyer can or is willing to buy. In a really free market environment, everyone, from the little guy to the big gun should have the same chances of success. That's not the case in the housing market when you have flippers around.
In essence, "flipping" is technically called "speculating" in other markets. That's why the ariline industry (not the average joe on the internet) is behind the congress so that they can pass a law to stop Wall Street traders from speculating on the price of oil. It's the same idea as flipping. In the end, it costs the airline industry more money to buy the oil that they need to run their legitimate business; a business that creates real services to people in this country. There you have it. Please educate yourselves.
<p>I signed up for hotmail just to reply to this. Thank you for the free email account.</p>
<p>First off MSN is affiliated with about 20 different mortgage companies. Thats just for starters. That is the short side of it. Not to mention the Brother company that owns the largest foreclosure auction in the world. So heres my question. Whats the BS I see all the time on the news where you have to disclose all your affiliations. See the average idiot doesn't get get this low down dirt bag sales pitch. I get it.</p>
<p>See you think everyone is an idiot and the ones that aren't want to play your game. Nothing in it for me. Even if there was. I would still wretch at the thought of doing business with a bunch of dirt bags like you.</p>
For the record I'm a liberal, but I agree with those who have no problem with bidders at auctions. It would be nice if cash wasn't required though, allowing those who can secure a mortgage to participate. But that would add complexity and challenges to would be lenders,
so it is understandable.
About the bubble: Flippers didn't cause it at all. That is, the conditions that caused the uptrend, were the trend itself and the bad mortgage practices. A lot of "me too" simpletons did get into it, egged on by the media, and that might have added something to the bubble.
But many of them were punished eventually for their naivete.
There is no risk of investors artificially causing such a bubble now. They me be right about the bottom, or they may get seriously burned. That's the risk they take. My guess is that getting burned in this case would mean values stagnating for a long time, rather than
(oh there's a correct use of "than") going down a lot from here. If they are buying at a price where rent would give a decent return, then who could blame them (note correct use of "then" as in if........., then.........). It's certainly their right.