Can flippers save the housing market?
In an attempt to breathe more life into the housing market, HUD is changing an FHA rule that prohibited insuring any home sold in fewer than 90 days. Officials hope the change will help rehabilitate distressed properties faster and raise home values.
The term "flipper" became a dirty word in the real-estate business just before the bubble burst. Now the federal government is turning to these quick-turnaround investors to pump some new life into the deflated housing market.
At the beginning of February, the U.S. Department of Housing and Urban Development dropped — for a year — the Federal Housing Administration’s prohibition against insuring a home that had been owned by the seller for fewer than 90 days.
The idea is to “facilitate the return of repaired and habitable properties to the market in a timely fashion,” according to the announcement by HUD, and hopefully to lift real-estate values as these properties are sold.
A boon for the first-time homebuyer
“We’ve seen quite a bit of activity in the market on the part of first-time homebuyers,” says Paul Bishop, director of research for the National Association of Realtors. But, he says, many of the options are too “distressed” for many buyers to consider or lenders to finance. “This will give them an opportunity to purchase a nice home at a pretty reasonable price.”
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And given that FHA loans are estimated to account for as many as half of all the loans made to first-time homebuyers, that increases the pool of buyers for flips dramatically.
Of course, just how much of a lift these investors will give is anyone’s guess at this point. And that shot in the arm might be limited if the backlog of homes going through the foreclosure process swells later this year, analysts say.
Will lenders agree?
Moreover, it’s unclear how many lenders will play along with the FHA and make loans for properties flipped in fewer than 90 days.
Bank of America, for one, says it was still “assessing the guidelines” and had not made a decision yet about lending on these quick flips.
Wells Fargo says in its “first phase” of its approach, it is “allowing FHA financing for a qualified borrower and property within 90 days of when the seller acquired the home, provided that the purchase price is less than 20% more than what the seller paid for the property.” It will continue to review the FHA policy and “evaluate the timeline for additional changes.”
In other words, at this point, Wells won’t finance a purchase with a big markup in value that sells in fewer than 90 days from its last sold date.
And industry observers say it may be a hard sell for some smaller banks that were burned several years ago when the market crashed.
“Investors are excited about it, but mortgage companies are hesitant until we know a little bit more,” says John Anderson of Minneapolis-based Twin Oaks Realty.
A green light for investors
San Diego investor Curtis Gabhart is ecstatic about the new rule and says it will definitely boost his investment in Southern California homes.
“We were (flipping) one or two properties a month until January,” he says. “With the new rule, we’ll probably do three to five a month. It increases our yield and decreases our risk.”
James Ward, an Ocala, Fla.-based short-sale negotiator with Crosswind Properties, says he has been getting 20 to 40 calls a week since HUD’s announcement from investors interested in buying and flipping more properties.
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“If it works the way everyone is hoping it will, it will be huge,” Ward says.
HUD initially instituted the 90-day rule because, at the market’s peak, many investors were found to have conspired with appraisers and lenders to artificially inflate values. However, Bishop and many investors argue that was fraud on the part of the few bad seeds. The environment now, they argue, is different.
And HUD has put some conditions on these flips:
- All transactions must be arms-length with no “identity of interest” between the buyer and seller or other parties involved.
- The property in question must have “no pattern of previous flipping” in the past 12 months.
- And in cases where the sale price of the property is 20% or more above the seller’s cost — which most of these sales will likely be — the lender must justify the mark-up with documents outlining the renovations, and/or order a second appraisal. Moreover, the lenders must order a property inspection and provide it to the buyer before closing.
“I’m surprised that other (government) players are not taking a similar position,” says Ted Akers, managing director of Investor Funding Alternatives, which provides bridge financing to investors.
Flipping making a comeback
However even without the waiver, flipping is making a comeback, as investors use cash to buy short sales and bank-owned properties.
In Southern California, 3.5% of the homes sold in January had previously changed hands between three weeks and six months prior, according to MDA Dataquick. A year ago, no part of the area had a flipping rate over 2.1%.
Boom-and-bust areas such as Miami and Phoenix also saw significant upticks in December — the last month for which data on these areas were available from Dataquick — as did Clark County, Nev., where Las Vegas is located. Here, flips jumped to 4.2% of all sales in December, up from just 1.7% the year before.
No time like the present
Investors can’t say with certainty for how long this new rule will boost their buying. Most are concerned with the so-called “shadow inventory” of homes that are delinquent but not yet foreclosed on.
A new study by John Burns Real Estate Consulting estimates that 5 million houses and condominiums on which mortgages are now delinquent will go through foreclosure, short sale or another process that puts them on the market over the next two years.
“It certainly is threatening another write-down in home prices,” says founder and CEO John Burns, especially if the economy does not improve later this year.
That threat has investors ready to buy and sell now, while mortgage rates are low and an army of first-time homebuyers is out in force, armed with the government tax credit.
“I don’t know what’s going to happen to prices in six months,” Gabhart says. “If I buy it and sell it in 90 days, I’m not as susceptible to the ups and downs of the market.”
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Just two weeks after the FHA waiver was lifted, Anderson says he is closing two investor deals that his clients hope to have fixed up and sold within the next couple of months – despite the hesitation on the part of some lenders.
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“What we’re hoping is that it will all be sorted out by the time the properties are fixed up,” he says.
For these and other investors, the FHA waiver also serves as a long-delayed nod to the mostly positive role that investors played in the nation’s housing market over the years.
“Flipping became a bad word,” Anderson said, “but that was a few bad players. Many did real work and really improved the market.”
Do you go to court without an attorney too?
Investor buyers are THE solution to the problem we are facing now. We pay cash for the property so the bank loves that. We negotiate the bad debt away and turn a distressed property into one that can be sold for retail. We give the new homeowner a great deal. Everyone is happy, and the seller is out of debt. No worries about the bank coming after him for deficiencies, and no huge black mark on their credit for 10 years.
People like Mr Short Sale Artisan there, (I hear your software is great by the way, my negotiator uses it) know the value we bring to the market. We are cleaning up the banks books by getting rid of a toxic asset, keeping more REO inventory from hitting the market, which would have even more negative impact on our economy, and we are giving the buyer a great deal while stabilizing the neighborhood.
I think most of the comments here can be put in the category of "eifersucht", as the Germans would say.
Some people hate to see other people gain something, even if they are providing a service.
As for the Obama-haters, they'll see a socialist conspiracy in a piece of burnt toast.
They bought the house for $404K (REO) and added about $30K in fix-ups (carpet and paint). They are selling it for $549K - what a profit! When I confronted them about it - they just said they are selling at market value and they have the advantage over me when obtaining the properties. What a load of bull - that is a huge profit margin for them
Case in point. I just remodeled a house for what I thought was a teacher and after I was done with the job house sold in 1 day. A instant $120,000.00+ profit for this teacher (2 months) and now I know she is also a Realtor had the balls to send me a bill of $275 plus $125 for repairs that her handyman damaged. I take pictures of every job I work on for insurance purposes and because I am a State licensed General Contractor.
But every transaction I have had with a Realtor they have tried some type of scam. From selling houses I have owned to other customers home. They are the root of the problem with the overinflated housing market. Do your home work and you can find a house you like that an agent is not involved in.
I have no problem with flippers, AS LONG AS THEY USE THEIR OWN MONEY.
My sister flipped about 20 houses in the past ten years.
The last two didn't sell.
So they were repossessed.
WHO PAID FOR THOSE ???
we did - the taxpayers - or all of us including our grandkids. Just add it to the already out-of-control deficit.
THIS IS ANOTHER EXAMPLE OF HOW THE GOVERNMENT SHOULD HAVE STAYED OUT OF THE HOUSING AND MORTGAGE MARKET.
Now we're trusting the same bunch of morons to get us out of this mess.
THAT CHANGE WE CAN COUNT ON.
My sister shrugs. Destroyed credit, NO PROBLEM.
Six months break. She's now shopping for more flippers.
In this new gimmick the flippers are the suckers.
I don't see how having more people buy crappy houses and rehabilitate them, and put them back on the market is going to increase home values unless there is a corresponding increase in available buyers. I don't see where the increase in buyers is going to come from. So from my calculations this is a trick to get flippers to buy more homes so they can be recorded as sold. Whether the flipper can offload them or not, is no real concern of the FHA.
With more good houses to choose from the available first time home buyers will simply hold out for the best deal and the prices will actually be driven down not up. A lot of flippers will lose money or go months without a sale, and maybe default, with the homes going back on the market as foreclosures. We are chasing our tail. The government needs to stop tinkering and let the market take it's lumps and then start to recover for real. They don't want to do that because a lot of wasted money is tied up in the housing market. Do most people really need a 3 bedroom 2 bathroom house except to pile it full of useless junk. A two bedroom 1 bath house worked fine in the past and had more people living in it than today. Also, do we really need an expensive stainless steel fridge to simply keep some food cold. Don't the white ones work just as well and have for years.
We created stupid, artificial needs among the public to drive up corporate profits and enrich the treasury. Both big business and government are partners in crime. They want to pay people $8.00 dollars per hour and expect them to be able to buy a home for 100,000 dollars. Yet everyone complains American workers are over paid. No one mentions that they are ripped off at every turn and over charged. I hope people stop being suckers.
CEO, Short Sale Artisan
It is interesting to see when people get upset about other people making a profit yet they expect a paycheck from their boss every Friday. If the company is unprofitable they still expect to get paid the same.
Ask yourself this. If you had the option of buying 1 house that had backed up toilets with turds still in it, smelled like a dead body, was moldy, leaky roofs, old plumbing and electrical, avocado carpet that was 30 years old, no appliances, cabinets, maybe even throw in a cracked slab would you buy it if you had other options?
Or if you could buy it at the courthouse steps (trustee sale) which is public but ran the risk of not knowing if someone was still living in the property, never saw the inside so you didn’t know if it was nice or crappy or even had structural issues.
Would you buy either of these two if you had to pay cash for it? If you said yes either of these two how much of a discount would you expect?
Consider that buying properties that can be flipped takes SO much homework and research it is a full time job. So either A) have to quit your job or B) work double time… What’s that worth? Oh yeah and if you’re not successful you wasted all your time and worse yet if you lost money you lost time and money you could have been working for a secure paycheck.
The choice is yours. The American dream has been to be able to take a risk but in turn because you took that risk that others were unwilling to do, and you worked harder than your competition and you got a little lucky you could become wealthy.
This isn’t how it was in England or other countries (most still) you had to be born into it. I was a high school dropout who lived in a broken down VW bus until I got tired of it and started working as a janitor in a gym just to get a job. From there I worked hard and kept going and am proud to say I am not rich by any means but am VERY lucky and fortunate to be where I am.
Sounds like most of you know nothing about real estate! Flipped homes are no different than homes sold by owners in good or bad times. The market determines pricing....not flippers. Indeed it is the flipper who is at a disadvantage. He most often has to pay cash, especially if TLC is needed and lenders will not lend for the purchase. Then he has to sink more cash into the property for TLC. That's 100% risk up front. Even people who purchase homes typically only put up 20% down or less: only a 20% (or less) risk of capital. Add to that the flipper has to sell the property quickly to free up his cash...that means a competitive price. He typically does not live in the home as an owner can for months until it sells. If he uses a real estate agent, approximately 10% of his sales price goes to commissions and closing costs and I haven't even considered the closing costs at purchase.
Bottom line: flipping is very risky. That's why I have for years "bought and held" properties as rentals. That's where the real money is and unfortunately today that money lies dormant. Why? Because the federal government (FHA, conventional conforming loans) limit the number of properties that can be financed to 4 or 10 depending upon location. That prevents people like me from financing new home purchases or even refinancing our existing homes in order to free up equity as the down payment for more home purchases. Personally I'd buy between 6-12 homes a year if I could get to my equity. But that is nearly impossible. The only way I can get to my equity is to sell my current properties and then pay cash for a replacement property since I'd still own more that 4/10 financed properties......oh yes.....a pay the government capital gains on the sold property.
So here I sit with a ton of equity I can't touch watching a buyer's market go by and unable to do anything about it. If you want to get rid of the glut of foreclosed homes, free up lenders to those most qualified to purchase them....the profession real estate investor.
Oh well, at least the cash flow is great.
I flipped two homes in Dallas. The first, I did well. The second, I got burned really bad when the market took its dive. Flippers are not the problem at all.
I'll admit, it was really easy to get a loan on both, even though I was a strong buyer.
Not until the mass of foreclosures is wiped off the books would I ever consider "flipping again." Home prices, no one knows when they will truly stabilize. Whether you're looking to buy a permanent home or "flip" one, proceed at your own risk. Right now, homes are a terrible investment. Better to put your money in th bank and earn 1%. At least you aren't loosing!
It also amazes me that the TV shows on TLC and A & E showing flippers are still airing. However, notice their original air dates at the bottom of the screen. Most were filmed back in 05' or earlier. It might make for great TV, but it misleads others into thinking they can become rich doing this high-risk business.
Nice way to sucker flippers to get some of the overload off the market.
When things were good it was hard to make money.
Smart flippers will stay away from this scam
another fine puff of smoke from our inept govenment
To me, a flipper is someone that purchases property that needs some TLC or brought up to the 21st century. They change floor plans, add or delete features and generally make the house better than it was before they bought it.
Those people who bought low and sold high, all within 90 days of the first sale were taking advantage of the broken housing market and the malfunctioning banking industry.