June 7, 2011
Marty Boardman flips houses – and he’s back in business.
Boardman, a partner in the Phoenix-based investment firm Rising Sun Capital Group, was riding high in 2007 flipping homes – until the housing bust killed his business overnight. His firm went into hibernation, Boardman took a 20-month break, his wife went back to work, and they lived on their savings. But by 2009, with the government’s $8,000 first-time homebuyer tax credit in place, the Phoenix market started to thaw. By April 2009, Boardman and his partner jumped back in. Since then, they’ve flipped 50 houses. This month they made one of their most successful deals yet: they bought a bank-owned property at auction in mid-April for $157,000, and then spent $9,000 renovating it, and sold it on June 1 for $215,000. After sales costs, they netted $30,000.
House flippers like Boardman — investors who buy, renovate, and quickly resell at a profit — helped drive up prices and fuel the real estate mania of the mid-2000’s. Now, four years after the housing market’s collapse, the savviest of the flippers are back — but this time they’re the good guys. They’re buying foreclosed homes, fixing up distressed properties and helping make the market more stable. They even may be critical to the housing’s recovery, by helping clear the market of excess inventory that is pushing down prices. Home values have fallen for 57 consecutive months, according to Zillow.com, a real-estate website.
A sea of more 1.8 million foreclosed homes in March, or nine months’ supply, are in some stage of repossession, with another two million expected to go into foreclosure in the near future according to the business data firm CoreLogic. The high numbers of foreclosures continue to drag down U.S. housing prices.
Yet even though home prices are scraping 2002 levels, consumers are still very wary. Only about 9 percent of traditional homebuyers — those acquiring a primary residence, vacation home, or retirement property — are planning to buy in the next 24 months, according to an April survey by real-estate publisher Move Inc. Another April survey commissioned by the real estate data firms RealtyTrac and Trulia was even more ominous: 40 percent of renters surveyed said they plan never to buy a home.
These are better times for real estate speculators, however. The Move survey found that one-third of investors are planning to buy in the next 24 months, and 11 percent of those plan to resell within a year. In the Phoenix area, purchases by flippers slowed to a trickle in 2007 and 2008, according to preliminary findings by researchers from Cornell University. But by 2009 (the last year covered by the study), flippers were back in force, buying more homes in Phoenix than in the previous ten years. And where there are foreclosures, there are flippers: the team’s data showed that neighborhoods with more foreclosures are also those with quicker turnover properties.
Many experts say that flippers had a hand in inflating
the disastrous housing bubble.
If flippers are helping the market now, it represents a dramatic role reversal. Many experts say they had a hand in inflating the disastrous housing bubble. Before the market tanked in Florida’s Sarasota and Manatee Counties, for example, 37 groups of flippers bought and sold hundreds of houses that ended in defaults totaling half a billion dollars. Speculators, who buy and quickly resell houses without improving them, helped jack up prices to unaffordable levels.
All over the country, people with no real-estate background jumped in. John Heithaus of Metropolitan Regional Information Systems, the nation’s largest real estate multiple-listing service, says he knew things were out of control when his wife’s manicurist told him she had purchased three houses — she later lost everything in the collapse. Shows like Flip That House (TLC) Flip This House (A&E), Flipping Out (Bravo) and The Big Flip (HGTV) made flipping look like easy money while downplaying the effort, expertise, hidden costs and headaches involved.
Today, the business is dominated by a different type of investor.
The amateurs have largely left the market, according to Crocker Liu, professor of real estate at Cornell University’s School of Hotel Administration. And speculators — those who buy and resell houses without improving them — aren’t faring well this time around. “Buying a property and then hoping to resell it because the market value is going to increase [without making any improvements] . . . is dead, dead, dead,” says Michael Corbett, author of Find It, Fix It, Flip It.
‘Foreclosure flippers are like catfish—they keep the ocean
floor clean. They’re people who make markets efficient.’
Those who are left are often full-time investors. Unlike in boom times, they’re likely to earn steady, modest profits. Jim Shute, a property developer during the boom, has flipped about 35 foreclosed properties in the last two and a half years in southern California, making a 20 percent net profit on an average flip. In Phoenix, Boardman says that while occasionally he and his partner “hit a home run,” their profits are running at about 8 to 10 percent per transaction.
One reason flippers can make money is that they play the game when most individuals are sitting on the sidelines. Successful flippers must do several things well, especially in periods when they can’t count on rising prices to bail them out of mistakes. Corbett says they pick a few markets and get to know them intimately; that helps them buy low and not overspend on renovations. They also choose properties that can generate rental income if they don’t sell immediately. And like anyone who invests in real estate, they run risks: Even expert flippers who know a market inside and out lose money, as Boardman did in 2007, when prices drop precipitously.
While some critics may see the profits of short-term investors as undeserved, flippers have an important market niche that’s critical to getting housing moving again. Corbett notes that many foreclosed properties need significant work, but average homebuyers usually want houses that are move-in ready. Flippers fill that gap by investing the money and expertise that it takes to get a property ready for the retail market. Cornell’s Liu says they’re “like catfish—they keep the ocean floor clean.”
The federal government seems to agree. A Federal Housing Administration rule in place since 2006 prohibits first-time home buyers qualifying for low-cash-down FHA-guaranteed loans from buying properties and reselling them within 90 days after the previous purchase. In early 2010, the FHA suspended that rule so people could buy and flip houses again. FHA Commissioner David Stevens says that since the waiver went into effect, the agency has insured more than 21,000 mortgages for properties that previously would have been disqualified under the rule.
Maybe because its reputation is on the rise, flipping is back on television too. This fall, Spike TV will debut Flipping Foreclosures, starring two Utah-based speculators. In May, A&E announced the debut of Flipped, which will focus on the investing exploits of a former Survivor contestant—that’s in addition to the network’s Flip This House. In the falling market of 2011, it’s just one more indication that short-term property investors are today viewed as friends rather than foes of a stable housing market.
Utah House Flippers Will Star in a National TV Show (The Salt Lake Tribune)
Return of the House Flippers (Bloomberg BusinessWeek)
How House Flipping Works (howstuffworks.com)