Flipping is not always a dirty word
I ran across this excellent piece of information and advise at Bankrate for anyone considering real estate investing, or ‘house flipping’ as an investment avenue. It has some very important caveats and pitfalls that you need to watch for if you embark on this road.
Q- “Why is it called “flipping” when an investor buys a house under value and sells it for what it’s worth? Whenever I hear the word, it seems to have a negative connotation. ”
A- “You’ve really hit on something here, especially with your “sell it for what it’s worth” comment. But let’s back up for a second. Some honest and handy rehabbers who buy properties that are physically and (or) financially distressed, then promptly fix them up and turn them over — or “flip” them — to a new owner are being punished because of rising mortgage fraud over the past decade.
Sadly, it was the old “one-bad-apple” syndrome that caused most of the acrimony. During the overheated housing market of the late 1990s and early 2000s the distinct odor of greed wafted over the industry. Not satisfied with healthy profits, a number of participants sought excessive profits and didn’t let things such as ethics and the laws get in the way.
The results: The buyer gets a house he’s not qualified for. The investor gets an obscene profit. The real estate agent gets a commission. The fraudulent deal elevates all other properties in the neighborhood by elevating “comps,” or comparable house prices in the area. The buyers have difficulty making payments they were never qualified to make and eventually default. The lender gets stuck holding the bag.
That gave “house flipping” a negative connotation, even though the majority of flippers are earnestly investing significant cash and sweat equity trying to add bankable value to a home before releasing it back into their market’s for-sale inventory. But in 2003, the Federal Housing Administration imposed restrictions on the resale of homes that happen within 180 days of an initial sale and stopped insuring mortgages on all properties that sold more than once in a 90-day span. Many private lenders joined in with similar policies to tighten underwriting standards for “flips.”
Those actions, not surprisingly, slowed down the rehab pipeline a bit. No longer could many honest investors quickly dig into fixer-uppers they bought legally from distressed sellers or foreclosures and then expect to recoup their investments in an equally expedient manner. There are many credible arguments both pro and con as to whether this is good.
But this gets back to your “worth” statement. So much of our country’s economic engine is driven by investing in something of substance, adding value to it, and “flipping” it to people who desire the polished end product — and are quite happy to pay what it’s worth, whether it’s a reconditioned house, car, boat, antique or power generator.
So, no, house “flipping” is not inherently bad. In fact, semantics may partially be to blame for its bad rap. What “flipping” is to the housing game, “wholesaling” is to most other businesses. “
