The term “house flipping” is used by real estate investors to describe the process of buying, rehabbing, and selling properties for profit. In 2017, 207,088 houses or condos were flipped in the U.S., which is an 11 year high.
Real estate flipping
Profits from flipping real estate come from either buying low and selling high (often in a rapidly rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”).
Under the “fix and flip” scenario, an investor or flipper will purchase a property at a discount price. The discount may be because of:
- the property’s condition (e.g., the house needs major renovations and/or repairs which the owner either does not want, or cannot afford, to do), or
- the owner(s) needing to sell a property quickly (e.g., relocation, divorce, pending foreclosure).
The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price. The “fix and flip” scenario is profitable to investors because the average homebuyer lacks the time and funds to repairs and renovations, so they look for a property that is ready to move into. Also, most traditional mortgage lenders require the home to be habitable with no significant repairs.
In the 2000s, relaxed federal borrowing standards (including subprime lending that allowed a borrower to purchase a home with little or no money down) may have led directly to a boom in demand for houses. Because it was easy to borrow, many investors bought homes as property speculation with no intent to live in them. Since the demand outstripped the supply, prices rose, giving a short-term profit. This resulted in an inflationary spiral until the bubble burst in 2008 and borrowing standards became stricter, leaving the housing market to bottom out.
Flipping becomes less desirable when interest rates are high and so demand is lower. The resulting lack of sales, and major price cuts, results in a flood of properties on the market at one time, resulting in an excess of supply to demand.
Rejuvenation and gentrification
“Rational” flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood, a process known as gentrification, which increases property values but can cause a population shift.
Under the broken windows theory, an unkempt house or area attracts a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on in a spiral. Restoration creates jobs, particularly in construction, and generates more sales (and sales taxes) for local vendors and suppliers. The renovated homes attract new populations and businesses to a region, encouraging more economic development; their higher assessed values brings more property tax revenue to local governments, allowing for more improvements and more policing.
When flipping occurs frequently in a community, the total cost of ownership can rise substantially, eventually forcing current residents to relocate, specifically poorer young and old people. On a small scale, flippers can cause distress and disturbance to their immediate neighbors by performing lengthy renovations. Flippers often have no interest in neighborhood integration, which may cause tension with long-term residents.
During the real estate bubble of the 2000s, flipping and gentrification were both linked to the mass migration of people to California, where high real estate prices and ample jobs attracted wealth seekers. In response, many native Californians were forced to migrate to the less expensive areas of states such as Arizona, Nevada, Texas, Oregon and Washington. This migration of Californians caused further gentrification in the areas that they had moved to in large numbers. Areas such as Phoenix, Arizona and Las Vegas Valley became much more expensive, although property prices dropped significantly after 2006.
After a renovation, the house itself will be in better condition and last longer, and can be sold at a higher price, thus increasing its property tax assessed value, plus increased sales for goods and services related to property improvement and the related increase in sales taxes. Neighbors can also benefit by having more attractive homes in the neighborhood, thereby increasing the value of their own homes.
In 2006, the Department of Housing and Urban Development created regulations regarding predatory flipping within Federal Housing Administration (FHA) single-family mortgage insurance. The time requirement for owning a property was greater than 90 days between purchase and sale dates to qualify for FHA-insured mortgage financing. This requirement was greatly relaxed in January 2010, and the 90-day holding period was all but eliminated.
Flipping can sometimes also be a criminal scheme. Illegal property flipping is a fraud whereby recently acquired property is resold for a considerable profit with an artificially inflated value. The property is quickly resold after making few, or only cosmetic, improvements. Illegal property flipping often involves collusion between a real estate appraiser, a mortgage originator and a closing agent. The cooperation of a real estate appraiser is necessary to get a false, artificially inflated, appraisal report. The buyer may or may not be aware of the situation. This type of fraud is one of the most costly for lenders.
Renovating distressed or abandoned properties was sometimes linked to malicious and unscrupulous acts in the post housing bubble era. As a result, “flipping” was frequently used both as a descriptive term for schemes involving market manipulation or other illegal conduct and as a derogatory term for legal real estate investing strategies that are perceived by some to be unethical or socially destructive. The term has a more positive connotation these days with the popularity of television shows like Flip or Flop and Flip That House.
In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP) governs real estate appraisal and Fannie Mae, oversees the secondary residential mortgage loanmarket. Both have practices to detect illegal flipping schemes.
The following is a list of several house flipping shows:
- Bravo‘s Interior Therapy with Jeff Lewis
- Bravo’s Million Dollar Listing and Million Dollar Listing New York
- Bravo’s Flipping Out
- TLC‘s The Adam Carolla Project
- TLC and Channel 4‘s Property Ladder
- TLC’s Flip That House
- TLC’s The Real Estate Pros
- A&E‘s Flip This House
- A&E’s Flipped Off
- HGTV‘s Flip or Flop
- Spike‘s Flip Men
- DIY Network‘s The Vanilla Ice Project
- BBC One‘s Homes Under the Hammer
- W‘s Masters of Flip house flipping
- HGTV Canada‘s Holmes and Holmes
- Housing bubble
- United States housing bubble
- IPO pricing
- Phillip E. Hill, Sr.
- Real estate investing
- Creative Real Estate Investing
- Creative financing
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