Why is the word “flipping” such a huge pejorative in our society? How did turning over properties for profit earn such a bad reputation in the investment property search process? Why is the small investor blamed for the downfall of the housing market? (The very same set of investors whose presence helps communities increase their tax rolls. And in so doing, help increase the overall viability and well-being of communities.)
My guess is that all the consternation and negativity thrown at property investors are the byproducts of what we see in the media. This includes all the half-hour infomercials that are on late-night television and have been running for many, many years, making it seem so easy to get rich quick by easily investing in real estate. If you buy their course, that is. In addition, over the last 10 years or so home shows have sprung up across the cable dial that also make it look, if not challenging, relatively simple to find fix-up properties for profit. And then of course there’s the slant the news media puts on any story involving our current economic downturn due to the housing crisis. A housing crisis which the media tends to report in a very slanted way – that gives the impression that not only banks, but greedy investors too are to blame for the mess that we’re currently in.
This couldn’t be further from the truth. Blame rests solely with the lending institutions and our government for their lax oversight of these institutions. It was lending institutions – some much worse than others – who created this mess. They did it through allowing lending standards to become so lax as to invite fraud across the board on any application for a mortgage.
And now we see what that has wrought: we have an incredibly tight credit market where a score of 720 in your FICO may not qualify you for a loan. And only the best scores can get loans these days. Clearly, about half of all loans being applied for in the United States today are being turned down.
I think it’s interesting that the very same news media spend very little time on describing the path of destruction that hit honest investors who got caught in the middle. Not simply homeowners, but also homeowners who also invested in investment properties – and multiple investment properties at that. As the housing market collapsed their net worth dropped substantially, sometimes by as much as 50%, in a very short period of time. These were all hard-working investors who had nothing to do with creating the crisis in the current downturn.
Restoring the residential housing market
So it’s quite ironic that the very same set of mom-and-pop investors are helping to restore the housing market today, as they perform their own regimen of investment property searches. And in so doing, they are helping to build a foundation for the entire United States economy. These investors are pouring large sums of their own cash, with usually low leverage nowadays, into purchasing more properties to hold and rent out for the short term.
Some investors are still taking greater risks by flipping properties. It is these flippers who are the real cowboys of the property investing world right now. They see the opportunities – especially in foreclosures and short sales – where properties are extremely damaged and need a tremendous amount of renovation work. And they’re going about, in a nice formulaic way, giving buyers what they want. Running investment property searches, picking up houses very inexpensively, fixing them up and then putting them on the market – making them look dazzling in the process.
In so doing, homeowners with not so dazzling homes that are currently on the market have been suffering. Because, by and large, those homes get bought after the newly refurbished houses are sold. But it is the property investor that takes the greatest risk of all, because it’s not their home that they’re living in that they are fixing up. So they are not getting any enjoyment out of the property in the process. Rather, they’re doing it in the hope that they will be able to sell the property in a reasonable amount of time for a profit. After all, to hold onto the property each day costs the property investor even more, cutting into their overall profit margin That is, if there is to be one. Which in the current real estate market is certainly not a given – and a huge risk for all property investors who are flipping right now.
Giving buyers what they want
But for investors who know their geographic area very well, and who stay close to home, run frequent investment property searches, have a reliable crew that they’ve worked with before, and who buy property at a great discount, there is a chance to make money on a flip. ( Flipping should produce yields in at least the 10-20% range, otherwise, they’re not worth the risk.) Flippers know that they have to give buyers what they want. And they have to feel quite confident that they are buying in areas that, while maybe not the tops in location, will become better in the near future, owing to increased gentrification.
Once they renovate these properties, they will be marketing them to “early adopters” types of buyers. This is a market segment that values not only the look and feel of the house that they’re buying, but the neighborhood is valued just as much as the property. These buyers like to feel that they are onto something special and that the neighborhood that they are buying into will become a lovely one in short order, even if it isn’t right now. Thus there is a special cache attributed by these early adopters to buying in neighborhoods that are coming up in value.
The maverick flipper
So what about these maverick flippers? Why are they the heroes of the investment property world? Simple. Not only are they the greatest risk takers, but they’re the ones that truly help to stabilize neighborhoods all over this country. Instead of foreclosed homes sitting idle with banks doing nothing to keep them up over time, investors who run daily investment property searches, locate the best buys, then purchase and renovate downtrodden homes, instantly start to renovate their properties, thereby adding value quickly to the community that the property is located.
Communities look better, and they can then attract the better buyer to the neighborhood – and in turn, the neighborhood swells. Shops spring up as communities grow while population increases, and more retail business means more types of business overall for the community. Assessments go up – residential as well as business, and tax revenues increase. In addition, new businesses that come into the community aid in higher revenues for local governments through greater sales tax revenues. The whole cycle is so American – the free market system working at its best.
Exploding the F Bomb will take time
Unfortunately, it will still take some time before the word “flipper” has a positive connotation in our society. As more investors add value to properties through sinking a great deal of hard work and money in to transform them, thereby increasing the value of local communities across our country, I think flippers collectively will develop a much better standing in our society. And “flipping” as a word will not be employed as the exploding F bomb that exists today.
photos courtesy of onlyhdwallpapers.com, hookedonhouses.net, dealmakersblog.com, tmgnorthwest.blogspot.com, home.howstuffworks.com, flipproperty.org, realestate.msn.com, moneycrashers.com, metrosdrealty.com, foreclosuredatabank.com