Foreclosure Flipper

Can someone explain to me why Real estate investors get a bad rap for flipping houses?
  The practice is no different than the widely accepted legitimate business of trading that takes place on Wall Street everyday.  An investor finds a seller who is willing to sell for a low price, whether due to the danger of imminent foreclosure or to gain fast cash to pay off debts, then immediately attempts to resell the property to another party. Those who have taken the time to become familiar with real estate law, the real estate market, and financing do have the advantage, but that’s the way things work in our capitalistic society, and I see absolutely nothing wrong with it.

Some will argue that the quick profits that sometimes accompany real estate investing attract equally quick condemnation. Around the country, an anti-capitalist group of people has been gathering. Several years ago, the Department of Housing and Urban Development (HUD) passed a rule penalizing property owners who resell the properties within a short period of time, citing concerns about property flipping.  Come on folks…what kind of arbitrary jurisdiction is this.  A person is not aloud to sell property if they are able to do so quickly?  This very idea flies directly in the face of the concepts of individualism that our great nation was founded on.

Often if extensive repairs are done to the property before the resale, the flipping is considered the slightly more respectable operation called “rehabbing.” Perhaps the flip includes a new coat of paint or a little landscaping, but otherwise it may not involve much physical change in the house. The profits from flipping or rehabbing — and they can be substantial — amount to those who are able to match willing sellers with willing final buyers. My buddy learned of a house he could purchase for less than $35,000, which he put under contract sight unseen. On his way over to the house, he contacted a potential buyer, had the buyer meet him at the house, and sold it on the spot for $85,000.

Certainly there are a few slimy real estate investors who will lie and steal. Thus the state obtains a certain amount of control, although anyone paying the least bit of attention would note that the state itself continually lies and steals, under the direction of truly slimy politicians. So does a little actual fraud suffice to justify clamping down on the entire industry?  I say hell NO!!! Proposed legislation regulating real estate flipping in North Carolina was based on three cases of fraud in the state, a tiny fraction of a large real estate market.  Unfortunately, these types of laws are so ambiguous that they are worse than useless. If the sense of the law is merely that the contract should communicate clearly what is to be traded, under what terms, and for what payment, the law may be harmless enough. But it seems to say much more than that. Since all transactions involve unequal knowledge (and opinion) between buyer and seller, who is to say what is “unfair”? This leaves all transactions open to potential cancellation by the state, should the court decide that the inevitable inequality of knowledge was great enough to warrant intervention.  There is way too much room for speculation, and they power is taken out of the hands of the people and given to the state.  Opinion should never be something that is regulated.

So what of the person willing to sell their home for $35,000, when a real estate investor believes there is a reasonable chance of getting $85,000 for the house? There is certainly a disparity of information. The seller may not know market prices for similar houses, and may not know where a person willing to pay $35,000 may be found. If rehabbing is necessary to bring in the $85,000 price, the seller may not know what repairs to do, or which contractors would do the work well and without fraud. This is valuable information which the investor may have obtained only through years of experience in the business. It may have taken years of trial and error to find realistic appraisers, sources of financing, reliable and low-cost contractors, and efficient methods for reselling the house. To argue that the buyer is under obligation to reveal all this to the person willing to sell at $35,000 is to argue for a communistic treatment of information.  The person who has taken the time to gain the knowledge should be entitled to use this knowledge to his or her advantage at his or her discretion.

The home owner may be willing to sell at a steep discount in order to pay off the mortgage to avoid imminent foreclosure. For whatever reason, the owner wants liquidity and is willing to make a large sacrifice to get it. It may even be the case that the home owner knows more about the neighborhood than the real estate investor, so that what looks like a steep discount to the investor is no discount at all.

In the process of buying, fixing up, and reselling properties, real estate investors tend to leave neighborhoods much improved. This is urban renewal free-market style, in which property is paid for at a price voluntarily agreed to by the seller, not condemned by the city and seized. One real estate investor I know purchased a house from an absentee landlord whose drug-abusing tenants (relatives of the landlord) had completely trashed the house. Rotting mattresses, filthy clothing, and broken furniture cluttered the bedrooms. Chunks of daylight were visible through the ceiling, and the walls looked structurally unsound.

The house was so unlivable that the tenants had apparently remained out of doors as much as possible, judging from the table and chairs in the front yard. My real estate investor friend bought the house, gutted it to the studs, and turned it into one of the most valuable houses in the neighborhood in about a month. The neighbors were delighted, since it removed an eyesore and increased the value of their own homes.

Some observers have remarked that increased “flipping” activity is a marker of a real estate bubble.  I doubt that is true for rehabbing, but it may be true for plain flips, just as the departure of employees to full-time day trading was an indicator of an overblown stock market in the late 1990s. Turning $35,000 into $85,000 in a couple of hours may be more common during a bubble, and it might be more reasonable to expect real estate investing to revert to modest profit levels as real estate values settle.

Being financially creative when buying real estate may turn out to be the equivalent of buying stock on loan using a credit card. However, even though the Fed’s monetary excesses may, from time to time, temp too many into day trading and real estate investing, both are fair and decent ways of making a living. There is nothing dishonest, unfair, or suspect about trading real estate, and certainly nothing that would require the state’s regulation of the flipping market.  And I challenge anyone to make an argument of the contrary.