Flipping

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In finance, flipping is a term used to describe purchasing an asset and quickly reselling (or "flipping") it for profit.

Contents

Within the real estate industry, the term is used by investors to describe the process of buying, rehabbing, and selling properties for profit. In 2017, 207,088 houses or condos were flipped in the US, an 11-year high. [1]

Effects

Bubbles

A spate of flipping often creates an economic bubble which then bursts, such as during the Florida land boom of the 1920s. [2]

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. [3] 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.

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, [4] 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.[ citation needed ] In response, many native Californians were forced to migrate to the less expensive areas of states such as Arizona, Nevada, Texas, Oregon and Washington.[ citation needed ] 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.

In 2020 the emphasis on house flipping shifted to the Midwest, where Greater Cleveland became one of the most lucrative places in the country to own rentals and flip homes. A typical project in the area, as in other areas in the Great Lakes region, pays back twice the cost of the purchased structure. Investors from California have been steered by advisors from the Sun Belt to northeastern Ohio. In 2019 the median flip home was bought for $60,000 and sold for $124,000. 100% margins were also endemic to Akron, Ohio; Pittsburgh; and South Bend, Indiana. [5]

Property values

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. [6] Neighbors can also benefit by having more attractive homes in the neighborhood, thereby increasing the value of their own homes.

Regulations

In 2006, the US 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. [7] This requirement was greatly relaxed in January 2010, and the 90-day holding period was all but eliminated. [8]

Illegal activity

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, typically in order to defraud a lender into lending more than the true value of the property or defraud a buyer into paying a higher price than should be necessary. 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 costliest 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. [9]

In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP) governs real estate appraisal and Fannie Mae, oversees the secondary residential mortgage loan market. Both have practices to detect illegal flipping schemes.

The term "flip" is also used in relation to certain types of scams, known as "money flip" or "cash flip". In such a scam, the scammer instructs the intended victim to send a certain amount of money, usually via wire transfer, with the promise they can quickly "flip" the money for a larger amount, typically about ten times as much. After the victim has wired the money, the scammer simply keeps the money, cutting off all further contact. [10]

In television

In July 2012, business network CNBC green-lit several pilots for reality television series focusing on house flipping. [11]

The following is a list of several house-flipping shows:

See also

Related Research Articles

This aims to be a complete list of the articles on real estate.

Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 audit report from the office of inspector general of the US Federal Deposit Insurance Corporation (FDIC) broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers", though "unfair" and "abusive" were not specifically defined. Though there are laws against some of the specific practices commonly identified as predatory, various federal agencies use the phrase as a catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing which is mortgage practices described by critics as unfair, deceptive, or fraudulent practices during the loan or mortgage servicing process, post loan origination.

<span class="mw-page-title-main">Real estate economics</span> Application of economic techniques to real estate markets

Real estate economics is the application of economic techniques to real estate markets. It tries to describe, explain, and predict patterns of prices, supply, and demand. The closely related field of housing economics is narrower in scope, concentrating on residential real estate markets, while the research on real estate trends focuses on the business and structural changes affecting the industry. Both draw on partial equilibrium analysis, urban economics, spatial economics, basic and extensive research, surveys, and finance.

<span class="mw-page-title-main">2000s United States housing bubble</span> Economic bubble

The 2000s United States housing bubble or house price boom or 2000shousing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a real estate bubble, it was the impetus for the subprime mortgage crisis. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and reached new lows in 2011. On December 30, 2008, the Case–Shiller home price index reported the largest price drop in its history. The credit crisis resulting from the bursting of the housing bubble is an important cause of the Great Recession in the United States.

A real-estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets, and it typically follows a land boom. A land boom is a rapid increase in the market price of real property such as housing until they reach unsustainable levels and then declines. This period, during the run-up to the crash, is also known as froth. The questions of whether real estate bubbles can be identified and prevented, and whether they have broader macroeconomic significance, are answered differently by schools of economic thought, as detailed below.

A slumlord is a slang term for a landlord, generally an absentee landlord with more than one property, who attempts to maximize profit by minimizing spending on property maintenance, and to tenants that they can intimidate. Severe housing shortages allow slumlords to charge higher rents, and when they can get away with it, to break rental laws.

<span class="mw-page-title-main">Real estate investing</span> Buying and selling real estate for profit

Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively develop, improve or renovate properties to make more money from them.

Mortgage fraud refers to an intentional misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase, or insure a loan secured by real property.

<span class="mw-page-title-main">Casey Serin</span>

Casey Konstantin Serin is an Uzbekistan-born American blogger, mortgage broker, and real estate investor. In a newspaper article, USA Today called him the "poster child for everything that went wrong in the real estate boom". Born in Tashkent, Uzbekistan, Serin immigrated to the United States in 1994. After graduating from high school, Serin bounced from job to job, generally working in website design. However, in his early twenties, Serin decided to quit working full-time in order to pursue a career in house flipping as a means of earning an income and building wealth. In an eight-month period beginning in October 2005, Serin purchased eight houses in four southwest U.S. states, and then began blogging about the foreclosure process on the properties he was unable to resell. In time, five of the eight properties foreclosed. The dubious nature of Serin's real estate transactions, coupled with his subsequent blogging about the affair, have led to Serin's name becoming strongly associated with the subprime mortgage crisis.

<span class="mw-page-title-main">Subprime mortgage crisis</span> 2007 mortgage crisis in the United States

The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. The crisis led to a severe economic recession, with millions of people losing their jobs and many businesses going bankrupt. The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA).

United States housing prices experienced a major market correction after the housing bubble that peaked in early 2006. Prices of real estate then adjusted downwards in late 2006, causing a loss of market liquidity and subprime defaults.

Phillip E. Hill Sr. was the ringleader of the largest mortgage fraud scheme ever prosecuted in the State of Georgia.

<span class="mw-page-title-main">Causes of the 2000s United States housing bubble</span>

Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan". Other factors that are named include "Mortgage underwriters, investment banks, rating agencies, and investors", "low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance" Politicians in both the Democratic and Republican political parties have been cited for "pushing to keep derivatives unregulated" and "with rare exceptions" giving Fannie Mae and Freddie Mac "unwavering support".

<span class="mw-page-title-main">Scott McGillivray</span> Contractor, entrepreneur, investor and television host

Scott McGillivray is a Canadian entrepreneur, investor, television host, author and educator.

Real Estate Elevated is an educational program that provides real estate investment training and aims to help students find and flip houses in the United States. Following the premiere of the HGTV’s ‘Flip or Flop’ in 2013, the show’s hosts, Tarek and Christina El-Moussa, launched Real Estate Elevated.

<span class="mw-page-title-main">Chinese property bubble (2005–2011)</span>

The 2005 Chinese property bubble was a real estate bubble in residential and commercial real estate in China. The New York Times reported that the bubble started to deflate in 2011, while observing increased complaints that members of the middle-class were unable to afford homes in large cities. The deflation of the property bubble is seen as one of the primary causes for China's declining economic growth in 2013.

<span class="mw-page-title-main">Causes of the Great Recession</span>

Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

<i>Flip or Flop</i> American reality television series

Flip or Flop is an American television series that aired on HGTV, hosted by the formerly-married couple Tarek El Moussa and Christina Hall. The program was the original show in the Flip or Flop franchise, debuting in 2013.

<span class="mw-page-title-main">Doug Clark (investor)</span>

Doug Clark is an American real estate investor and TV personality. Before getting into real estate, Doug also worked as an airline pilot. Between 2011 and 2012, he was featured on the Spike TV reality television series Flip Men alongside co-host Mike Baird. The series follows Baird and Clark as they purchase foreclosed houses at auction, remodel the homes, and sell them for return profits.

The Canadian property bubble refers to a significant rise in Canadian real estate prices from 2002 to present which some observers have called a real estate bubble. The Dallas Federal reserve rated Canadian real estate as "exuberant" beginning in 2003. From 2003 to 2018, Canada saw an increase in home and property prices of up to 337% in some cities. In 2016, the OECD warned that Canada's financial stability was at risk due to elevated housing prices, investment and household debt. By 2018, home-owning costs were above 1990 levels when Canada saw its last housing bubble burst. Bloomberg Economics ranked Canada as the second largest housing bubble across the OECD in 2019 and 2021. Toronto scored the highest in the world in Swiss bank UBS' real estate bubble index in 2022, with Vancouver also scoring among the 10 riskiest cities in the world. By 2023 Canada’s nonfinancial debt exceeded 300% of GDP and household debt surpassed 100% of GDP, both higher than the levels seen in the United States before the 2008 global financial crisis.

References

  1. ↑ "2017 Home Flipping Report". ATTOM Data Solutions. 2018-03-08. Archived from the original on 2019-07-26. Retrieved 2018-12-20.
  2. ↑ "Crashes: The Florida Real Estate Craze". Archived from the original on 2006-09-01. Retrieved 2006-09-08.
  3. ↑ Duca, John. "Federal Reserve Bank of Dallas". Archived from the original on 2015-12-09. Retrieved 2016-11-02.
  4. ↑ "Housing Issues in Jersey" (PDF). States of Jersey States Assembly. Archived (PDF) from the original on 2016-08-12. Retrieved 2016-06-03.
  5. ↑ Dezember, Ryan (8 June 2020). "Cleveland Is a House-Flipping Hot Spot, and Covid Adds Fuel". Wall Street Journal. New York NY. Archived from the original on 29 June 2020. Retrieved 26 June 2020.
  6. ↑ "Put Your Money to Work: Increase Your Wealth by Investing Your Business Assets". allbusiness.com. 4 April 2016. Archived from the original on 5 August 2016. Retrieved 3 June 2016.
  7. ↑ Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs; Additional Exceptions to Time Restriction on Sales | Federal Register Environmental Documents | USEPA
  8. ↑ "HUD Press Release, January 15 2010". Archived from the original on 2010-01-27. Retrieved 2010-03-10.
  9. ↑ "Sold! HGTV flips over big ratings growth". USA TODAY. Archived from the original on 2018-12-20. Retrieved 2018-12-20.
  10. ↑ "Fraud types". Western Union. Archived from the original on April 22, 2021. Retrieved April 22, 2021.
  11. ↑ "CNBC to Promote House Flipping". Helaine Olen. Forbes. July 25, 2012. Archived from the original on 22 February 2013. Retrieved 12 February 2013.

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