 'Flipping' is not always a dirty word
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 Dear
Real Estate Adviser,
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.
-- Tina R.
 Dear
Tina,
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.
 |
Here's a common fraud scenario: | |
|
| • | A
shady investor gets a house at a bargain price. He slaps a coat of paint on it,
cleans up the yard and does some minor renovations. | | • | The
investor then gets an unethical appraiser to present an overinflated valuation
for either a fee or a cut of the action. | | • | The
shady investor finds an unseasoned buyer, ideally an immigrant or first-time buyer,
whom he steers toward an equally shady mortgage broker or real estate agent. |
| • | The
broker or agent assists the buyers in falsifying documents to show they qualify
for the loan. The mortgage broker uses the inflated value to roll the buyer's
costs of the down payment and closing costs into the deal. | |
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. To
ask a question of the Real Estate Adviser, go to the "Ask
the Experts" page and select "Buying, selling a home" as the
topic. | 
