Monday, June 19, 2006

Flipping Has Been Made More Difficult

I saw this Realty Times article posted over at the Sonoma Housing Bubble blog and couldn't pass it up (good catch Athena). It seems we might be entering into the predicted post-bubble-peak-legislation phase of this housing bubble. I mean, we've seen the escalating inventory, increasing foreclosures, and the uncovering of appraisal fraud (and other types). Now that the housing bubble is generally acknowledged to be for real we seem to be starting to see anti-flipping regulations. Next in line should be the law suits against builders and maybe lenders and realtors.
Real estate flippers got a new set of marching orders last week -- at least those flippers who want to use FHA mortgage financing.

The Federal Housing Administration issued long-awaited final regulations on property flips last Wednesday. The rules take effect nationwide July 7. Flipping involves resales of houses or other real estate shortly after acquisition, typically at a substantial price markup. Say you buy a rundown rowhouse at a bargain price, do cosmetic fixups, and then sell it a month later for twice what you paid for it.

Sounds like a high payoff short-term investment, right? It is. But the FHA found that too many property flips using its insured mortgage program involved outright fraud -- hyped appraisals, shell games where property flippers never actually took legal title to the house before selling it for huge profits, sometimes overnight.

Often the end purchaser of the flipped property was not financially qualified, and used fraudulent income, employment and assets information to obtain the FHA loan. Then the buyer quickly defaulted, leaving FHA with insurance losses and a house that was worth nowhere near its appraisal valuation. The flipper, meanwhile, pocketed all the sales proceeds financed with the FHA mortgage.
No one complained about flippers destroying affordability when taking action could have made a difference; everyone was too busy making a profit. But now that the money has been made, only now are we finally seeing some action taken. But it's too little, too late I'm afraid. Hopefully these FHA regulations will be the start of more stringent and encompassing laws and regulations for the future.

To my mind people who purchase residential real estate should be required to put at least 20% of the sale price down and be required to live in the property for at least three years before they can sell it. For real estate that is clearly intended to be rented then the period of ownership should be increased significantly while the requirement to live in it for a period of time should be dropped.

I'm sure my framework of a solution is overly simplistic. Let's hear about it in the comment section.

20 Comments:

Blogger bobbyj0708 said...

Not sure I understand your rational for the 3 years selling period or the 20% DP. Should people be legislated out of making a buck? I agree there should be rules but to limit opportunities for everyone because of outright fraud on the part of criminals doesn't make a lot of sense to me.

You'd be punishing people who might have either superior knowledge of the market or superior skills at different facets of real estate. I've made money before by buying a dump, remodeling, and then selling for a profit. Under your rules I wouldn't be allowed to do that. It's not fraud on my part to add value and be compensated by a buyer for adding that value yet I would be punished under your system.

I'm not sure that the flippers are responsible for destroying affordability. I think you can pin the blame on Mr Greenspan and his rate drop and the relaxed lending requirements. Flippers took advantage of a loophole, nothing more.

You need to rethink.

Jun 19, 2006, 11:43:00 AM  
Blogger anon said...

@bobbyj0708

Congratulations, you made money flipping property. Unfortunately you made this money in an environment where the rules are weighted way in favor of "bending" the rules to make that money.

I don't for one moment believe you are dishonest, but there are lots of people out there who are, and who were making money flipping properties at the expense of everyone else. I don’t blame them either, they are just playing by the rules. However the rules are just plain wrong.

When it comes to real estate the playing field isn't level. In almost every industry in America today there are rules that level the playing field to some extent so that when the rules get broken there are consequences - not in real estate.

I think Marinite's plan is brilliant; it would only need a simple caveat for those folks who want to make money (as you do) via flipping. There should be a financial penalty for early selling, scaled to the duration of the sale. For example; you buy, and then sell 2 days later - 95% of your profits go to affordable housing schemes. You wait 2 months later and can evidence a measurable improvement in the property, 10% of your sale profit goes to x. You wait 6 months etc, 1% goes to x, and so on….

Marinite's suggestions are a great starting point, and would probably change the mindest from “real estate is an investment” to “real estate is a place to live” almost overnight, yet still allow for a quick buck.

The idea is great.

Jun 19, 2006, 12:01:00 PM  
Blogger marin_explorer said...

I'm not sure that the flippers are responsible for destroying affordability.

Right. They wouldn't have been able to flip without a willing buyer. However, many of the buyers were flippers themselves, and this practice contributed to appreciation way beyond affordability in areas with a limited job base. The economic fallout from foreclosures in some areas won't be pretty. On the other hand, many homebuyers should've sat on the sidelines and waited for the end-game carnage.

Jun 19, 2006, 12:07:00 PM  
Blogger Marinite said...

You need to rethink.

I'm sure I do; it was not meant to be taken as a full-fledged plan of action. I was being deliberately a bit short on details...trying to drum up discussion. But I think that something along the lines I've proposed should be done.

Houses are different from other investments (e.g., stocks, bonds, gold, etc.) because people live in houses and really do need them. Houses are not (or should not be IMO) investments in the same sense. Affordability matters. And when affordability is destroyed, then that matters too.

Jun 19, 2006, 12:45:00 PM  
Blogger Marinite said...

And people can still invest in real estate...but they have to understand and pay for the consequences of that on society and community.

Jun 19, 2006, 12:45:00 PM  
Blogger bobbyj0708 said...

First off, I'm not a flipper. IMO, a flipper is someone who either sells an option to buy a house to someone else or takes possession and then sells to someone else w/o making other than the most rudimentary improvements.

Before you start throwing labels around, join me in the crawl space or on the roof of the next home I rehab. I tell you, it's a real party. But be prepared to work late (midnight or so) because I usually don't start working until after I'm done with my normal job. How does see you @ 6 PM sound?

You guys sound like a bunch of socialists (and I'm making allowances since I know you're in Marin). Affordable housing schemes, puhleeze; "don't make money off houses because people live in them." again, puhleeze. Is there something inherently wrong with taking advantages of your skills or knowledge and making money with them? I can't see how.

And in regards to Anon, Wow, thanks for thinking I'm not dishonest, I feel better already. I'm just as upset about current conditions as you are. I haven't been able to buy a house to fix for some time now. This current market has completely limited my opportunities and it's pissing me off.

And in case you hadn't noticed, there already are very stiff penalties in place for my extra work. Ever heard of capital gains and in some instances, self employment taxes? They're a real joy, I tell you.

Affordability was destroyed by Greenspan and the mortgage industry, not by me and my little fixer upper operation. Get a grip.

Jun 19, 2006, 2:45:00 PM  
Blogger marin_explorer said...

"not by me and my little fixer upper operation. Get a grip."

I don't see anyone accusing you personally, but certainly the collective flipper game (and its effects) has been worrisome for several years. Certainly Fed policy plays a part, and anytime multiple investors bid up houses, that tends to skew prices for real homeowners who aren't looking for short returns. Whether it's done in Boise or San Diego, the effects are still felt by locals. The market, not socialism, will drive house prices--a future that may not be kind to some "get my buck and run" investors.

Jun 19, 2006, 3:05:00 PM  
Blogger rejunkie said...

Marinite-

This article is pointing out flippers who are outright fraudulent and have people in the industry, such as appraisers and realtors, who are complicit in the perps actions.

There are others, like BobbyJ perhaps, who are adding value to the property through improvements and should, rightly, profit from the large risks they take in buying and improving a home.

I do agree that a 10% down payment(20% is a bit rough for first time buyers around these parts) should be required and stated income loans abolished.

Real Estate IS an investment. If it weren't, everyone would rent. Even doe-eyed first-time-buyers who want the perfect home to raise little Johnny and little Katey (cue fuzzy lens shot of Marin POS with schmaltzy music) don't NEED to own a home, they choose to do so because it is an investment.

Oh yeah, and get rid of prop 13 and MALT

Jun 19, 2006, 8:44:00 PM  
Blogger Marinite said...

profit from the large risks they take in buying and improving a home.

But RE always goes up; that's what they say in Marin.

Real Estate IS an investment. If it weren't, everyone would rent.

What about all those "intangibles" that always get pulled out as a last resort?

The system is broken and needs serious medicine IMO.

Oh yeah, and get rid of prop 13 and MALT

MALT too? Now I know you are playing Devil's advocate.

Jun 19, 2006, 10:06:00 PM  
Blogger marin_explorer said...

Real Estate IS an investment. If it weren't, everyone would rent.

And I thought people used to buy homes because they weren't extremely stressful to own over renting. Now everyone's told to swallow the bitter housing pill for their own good. Sometimes housing can be an investment, other times it's merely a shelter and hedge on inflation. Take your pick.

Jun 19, 2006, 11:41:00 PM  
Blogger cajun100 said...

Hmmmm, let me see, now ... oil prices continue to climb; gas prices go to, say -- $6.00 a gallon. Manufacturers (esp. US) will not or cannot produce enough fuel-efficient vehicles ... and I start a business to acquire beaters that ARE more fuel efficient, but "need substantial work". I fix these, resell them at high prices to the fortunate who can pay. Oil producers and gas companies are raking it in, but what we REALLY need is legislation that restricts my profits in selling cars others will not or cannot produce. I agree with BobbyJ. Let's get at the real root causes of inflation of housing prices; reform banking and lending practices. We have NOT done enough since the S&L crisis of the late eighties. The "quasi-public" mortgage empires (Fannie, etc.) are a national scandal. Time for some structural changes in the way we direct investments on a national basis.

Jun 20, 2006, 5:10:00 PM  
Blogger Marinite said...

cajun100 -

I agree that my proposal is unfair to folks like bobbyj0708. But if you put exceptions in such regulations/laws that try to discriminate the bobbyj0708s from the real problem makers, then you introduce a wide avenue for abuse thus making such regulations worthless. It's happened time and time again. You either go all the way or not at all.

Besides, no one is saying the owner of a newly purchased house cannot rennovate it or hire the bybbyj0708s of the world to do it. We are just trying to eliminate flipping.

And your analogy to cars is absurd. Houses are far more critical to people's lives, families, communities than cars are and the price disparity is too gargantuan to give your argument any credibility.

But I do agree (as has been covered on this blog before) that we should certainly go after the bankers, lenders and regulate the real estate industry (you didn't actually mention that last one, I just thought I'd throw that one in too for good measure).

Jun 21, 2006, 10:03:00 AM  
Blogger cajun100 said...

My analogy of a car rebuilder may seem "absurd" to you, but I think it's relevant, and I could come up with other examples. Many people might argue with your belief that houses are more important than cars -- and what about protection of pensions or health care?

Overall, I would readily agree with you about national and local needs. But simply attempting to regulate "flippers" (oh, OK, and the banking, lending, and real estate industries) does not seem comprehensive enough to me. Do you feel that the regulation of the national S&L sector and some of the banking laws changed in 1989 have prevented fraud and excesses in the past decade's mortage lending sector (using funds from sources outside the S&L sector)?

I was simply trying to agree with points well made previously -- why single out housing for "protection" from use as an investment vehicle? How's about let's deal with affordable supply and have a SERIOUS national housing production effort (other than public housing), for a change? We as a nation can harness vast sums and production of other things, not all "needed" by everyone. If we produced more nationally (and if selfish areas like Marin County didn't fight all new construction and redevelopment like the plague) much speculation would subside. I just returned from the Washington DC region. Housing values have risen rapidly there too -- but I guarantee you there is more choice in the marketplace, mainly due to vast new construction everywhere. And you get more for your money, since there is competition that we do not enjoy here.

I suspect most of the posters here are in general agreement that some protection against speculation in the residential markets is overdue. But YOU seem to be saying (I went back and read your comments again) that investment (including speculation and profit) in housing is to be at a minimum severely constrained because it is "needed"? As a practical matter, could you segment the buyers into groups (very rich -- no protection; very poor -- total protection)? If we compare the 4 person middle income family to the well-heeled professional couple, we see vast differences in the impacts of residential speculation, do we not? And how about the "excess profits" earned by any sound residential building organization since values started to rise rapidly? Want to restrict those too?

I am only trying to emphasize that this is a very complex problem. I truly wonder if the last five years of frantic residential remodeling will end up generally more positive rather than negative for many communities? I have seen a lot of VERY marginal properties brought up to and past code in Marin in my 35 years here; in fact, I have improved my smallish home significantly in the last 10 years, and yes -- I would like a large return when I sell it; I need to retire, too. And what if we see a leveling off of values or a severe downturn in values generally? Those who are speculating would get less, and there should be a positive improvement in affordability, and in a modernized and better housing stock. Do housing costs increase in this equation -- yes.

I've worked abroad a lot in development in my life. Very high housing values are an accepted fact of life in many countries. We are naturally shocked to find in the US what was once readily available is harder to obtain. Perhaps we had better adjust fast -- given the trends in global pricing of resources and domestic pricing of things like health care.

BTW, I think this is a very worthwhile blog effort, and I appreciate it.

Jun 21, 2006, 3:37:00 PM  
Blogger bobbyj0708 said...

I am a firm believer that the market eventually evens itself out. I don't believe for an instant that more legislation will prevent circumstances such as this. The bubble will end when the market has had enough and the smart, prudent and lucky will succeed and the others will not. That some people have succeeded in flipping properties doesn't cause me a second of consternation. They took a risk and they were rewarded. Why is that a problem? Any one of us could have done the same but we chose not to play. If I'm bitter about their success, isn't that my problem?

Legislation seems to always have unintended consequences and that's because the smarter (and usually richer) figure out quicker how to take advantage of new rules. Why change the game now just when this thing is playing itself out. A lot of us have been sitting on the sidelines, just waiting for the eventual end.

So let the market take care of this. That means no bailouts, no new laws, no new anything. When enough lenders get burned and flippers get torched, this thing will take care of itself.

Jun 21, 2006, 10:10:00 PM  
Blogger bobbyj0708 said...

Marinite

I don't understand your position on why houses should be different from other things. A house is a thing, period. Like any other thing, it has a value, and that value is determined by what people will pay for it. Buying a house isn't a god given right. If you can't afford to buy, then rent. If you can't afford to rent, then move in with your folks.

I'm not buying your argument that a home is special because people live in them. Using cajun's example, I can think of a number of ways that I might value a car more than I would owning a home. Should there be laws in place to ensure that I can afford a car as well? Where would it end?

Jun 21, 2006, 10:24:00 PM  
Blogger Marinite said...

I cannot back down from the 'houses are special because' argument because I care too deeply about how this housing bubble has negatively impacted people and society. I agree that there is no God-given right to be able to buy a house at least as long as people are making a decent income. That's not what I am saying. But houses are places where people live and raise families. People who "own" their own home have clinically proven better mental health. Children who are raised in their own home have been proven to do significantly better in schools and have a better future ahead of them as a result. People who "own" their own homes care for and participate in the community in which they live. Etc, etc, etc. It is that simple. You cannot say the same thing for cars. And besides, used cars, even if "upgraded", are still affordable.

You can continue to look at houses in a clinical fashion if you want. But I don't because there is a human dimension to them that makes them different from most other things that we think of when we think of selling for a profit.

Jun 22, 2006, 12:25:00 PM  
Blogger Marinite said...

I just found this lengthy quote over at the Boycott Housing site;he gets it:

"I am a teacher. I've spent several more years in school to be a 'fully qualified' credentialed teacher after my BA at UCB (4.0), so comparable to post-grads who attain Master's/PhD's. I am a professional, same as a doctor or lawyer or business exec, I just chose teaching, probably the most underpaid and under-respected profession. But I am a comparably post-college graduate professional, yet I cannot afford to live where I teach. I am absolutely so sick of renting, dealing with other people's homes, issues, and circumstances, as a professional is degrading in a way. I've had to move twice due to owner's selling their homes, and twice because of harrassing/nuisance tenants and/or landlords. I'm not as I was, young and happily renting, I'm a grown, mature professional and I just want a home! I started looking into buying this past spring, again, as I did several years ago with my sister to buy together, but we couldn't afford it then and it's worse now. I find it so depressing, for I am settled into a teaching job, school, and district that I like and would like to stay, especially live where I work so I don't have to commute and don't want to add to the already congested traffic and pollution. There should be more programs to assist and help many folks like teachers who can't afford to live where they work. I don't know how S.F. or many other bay area cities plan on keeping teachers in the future, or a working class. what will happen? bad teachers, schools, less children, and working class who certainly cannot afford to buy houses, barely can afford the cost of living renting, SF Bay Area is going to be bought up by a small class of elite rich, wiping out the diversity we are so well known for & attracts people from around the world. My sister moved to Austin, similar in that there is quite a huge cultural/musical mecca like the bay area, but with a cleaner environment, and she bought a brand new house with a big yard for the price of a down payment here. I mean BRAND new, with her picking out the building details. She hasn't even had to work for years since she moved there, with the money she had saved and having a roommate pays the mortgage. It's absolutely ridiculous. Owners of properties, however much I can try to understand that you want to make every last dollar profit you can off the sale of your homes, I plead to you to think hard of what's happening here, and owners need to get involved and take a stand somehow. Of course money is important, but it's blown way out of proportion in U.S. Enough to be comfortable and have a big safety net for life, sure. but how many $100,000's of dollars profit do some owners need to make off a house they've had in the family or bought 50 or more years ago? Or contractors and real estate developers building new homes, isn't there some ways to create more reasonably priced homes? I don't know, but compared to most other parts of the country, SF Bay is out of this world. If it doesn't come down to earth soon, I and many others (I know many personally who have left already for north or east - also beautiful parts of this country)will be forced to leave, and I for one hate to think of what will be left for the next generation. owning a home should be a basic right in this country, like health care and education, or at least realistically attainable, AT LEAST to overly college educated hard working professional citizens. excessive profits should not be a part in housing market. 'In the land of the free, and the HOME of the brave'...Teacher's Uniting to Boycott Buying Bay Area Housing (TUBBBAH)!!"

Jun 22, 2006, 1:37:00 PM  
Blogger cajun100 said...

OK, let's clear this up.

Please don't feel defensive. There is no need to "back down" from your comments, which are quite valid to a point. My "car" analogy, if you read it carefully, stated there was an assumed shortage of usable vehicles and auto and gas prices were skyhigh. So nothing in that envelope was affordable; there were no cheap solutions. Let's leave it be, those who disagree. I cannot make it clearer. It is not important.

Now, as far as the teacher's expressed woes. This is a common refrain. Suppose we were to magically "create" hundreds of truly affordable units for this man and his entire class of "overeducated, and underpaid" teachers, firemen, policemen, general civil servants, etc. This would require -- let's be honest here -- various sacrifices, including financial, on the part of the population at large. Would these folks who enjoy safe-job circumstances, excellent pensions, excellent health-care paid for by taxpayers consider freezes or reductions in their employment security, salaries/benefits and the like to help fund their segment of the affordable housing inventory? No, you say? That wouldn't be fair?

I would like to see the statistics on how many experienced, tenured people of this "protected" class are actually leaving California BEFORE RETIREMENT for other locales where either income and benefits are much lower, or housing costs are comparable? Not too many, perhaps?

However, I am sympathetic in general. But I am saving most of it for people of circumstances less fortunate than our teacher friend. The housing situation is critical -- it's been that way before (all of WWII and some years afterwards, remember). But are some people constantly expecting more from society than others who have also contributed get? I think I was underpaid for most of my working career. And there was no fat public benefits package waiting for me at the end as an offset. My choices; I made them and can live with them.

I don't mind people venting because they are very frustrated. But none of this will bring about near-term or long-term solutions to the housing problem. I have a 19-year old son who is fully considering a move away from northern CA for good because he feels that "I will never be able to afford to live here as an adult". Who do you think I should be more concerned about -- my only son or the fully employed (single?) teacher (by choice) who is frustrated because he can't live as well as he thinks he should or in comparison to others around him?

I personally am doing as much as I can to argue for major changes and more balance in the way we view protection of open space and other related things people feel are important. And for a simultaneuous "Marshall Plan" of national investment in housing -- one that reasonably deals with selfish anti-growth sentiments, tax policies and related barriers so common in our region particularly. If it cannot be done before the teacher happily retires, he can then move away with his taxpayer-secured benefits, to a less costly area where he will have the marketplace advantage with his relatively high retirement income. But I might then get my son back before it's too late. I think we all "get it". But frustration has replaced cold, clear reasoning and the search for a long-term solution.

Jun 22, 2006, 7:04:00 PM  
Blogger bobbyj0708 said...

I'm still not finding your "houses are special" argument all that compelling. You say that "People who own their own home have clinically proven better mental health." I say that people with better mental health are more apt to purchase and own their own homes. You say "Children who are raised in their own home have been proven to do significantly better in schools and have a better future ahead of them as a result." I say that those saner people who purchase and own homes just might be better parents and are more apt to instill good values in their children. In a nutshell, you're taking the chicken and I'm taking the egg.

So what were you trying to prove with the long and incredibly boring rant from the teacher? He backed the wrong horse. He brought a knife to a gunfight. Imagine, a teacher in the Bay Area who can't afford a home. Simply shocking.

I used to live in Marin. I found it to be an overpriced and generally unfriendly place. But rather than try to change conditions in Marin, I moved to an area that was more accomodating to my way of life. End of problem. I'd suggest that rather than complaining, other people should follow suit. They'd be a lot happier.

Jun 22, 2006, 10:20:00 PM  
Blogger marin_explorer said...

I agree with the sentiment that people eventually want to put down stable roots, and owning a home can add to that stability. But that only works when prices provide good buyer opportunity. Otherwise, people opt out temporarily (rent)--or move. Excessive liquidity provided the illusion of opportunity--for a while.

Personally, I don't buy the "new paradigm" stuff; there's plenty of homes on market now; it's time for sellers to adjust their expectations. Unless they can find Google execs to buy their crappy tract homes; good luck. It's a predictable Bay Area conceit that teachers shouldn't expect to own a home. Those poor things: they cannot enjoy that 1000sqft $1M shitbox that others suffer to pay. I’m glad these people were priced out (for now); they’ll be spared the pain of a resetting mortgage in a correction. All these half-baked arguments pumped up investor expectation past the peak (8/05) look far less a sure thing in 2006; déjà vu c.2000.

Jun 23, 2006, 12:55:00 PM  

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