As an economics major, real estate agent, and a licensed general contractor, my opinion on the idea of flipping a house might be a little biased. However, a recent encounter with a prospective buyer, who voiced his opinion in front of me to an investor, motivated me to write this article as an educated response to his comment. The angry buyer and his agent told the investor that he was ruining the market by flipping houses. To be completely honest, I’ve never considered the possible negative effects that flipping a house might have on the market before hearing that, but this incident forced me to examine the ethics behind flipping a property.
The first question to answer here is if the real estate market influences the economy or if the economy influences the real estate market, which on the surface seems easy enough to answer. The role that real estate plays in the economy is enormous because we all need a place to live. The residential real estate market provides housing along side with equity, which can be a source for leveraging in other financial matters that homeowners might be faced with. The commercial side of real estate also opens the opportunity to generate revenue for people whether it is in apartment buildings, retail spaces, offices, or manufacturing. Now getting back to the question, what influences what? Well, if the economy is doing well and the unemployment rate is low, then the demand for houses will increase. As the demand for houses goes up, the cost of housing will follow. In this micro example, it is fair to say that the economy influences the real estate market more then the market influences the economy.
On the other hand, the economy is in a constant cycle going up and down through time. Once the economy starts to take a dive, we try to make changes to stay afloat. Normal goods become inferior goods, and funds get reallocated until they’re all gone and we’re left with a debt crisis. In this example, I would like to look at home maintenance and improvements as normal goods during flourishing economic times. Moreover, once the economy takes a turn in the wrong direction, funds that would normally go to upkeep on a person’s property get reallocated toward paying his or her mortgage. Eventually the house becomes outdated and poorly maintained, and in most cases these types of homeowners are either foreclosed on or forced to sell in an effort to avoid being foreclosed on.
Now, in the midst of a struggling economy faced with extremely high unemployment rates, the demand for home ownership has decreased. When demand goes down, and supply goes up, prices fall, which hurts the few homeowners that worked hard to keep and maintain their homes by bringing down its value.
Whether or not the economy is growing or diminishing, does not change the type of economy we have in the United States. We live in a “Free Market Economy”, which is based on supply and demand with little or no government control. A completely free market is an idealized form of a market economy where buyers and sellers are allowed to transact freely based on a mutual agreement on price without state intervention in the form of taxes, subsidies or regulation.
Finally, in response to that angry buyer: who is the house flipping business really hurting? Is it the homeowners living in the neighborhoods surrounded by abundance of distressed, under-maintained, homes which are driving down the value of their own homes; or is it the angry buyer who is looking for a cheap home and has neither the means nor the motivation to bring value to the neighborhood? Is it fair to point fingers at an investor who is looking to capitalize on a free market economy by using their hard earned money and a little know how? I personally do not believe so. If you really take a second and think about what flipping does, you will see that investors are helping revitalize the economy by adding to the appeal of the community, and giving a qualified buyer a newly restored home; and best of all: they will do it in months, not years.
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Normally I would agree with you on the subject of flipping homes for profit. But when the banks control the number of home on the market any given time not the normal drivers of supply and demand then I must say no this practice is not good for the economy in the long run. Only selling to cash customers who then drive the price of the same home they just put back up on the market for even more inflated cost because of a controlled market will hurt the economy.
I see your article from your point of view and i agree with you on some points that it is good that house flippers make a neighborhood look better by fixing a house up. What i dont agree is this, they buy the houses that need the least amount of work and in cash. They are not buying the bottom of the barrel houses that needs tons of work. They are buying houses that barely need anything done at all that are close to mint shape. they bu houses that already look excellent on exterior so its not making the neighborhood look bad at all. They buy houses that they “upgrade” usually which means there is no real damage there is just outdated items in it that have no real problems
So lets look at it from my POV as the average american who cannot get a house. I am in my early 30s and i have lived in one of the worst neighborhoods in america. #1 to #3 almost every year in crime in the top 10 as a matter of fact. I also have social anxiety which makes it hard for me to be able to work anywhere i want, i have to be select in my jobs but yet ive still worked since i was a kid but ive had to work back breaking jobs. I have been saving money for the past 10 years from dead end jobs usually part time ones that pay crap in hopes of one day buying a decent house in a better neighborhood. I skipped having kids and even lost my gf because i wanted to wait till i had a good home and neighborhood for them to grow up in and she moved on to someone with more income. My resources are very limited but im a great person with morals and it has taken me a very long time to save up the money i finally have to have a down payment for a home. Now due to all the house flipping shows on tv, when i finally got all my approvals in order and a few home assistant programs which took a good year to figure out what i was doing its now to late because the flipping industry has tripled since last year. Ive already lost 12 houses due to people paying in cash offers. all the houses im looking at in my price range have beat up mold and water damage but in very good areas. it takes me a month of looking to find that 1 good houses to bid on, and when i do a house flipper gets it. someone who doesnt need a house buys it and im stuck in my hell hole community around drive bys and bullshit every single day because of some asshole who is flipping houses because he doesnt work a honest job to make a living. why cant the house flippers buy the other houses im looking at that have mold and water damage and roof damage and leave that one nice one to the person who wants to start a family. I hope one day i can rise above this mess im in but the way the world works isnt really helping my situation any.
I’m have a very very similar situation to Confusion and I would bet that we are not the only ones. I’m all for the free market but I would love to own a home sooner than later but our economy is in bad shape right now, how hard is finding a home going to be when it turns around? if the “economy drives the market” .
flipping is what caused the last housing crisis. Bank new everyone and their mother were all out there trying to buy properties with little to no money down with the sole purpase of flipping it for a quick buck. The flipping investors made the lions share of forclosures.
I do not even know how I ended up here, but I thought
this post was great. I don’t know who you are but definitely you are
going to a famous blogger if you are not already 😉 Cheers!
Flippers are in the business of making money for themselves at the expense of the potential buyer of their renovated home. Unlike a person who actually will live in a home, the renovations are likely to be cosmetic-(i.e. painting vinyl siding, covering up posts rather than replacing old wood ones). When the s…t hits the fan after these bargain basement fixes, they have already cashed the check. Anyone who buys a home from a home flipper would do well to be a top notch home inspector, or better yet, buy a home from someone who has actually lived in it.
Flipping for cash or rent is helping to drive down home ownership rates for families. Historically familys purchased homes and did the work themselves netting them a nice home to live in.Investors take these properties and jack up the price to the point where that same family can no longer afford to buy it. It is serving to further seperate lower income from higher. Those of you flipping are doing so at the expense of the american dream for profit.I will also say that they are not buying homes to raise neighbour hood values if that was the case gary indiana would be a flipping Mecca.
I could not agree with you, Paul and Lynn, more. I have been a Realtor since 1988. I have seen a lot over the years. I agree we have taken away the dream of home ownership from so many young people. The flippers are picking up the homes, as middle men, make a quick buck and turn the home back onto the market at a price that eliminates so many first time home buyers. Most flippers now have Real Estate licenses so they can pick the property before the public even has a shot at it. The result is these young people are being driven into expensive apartments in record numbers across the country as they are now priced out of the market.
Great reply Pam McCormick and others!
When I saw that the article was written by a Real estate agent I knew it would be slanted for the investor(flipper). Real Estate Agents benefit from housing bubbles with big commissions. They love buyers fighting over an overpriced house.
Just look at the picture in the article. The real Estate Agent that sells the “before house” would only make $6,000 Dollars, but if they sold the Flipper house they would make $12,000 commission. Pretty easy to see why the real estate agent loves the flippers.
HUD Foreclosures are pretty cool, they will not allow investors to bid on a house until it has been on the market for a period of time so families have a change to buy it.
If investors really wanted to create value in society they should build(create) new homes. Investors buying up any good deals only drives up the cost of housing for the average person trying to find a home to live in.
I do not like excessive regulations but maybe residential housing should be limited to American Citizens who are buying the house to live in.
I live in an area where homes are getting snatched up faster than you can set an appointment to go see them. It’s very scary for a home buyer because you have to sell your home first and then hope you find something the flippers haven’t snatched. They are not taking the bad one’s either. They are taking the ones that allow them to do a few minor repairs and then double the price. This leaves home buyers with the worse homes to – literally fight – over.
As hard as I try, I can’t blame the flippers.
The banks approve monthly mortgage payments which lenders cannot truly afford. On top of that, the gov’t (i.e. Fannie & Freddie) implicitly backs 30-year mortgages making the total mortgage value super expensive (see $389k in the above pic). The high price of the loan makes the down payment super high. A down payment is $78k for above ‘flipped’ house as opposed to $40k in original condition. As a result, most new home buyers can’t afford to make anywhere near a decent down payment and the monthly payment is burdensome (leaving little money for home repairs). The above house was basically ‘flipped’ out of availability for new buyers.
But its not the fault of the flippers. Blaming the flippers is like blaming your CVS pharmacy tech for filling a large opioid prescription. The pharmacy tech didn’t allow the drug on the market, the FDA did. The pharmacy tech didn’t aggressively market the drug to doctors, Purdue Pharma did that.
It’s easy to point the finger at the flippers…but lets focus the blame with those institutions truly causing this problem.
I understand making money. But when investors/flippers start rapidly buying up affordable and livable homes….under cutting first time home buyer offers. It hurts the poor. It keeps them poor. I’ve been looking for starter home as my first home. I know that if I could buy now in a few years I’ll have equity. I was excited to buy, thinking wow I might have a lil retirement when I’m older at the very least I’ll secure a nice low mortgage. Everytime I go to see a home, there are cash investors there ready to under cut whatever offer I make. They are rude, pushy and act like I’m nothing and don’t deserve the home because hey “they have cash”. In Tampa FL. For instance I’m looking for a home $120k and under. These are homes that don’t need much repair and are ready for me to move in and make repairs little by little are being bought and then flipped right out of my price range. But hey, I’m not a rich person so I guess I don’t deserve to own property. That’s what it feels like.
This article could not be farther from reality.
Flipping houses works because it’s basically a form of arbitrage – it’s using market inefficiencies to turn a quick profit. This is exactly the opposite of the self-congratulating rationale the author gives about “bettering a neighborhood”.
As many above me have pointed out, most of the flipping is done at minimum cost to maximize profit, NOT to invest in the home. To take an example from the show “Flip or Flop” – “because this is a million dollar flip we’ll have to use real hardwood floors”. That tells you all you need to know right there. The flips are done with minimum quality materials to turn pump up the cost and turn a quick profit.
It does not help the neighborhood when a flipped house is asking for 80k more than other neighborhood houses. Yes, the people selling their houses at the same time can jack their prices up, but when they “run the comps” how would a house that hasn’t been “upgraded” compare to the flipped one? It wouldn’t.
This artificially inflates the housing prices around the flipped house creating a bubble. Probably not as bad as the 2008 bubble, but the bubble impacts those who are legitimately looking for a home. Most of the flipped houses I’ve looked at with a realtor, and those that are on Redfin/Zillow/etc…are transparently obvious as to what went on. They are ALSO the ones that have asking prices well over 75-100k than others (no way a new backsplash adds that much value), and, this is the important part, they’ve also been on the market the longest.
So much for helping the neighborhood. As an aside, the other aspect about the allegation that flipping houses helps neighborhoods is that those who can afford an inflated 100k premium on the house probably aren’t the ones who are going to move into a neighborhood that “needs help”.
So let’s be realistic here – any time you have a massive influx of cash into an area, those people can usually afford to sit on an investment for a while. This is precisely the opposite of what home ownership is all about.
I’d expect more realization out of someone who has made his living as close to the issue as the author has.
Flipping houses would have a place in the economy if it were the very worst houses that were being flipped. But it’s not. I’m experiencing this issue first hand. I have $50k saved for a home purchase and I’m looking at houses in the $200-230k range. Everyone of them seems to spend VERY little time on the market before they are marked “Pending” for a sale. I’ve seen no less than 10 houses in my area alone that I was interested in purchasing in my price range that have been sold in the last 6 months that are now back on the market with a price tag of $320k or higher. And based on the pictures I’ve seen of the before product and the current product they aren’t doing much to justify the markup. Most of them have new paint, maybe new carpet. Some have updated appliances and some have landscaping done. That’s it. I would have bought the home for more than the sold price was to live in with my 2 kids… but the seller wanted the cash offer even if it meant a accepting a little less.
Really? Think about what you wrote Steve. You are correct on the banks giving loans to those who really can’t afford it. Although, flippers made just about every house twice the average price. So, if the price was reasonable, the loans would be to.
I have been in construction all my life, I have helped build million dollar homes, so I’m sure I could keep up with the maintenance. Competing with cash investors is damn near impossible for blue collar workers.
My wife is disabled and has no income. I’m the only money maker with 3 children, life happens and we all have stories. I could really use a house needing some TLC, in a decent neighborhood for an average price. Unless your willing to overpay or settle putting your family next to a sex offender or meth lab, your choices are limited if any.
So, show me in the book of stupid; where it makes since to take a 150k home, slapping paint on it and selling for 300k to someone that will be foreclosed shortly after purchase HELPS the economy?
Patrick the economics major who started this thread is a tool! Come in the trenches with the ones making the economy run. You post shit you were taught out of a text book, from another idiot. Break the cycle, pick up a hammer, drive a semi-trailer, pick a field of fruit. Here’s the lesson you should been taught. It’s the little guy that makes the economy work, not the teachers and not the government. We need an affordable place to sleep and raise a family.
I live in a retirement community where mortgages are not allowed; homes have to be purchased out right. My question is: does the flip increase the overall value of the neighborhood or does it actually decrease the value of homes that are smaller or maybe not updated. We have been allowing flips which previously were prohibited; one of my neighbors voiced this concern to me; that the flips which expand and update the acquired homes could actually be lowering the value of the homes in original condition. Keeping in mind that the norm was for people to come in expand and update but live in the house, hopefully for many years. If anyone has any insight or experience with this I would greatly appreciate your response.
I’m sick of flippers. I have been looking for an affordable home in order to fix it up the way I want it to be. I’m an artist. I have specific tastes. But I also live on a budget. Every time I find something my husband and I like, it is literally under contract and then six months later it’s back on the market. While I may still like the layout, the cosmetics of the house are not to my tastes and I feel it wasteful of time, money, energy, and materials to redo this just remodeled house.
I live in the Nashville metro area, was born here and lived here back when it was “nowheresville”, USA. You used to get a great deal on houses. Now all these out-of-towners are flooding the area to play “landlord” or flip houses. As a result, we have a bunch of overpriced, shoddy places everywhere, millennials can’t buy our first homes, and we’re stuck. It breaks my heart to see my husband break his back every day 15 hours a day just to give half our money to our landlords who literally just go on retreats all the time and are generally rather useless members of society. Fuck people who flip houses. Yall are vultures.
I read the article and comments & it’s a crazy scenario. Yes I love ppl fix up these houses & these put of country out of state investors hit my city approx 2 yrs back and massively started buying and flipping all affordable property. The main issue is like others pointed out, local real ppl aren’t able to afford the high end, LA style flips they are doing in areas that normal ppl live in making it great to sell if u already have a home but then simultaneously difficult to then buy in the same area bec they only do high end flips with high profit margins and us normal ppl who lost jobs During COVID & are just getting back on our feet are now forced to try to rent, but can’t bec no one is moving bec no one can afford a place to live in the market the investors are aggressively buying up w cash offers. It really sucks & I wish there was some more regulations suppressing the out of control nature of the flipping… At least make the rule they can’t buy the 1st month and let there be rules that u can’t Improve beyond a certain percentage of what the median income is. Some of the flippers are making $100 grand profit and the rest of our dreams of finding a decent home are shot to hell bec of the way the flippers are making it impossible for us to own a home.
Post date 06/04/2021. Now look how messed up the market is Flippers and wanna-be landlords are buying up anything decent and affordable, invest a bit of money into them and then price them at $50k or more over whatever money they have in them. First-time buyers are screwed and down-sizers are screwed. This is what happens when homes are viewed as a commodity in a capitalist market. There should be more regulations put in place to control this nonsense.
I look at Zillow regularly and I can spot a flip immediately just by the first photo. They all have grey siding or they paint the brick grey. Then once inside, they all have the same white and grey kitchens with three pendant lights. White subway tiles. All the walls are grey. The floors are usually grey or brown vinyl click tiles. They all use those giant fake marble vein tiles on the bathroom floors and walls… if they use other tiles, there are too many different styles in the same room. I’ve seen lots of old homes ruined too, where the whole soul has been ripped out. Bunch of schmucks.
In my area, it’s frustrating for people like myself who are looking to buy a new home. It is estimated that the average household income in my area is around $50,000. In the past, we could buy really nice two-story homes for around $250,000. As soon as Covid occurred, people began buying up houses in our area and flipping them. I know of one person who bought ten houses. For around $200,000 to $300,000, they buy the houses, flip them, and try to sell them for $400,000 to $500,000. Income hasn’t increased, and this is really absurd.