flipping

The FHA’s “Anti-Flipping” Rule and Dorothy, the Wannabe First Time-Homebuyer.

Once upon a time, there were fantastic loans widely available that were backed by government “FHA” insurance. Down payments as low as 3.5% were made available to encourage homeownership by The Wizards of Oz, and homebuyers flocked down the path of golden bricks. All was well in the land of first time buyers until the Wicked Witch of the East decided to throw a flying monkey wrench into the game and passed the evil anti-flipping rule (as codified in 24 C.F.R. § 203.37a) which prohibits the FHA from insuring loans on properties which have sold within the last ninety days. While the Good Witch of the North temporarily suspended the anti-flip rule, it is currently scheduled to go back into effect in June of 2009.

Thus, these days, even if you are a legitimate flipper (and add value to the property), the buyer won’t be able to get an FHA backed loan until your ownership is property “seasoned” – i.e., aged to perfection. The upshot: If you plan to flip to FHA buyers, expect that you’ll have to wait 90 days before you get the property under contract and then perhaps even longer get to closing. (This may not be a problem if you have a lot of work to do). This can be avoided by simply using conventional financing, but that eliminates a lot of buyers, and profits.

In our opinion, the anti-flip rule needs to go – all it does is discourage people from fixing distressed properties and making nice housing affordable to all, including Dorothy, the Tin Man, and the Cowardly Lion.

flipping

The Flip is Dead! Long Live the Flip! (Flipped Properties Are Selling Again In The San Fernando Valley In 2009)

Let’s face it: America had a bad case of flipping fever over the last few years. I’ll admit to enjoying watching more than my fair share of such classics as “Flip that House” (not to be confused with “Flip this House, ” under any circumstances), “Flipping Out “, “Real Estate Pros “, etc., etc. A lot of these focussed on everyday people flipping houses in their spare time, folks who stood ready to make vast fortunes if everything turned out right. The backlash, of course, was not far behind: some of these shows have been criticized as puff pieces, some of the people profiled have been investigated, and I’m sure that a plenty of important details were sometimes left on the cutting room floor (uh, transaction costs?). Some went so far as to point the finger at flippers (unfairly, IMHO) of causing the real estate bubble/crash. Eventually, after the crash, our interest and attention as a country waned, and perhaps it should have.

Now, the flipping shows that are still on the air tend to feature prominent disclaimers written by their lawyers about the fact that you can lose your shirt in a flip gone sour. (Actually, it was interesting to see how many would-be flippers ended up living in their failed flips when the market turned. There has to be a lesson there somewhere — like don’t buy a house you could not see yourself living in if you had to.) I was amused to see a new reality show, obviously set in Canada according to the accents which only describes how to add a “rental suite” to an existing home to help make the mortgage payments. We really are living in a different time.

Fast forward to Southern California, Springtime 2009. Well-priced properties in the San Fernando Valley are being snatched up soon after they hit the market, often with multiple offers. There are a lot of would be buyers having a very hard time landing a property that does not need a lot of work, and is also realistically priced. The reason for this is that much of the inventory actually selling these days is bank owned, badly out of date, very likely trashed, smelly, and sold “as is”, all at the same time. It is a whole lot more than the average homebuyers want to take on — since virtually everyone wants a move-in ready house. This is particularly the case if the buyers are shopping for their first first home purchase since they may be eating Top Ramen and day old bread to save every dime for the down payment. To throw another 60 or 70 grand at a house on top of the down payment is simply not a realistic possibility for most.

So, there is a need. This being capitalism, where there is a need, there will be a solution. You guessed it, the flippers are back. But it seems likely that the flippers that came back never really left in the first place, because they are well-capitalized professionals who know and can control their costs and have turned flipping into a sustainable business. Thanks to the efforts of these enterprising folks, it is possible to pencil out the numbers, and see that in many cases, it can be profitable to flip a property, provided, of course, that all the numbers work, and, if nothing too major goes south along the way.

Here’s a case study of what appears to be a recent flip from a Reseda property I recently found on the MLS. I’m not going to put down the address, because I think the current owner deserves some privacy, but I will give the numbers and a few photos from the MLS.

First, the before:

Sold Price $256,000 close of escrow: 12/1/08. Quite a dump, really. Not a lot to recommend it, except the price.

Now the after:

And I quote:

“New kitchen cabinets with absolute black granite slate, back splash, BOSCH stainless appliances with stainless stove hood. Got to see laminate hardwood floors. Master suit has walk-in closet, double sink in bath, french doors off family room leading to a relaxing outdoor patio. second french door off dinning area leading to a barbecue outdoor eating area. All new doors. door handles. and electric outlets. New air conditioning and heating, new copper plumbing, permits on file. New paint in and out, new landscape and sprinklers. park-like backyard. Won’t last long! ”

List Date 1/23/2009 Close of Escrow 2/28/2009 Sold Price $ 385,000

Pretty spectacular. Plus, this is a rare instance where the “won’t last long” turned out to be completely accurate, unlike the hyperbole of many real estate listings. You can tell that this thing went into escrow (in its flipped condition) just days after being listed. I’m sure you will be tempted to run the numbers yourself — the price difference is $129,000 for three months of work, out of which the flipper had to pay all costs (like the copper plumbing and the Bosch appliances) of course, and God knows what else.

Feeling brave and resourceful? Want to join the flipping club? I’ve got a few properties in mind that you might want to consider.

flipping

Bidding wars on foreclosures? What does the future hold? Investors want to know!

Yes, according to the Wall Street Journal and local brokers, bidding wars are breaking out over REO properties. Certainly there is a lot of money on the sidelines, and investors are getting ready to snatch up the best deals. Some investors are aggressively pursing deals right now. However, the New York Times reported on 4/22/09 that “Fannie Mae, like many banks, is inundated with foreclosed properties. In recent weeks, banks have begun accelerating foreclosures again, after having held off while waiting to find out which homeowners would be eligible for the Obama administration’s assistance program.” So, these multiple-offer situations may be a result of (1) banks deliberately underpricing properties (shades of the go-go days!) ; (2) the simple fact that a lot of distressed inventory has been kept from the market over the last few months; and/or (3) investors who write up dozens of offers on REOs, hoping that the bank will take the bait on at least one — thus inundating sellers with “multiple offers” — although few serious ones.

An observation: a few weeks ago, I found a very nice looking property in North Hollywood while I was working an open house on the same block. The property looked like it had been extensively rehabbed in the not-too-distant past. It may have been someone’s flip. To make a long story short, it was vacant, and had been broken into and vandalized on the inside. From what I could see, it was mostly cosmetic damage, so I thought it might make a good property for one of my investor clients. So, I jumped on my computer to see who owned it. The answer was: WaMu now known as Chase, and it was an expired listing. Since I have a personal relationship with Chase, I thought I’d have a go at trying to get the listing, or at least find out what they intended to do with the property. The result, after many phone calls and emails — I could not get anyone to give me an answer. So the property is still languishing there, waiting for some more vandalism, or perhaps some squatters to move in. What a shame!

On a similar note, I heard a story (about relatives of my friends) who stopped paying their mortgage last year. Figuring it was only a matter of time before foreclosure, they moved out into a rental. After a few months went by, one of their old neighbors told them that nothing had been going on at their “old” house. So, they promptly moved back in where they have been living mortgage- and rent-free since then.

What’s the lesson here? If these stories are evidence of a larger trend, we will see a lot more inventory and even better prices over the next year. You should get your ducks in a row now, and start investigating interesting markets so that you will know a great deal when you see it.