As the real estate market heats up again, people seeking quick profits by “flipping” properties are coming out of the woodwork. Experts worry that they are going to hurt the California market, but what is a flip? As it turns out, there are good ones and bad ones. A Good Flip, is one where a junker property is purchased, improved, and resold. The improvements can range from upgrading kitchens, bathrooms, and paint, to complete home renovation, including all major systems, landscaping, and possibly adding substantial square footage. In these situations neighborhoods are improved, as eye-sores, or even abandoned homes are replaced by desirable homes, with new owners that ultimately reshape the community for the better.
What is a Bad Flip then?
Bad Flips were common in the last real estate run up before the bubble popped. These were represented by scenarios where people purchased property, and then resold it quickly thereafter for a profit. The distinguishing factor is that no inherent value was being added by the “flipper.” No work was being done, and nothing was improved. This only works when market conditions are such that appreciation is occurring so rapidly that people are encouraged, and able to take advantage of it.
Another bad scenario is when competition for fixer upper property gets so stiff that people (often newcomers to the flipping world) buy properties for far more than they can buy them for, and reasonably expect to make a profit. In other words, the less experienced, or the careless investor comes to rely on appreciation to make deals work. Without substantial rapid appreciation, fueled by buyer frenzy, these flippers would lose money.
The bright spot on the real estate horizon this time around is that in order to obtain property to flip, substantial amounts of money are needed in the form of down payment and rehab budget. Gone are the days when banks freely doled out money to overpay for a property, and overspend to fix it up. In today’s world of tightened lending guidelines, people have to prove that they qualify to borrow money. They also have to demonstrate that they are likely to be able to rehab a property in a timely, and profitable fashion.
Flipping is sexy. The prospect of making large profits over a relatively short amount of time will always bring people into the fray. And when rapid appreciation makes it seems easy, everyone wants to get in on the action. With today’s more responsible lending standards, one can be hopeful that flippers won’t push the market out of balance too quickly. But one thing is certain: When Flipping has the attention of the nation again, as it does today, the market is in for a wild ride.