Tuesday, July 2, 2013

Property “Flipping” That’s Good for the Soul

Below is a guest post by Frank Bateson.  This is a continuation on our discussion on real estate investing.  If you would like to write a guest post, please contact me.  Click on the About Me link for my contact info.

Frank Bateson is a retired appraiser who is now dipping his toes into blogging. He is considered an expert on Windham NY real estate.  When he's not plugging away at his keyboard, Frank enjoys tracking the stock market and lowering his golf handicap. 

When the great subprime mortgage crash broke in the fall of 2008, I doubt there was anybody working in real estate, banking and finance, development, construction and contracting or any related fields (which means just about everybody) that didn’t feel at least a little sick. For many of us that sensation was the result of several concurrent reactions: anxiety/fear/panic, bewilderment, a mistrust of government and private sector financial prognosticators and experts, apprehension and insecurity about the future, and perhaps the most pervasive (apart from worry) – anger.

In the months that followed a flurry of blame swept through the media and population in general. Who was responsible? Was it Alan Greenspan and his support of deregulation or his replacement Ben Bernanke’s failure to see it coming? Was it President G.W. Bush for likewise backing and pushing deregulation or supporting his Treasury secretary Henry J. Paulson’s 2007 prediction that the subprime crisis was “contained”? Was it the banks and/or Fannie Mae and/or Freddie Mac? Standard and Poor’s, Moody’s and the other rating agencies’ apparent good-ratings-for-profit racket must have played some role in the collapse, right?

All of these entities and individuals mentioned no doubt contributed to the collapse, of course. However, for months if not years after the crisis there was pretty much a 100% chance that any story you encountered on the Great Recession would inevitably contain or close with a high-handed critical rebuke from the story’s author that really, when you got down to it, we were all to blame. If we’d just been a little more responsible maybe we wouldn’t be in this mess. The lion’s share of that blame often seemed to find its way to a particular breed of everyman- the property “flipper”.

Although there are several different subclasses, the species of flipping practitioner most people are familiar with, and the sort that now populates about a dozen television shows (with at least two more reportedly planned by CNBC), is the “fix and flip” artiste. The fix and flipper buys a property listed for less than that property’s value would be if all things were equal. Those unequal things include a house that’s in bad shape or looks like it is, is being foreclosed on, has been seized for whatever reason or often some combination of those. The flipper then fixes the house up and sells it for a profit.

Flippers got a bad rap for a few reasons. They were often considered a predatory symbol of the real estate market’s woes- flash in the pan slicksters who leeched off of honest people by artificially ratcheting up the value of properties that “honest” homeowners would have to pay more for. And unfortunately, there were indeed some scammers who’d work in collusion with each other and either dishonest or inexperienced mortgage brokers, appraisers and loan officers to inflate a property’s real value for shady flipping schemes.
Plus, it’s certainly not unheard of for underhanded hustlers to buy a property with major issues, make some superficial or cosmetic repairs or additions and sell a faulty product as a sound one. One of the most common admonitions of the fix and flip investors, however, was that a house just wasn’t a product meant for the making of a quick buck like doing so with other commodities like electronics, clothes, jewelry or even cars. Houses are meant to be homes and long-term investments that pay off when you move.
There’s something to be said for that perspective, certainly. That being said- even nowadays, with the market the way it is, prospective flippers can buy properties and turn them around for a profit without sacrificing one’s ethical deportment, spiritual commitment, moral code or integrity. In fact, when done right, flipping can do a great deal of good while turning a profit. The keys to doing it right is: having patience, being discerning, being honest and forthright with everyone involved in the process and making a commitment to legitimate property improvement.

Once you’ve gotten into property sales that aren’t costing you sleep at night (at least not because of your conscience) you’ll start to see the positive impact a good flip can have on your community and pocketbook. For instance, every successful real estate turning entrepreneur has an established network of subcontractors and maintenance people in their rolodex. That’s a huge link in the profit chain and obviously you’ll want to establish connections whose credentials, work ethic and honesty you’re sure of. Whenever rehabilitating a property everyone you employ in that network makes an honest buck; and an honest buck that contributes to the quality of a neighborhood.

There’s no neighborhood on the planet that would balk at a house on their block being improved. Improving and beautifying any house, particularly if it was something of an eyesore, raises the property values for everyone in the area. Not to mention that a distressed property has been made livable. Finally, and most importantly, when the house is put on the market an individual and/or their family has a home waiting for them.

As my wife and I bought our first house from a flipper, I know exactly how comforting it is to know that the house you’re buying has recently been inspected, touched up, certified, improved upon and often brought up to code. Had my wife and I bought the house as-is before the flippers had and attempted to hire the various contractors, about whom we’d have known little, and/or work on fixing the house’s quirks and shortcomings on our own, I have no doubt that the money we put in (especially if the hours of labor we’d have spent are included) would have been far more than the final closing cost of the house itself. So all in all, house flipping investors saved us money on the house we bought. Not a bad way to make a buck.