In finance, flipping is a term used to describe purchasing an asset and quickly reselling (or "flipping") it for profit.

Within the real estate industry, the term is used by investors to describe the process of buying, rehabbing, and selling properties for profit. In 2017, 207,088 houses or condos were flipped in the US, an 11-year high.[1]

Effects

Bubbles

Further information: United States housing bubble

A spate of flipping often creates an economic bubble which then bursts, such as during the Florida land boom of the 1920s.[2]

In the 2000s, relaxed federal borrowing standards (including subprime lending that allowed a borrower to purchase a home with little or no money down) may have led directly to a boom in demand for houses.[3] Because it was easy to borrow, many investors bought homes as property speculation with no intent to live in them. Since the demand outstripped the supply, prices rose, giving a short-term profit. This resulted in an inflationary spiral until the bubble burst in 2008 and borrowing standards became stricter, leaving the housing market to bottom out.

Rejuvenation and gentrification

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"Rational" flipping can encourage a rejuvenation and restoration of a previously decrepit neighborhood, a process known as gentrification, which increases property values but can cause a population shift.

Under the broken windows theory, an unkempt house or area attracts a criminal element, which drives out those making a responsible living, which allows for more criminal element, and so on in a spiral. Restoration creates jobs, particularly in construction, and generates more sales (and sales taxes) for local vendors and suppliers. The renovated homes attract new populations and businesses to a region, encouraging more economic development; their higher assessed values brings more property tax revenue to local governments, allowing for more improvements and more policing.

When flipping occurs frequently in a community, the total cost of ownership can rise substantially, eventually forcing current residents to relocate, specifically poorer young and old people. On a small scale, flippers can cause distress and disturbance to their immediate neighbors by performing lengthy renovations. Flippers often have no interest in neighborhood integration,[4] which may cause tension with long-term residents.

During the real estate bubble of the 2000s, flipping and gentrification were both linked to the mass migration of people to California, where high real estate prices and ample jobs attracted wealth seekers.[citation needed] In response, many native Californians were forced to migrate to the less expensive areas of states such as Arizona, Nevada, Texas, Oregon and Washington.[citation needed] This migration of Californians caused further gentrification in the areas that they had moved to in large numbers. Areas such as Phoenix, Arizona, and Las Vegas Valley became much more expensive, although property prices dropped significantly after 2006.

In 2020 the emphasis on house flipping shifted to the Midwest, where Greater Cleveland became one of the most lucrative places in the country to own rentals and flip homes. A typical project in the area, as in other areas in the Great Lakes region, pays back twice the cost of the purchased structure. Investors from California have been steered by advisors from the Sun Belt to northeastern Ohio. In 2019 the median flip home was bought for $60,000 and sold for $124,000. 100% margins were also endemic to Akron, Ohio; Pittsburgh; and South Bend, Indiana.[5]

Property values

After a renovation, the house itself will be in better condition and last longer, and can be sold at a higher price, thus increasing its property tax assessed value, plus increased sales for goods and services related to property improvement and the related increase in sales taxes.[6] Neighbors can also benefit by having more attractive homes in the neighborhood, thereby increasing the value of their own homes.

Regulations

In 2006, the US Department of Housing and Urban Development created regulations regarding predatory flipping within Federal Housing Administration (FHA) single-family mortgage insurance. The time requirement for owning a property was greater than 90 days between purchase and sale dates to qualify for FHA-insured mortgage financing.[7] This requirement was greatly relaxed in January 2010, and the 90-day holding period was all but eliminated.[8]

Illegal activity

Flipping can sometimes also be a criminal scheme. Illegal property flipping is a fraud whereby recently acquired property is resold for a considerable profit with an artificially inflated value, typically in order to defraud a lender into lending more than the true value of the property or defraud a buyer into paying a higher price than should be necessary. The property is quickly resold after making few, or only cosmetic, improvements. Illegal property flipping often involves collusion between a real estate appraiser, a mortgage originator and a closing agent. The cooperation of a real estate appraiser is necessary to get a false, artificially inflated, appraisal report. The buyer may or may not be aware of the situation. This type of fraud is one of the costliest for lenders.

Renovating distressed or abandoned properties was sometimes linked to malicious and unscrupulous acts in the post housing bubble era. As a result, "flipping" was frequently used both as a descriptive term for schemes involving market manipulation or other illegal conduct and as a derogatory term for legal real estate investing strategies that are perceived by some to be unethical or socially destructive. The term has a more positive connotation these days with the popularity of television shows like Flip or Flop and Flip That House.[9]

In the United States, the Uniform Standards of Professional Appraisal Practice (USPAP) governs real estate appraisal and Fannie Mae, oversees the secondary residential mortgage loan market. Both have practices to detect illegal flipping schemes.

The term "flip" is also used in relation to certain types of scams, known as "money flip" or "cash flip". In such a scam, the scammer instructs the intended victim to send a certain amount of money, usually via wire transfer, with the promise they can quickly "flip" the money for a larger amount, typically about ten times as much. After the victim has wired the money, the scammer simply keeps the money, cutting off all further contact.[10]

In television

In July 2012, business network CNBC green-lit several pilots for reality television series focusing on house flipping.[11]

The following is a list of several house-flipping shows:

See also

References

  1. ^ "2017 Home Flipping Report". ATTOM Data Solutions. 2018-03-08. Archived from the original on 2019-07-26. Retrieved 2018-12-20.
  2. ^ "Crashes: The Florida Real Estate Craze". Archived from the original on 2006-09-01. Retrieved 2006-09-08.
  3. ^ Duca, John. "Federal Reserve Bank of Dallas". Archived from the original on 2015-12-09. Retrieved 2016-11-02.
  4. ^ "Housing Issues in Jersey" (PDF). States of Jersey States Assembly. Archived (PDF) from the original on 2016-08-12. Retrieved 2016-06-03.
  5. ^ Dezember, Ryan (8 June 2020). "Cleveland Is a House-Flipping Hot Spot, and Covid Adds Fuel". Wall Street Journal. New York NY. Archived from the original on 29 June 2020. Retrieved 26 June 2020.
  6. ^ "Put Your Money to Work: Increase Your Wealth by Investing Your Business Assets". allbusiness.com. 4 April 2016. Archived from the original on 5 August 2016. Retrieved 3 June 2016.
  7. ^ Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs; Additional Exceptions to Time Restriction on Sales | Federal Register Environmental Documents | USEPA
  8. ^ "HUD Press Release, January 15 2010". Archived from the original on 2010-01-27. Retrieved 2010-03-10.
  9. ^ "Sold! HGTV flips over big ratings growth". USA TODAY. Archived from the original on 2018-12-20. Retrieved 2018-12-20.
  10. ^ "Fraud types". Western Union. Archived from the original on April 22, 2021. Retrieved April 22, 2021.
  11. ^ "CNBC to Promote House Flipping". Helaine Olen. Forbes. July 25, 2012. Archived from the original on 22 February 2013. Retrieved 12 February 2013.

Sources

Published articles

Books