Some depth to our story – even when making all-cash offers, it’s not easy:
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by Jim the Realtor | Aug 25, 2009 | Flips, Thinking of Buying? | 54 comments
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If they were making all cash offers for food to flip instead of shelter I wonder if we’d be as admiring of their business savvy.
The advantage of all cash is mainly in the much lower risk of the buyer walking (can’t get a loan) and the greater speed and simplicity of closing (lots of paperwork required for a mortgage). It’s worth several thousand, especially if the house is vacant (carrying costs for seller). But if your offer is not in the same ballpark as the seller’s, no deal.
As first-time buyers, you can get most of those advantages simply by being a non-contingent 20% down offer.
I’ve seen a ton of deals fall through on contingency, whether it’s the appraisal, financing, or the buyer being contingent on selling his home.
looks like he hadn’t ever thought of what would happen if the buyer pool dried up? sort of a long pause to consider it.
If the investor buyer is offering all cash at or near list price, then the FHA buyer (with 90 day seasoning of title) has no chance to buy even at a higher price.
I just received an offer today a few thousand below list price on an investment property I am selling (not a distressed sale). It was an all cash close in 2 weeks so I didn’t have to think more than a few seconds to take it.
Investors buying properties for all cash today is much different than “investors” buying homes in 2005 with nothing more than a signature on a piece of paper.
Today we are seeing healthy investor behavior that is putting a floor under real estate prices.
For the investor in at entry level home price points you have multiple ways to win. Perhaps you flip like JtR’s buyers in the video. Worst case you hold for cash flow (probably better than a money market return). Maybe just combine the two and hold a few years and then sell.
Caveat: If the government stopped subsidizing home ownership with loans (FHA, Fannie, Freddie), low interest rates, interest deductibility, buyer credit, etc. Then prices would not rise but fall some more.
From Nightline’s Vicky Mabrey:
Hi Jim….
Thank you and Donna – she was a champ today…
Some of the video came in distorted, though, so I’m sorry to say your section is a bit short…
That’s okay, though, ‘cause it just means we’ll have to come back and shoot something else with you ourselves.
But thanks again – and keep the updates coming.
Best,
Vicki
Retail is for suckers.
There’s a sucker born every minute.
A fool and his money are easily parted.
Smart people like these can take advantage. Oceanside and Vista are different than CV and Del Mar, however.
Interesting point, Rob Dawg. I like your use of “shelter.” I think “real estate” is more commonly associated with “investment” than “shelter.” When that philosophy changes, then I think we’ll truly be headed in the right direction.
Our spot on Nightline is going to get bumped by Ted Kennedy.
These flipper a-holes are ruining the market and driving up prices. God forbid a normal buyer gets a shot at a “deal”. Noooooo, let some grass-effing flipper get his meat-hooks on it, then throw it back on the market at an inflated price. These scum profited on the way up, now are profiting on the way down. Makes me sick.
This is very rough back-of-the-envelope stuff, but with what looks like her $1mm+ cash investment, she only made 5% more than if she had just moved her money into the broad stock market for the same period of time (mid-May to mid-August). And that doesn’t take into account tax implications for either scenario (flip vs. stock investment).
Nothing wrong with smart people making money taking risk.Long live capitalism.
There is something wrong with people adding zero value to the system and raising the costs for the real consumers. There is something even more wrong when they can use capital to gain advantage over deals where the end consumer can’t compete with a loan, even for a higher amount. That is not capitalism or a free market, arizonadude. Flippers need to die.
I think the government should tax the hell out of income from selling a home that was held less than 2 YEARS that you had as an investment. This needs to be discouraged.
Kevin –
She (and her contractor) added *some* value… They fixed the places up. And, the chaos of a remodel and dealing with contractors and subs is worth some money. (Trust me on this. It can be very stressful and a lot of work.)
It sounds like she didn’t go into this looking to flip, rather she was looking to have a bunch of rental properties. Not the attitude of most flippers during the bubble years who were so overleveraged/in debt they were screwed if they couldn’t sell. Flippers who have serious skin in the game (all cash is serious skin) are a different breed than those who bought on I/O loans and hoped to make outrageous profits.
I’ve considered doing something similar to her original plan. The stock market still has me very nervous and owning some rental properties, outright, for a steady stream of income has it’s appeal. But it involves a lot of work, and I’m not sure I’m ready for that commitment.
If you’re jealous of people who pay all cash, consider that some of these people got the cash through frugal living, living within their means, and lots of saving. Nothing wrong with that.
I have to say our featured flippers did improve the property they bought. Probably raising the whole neighborhood faster than someone with sweat equity and a do-it-yourself level of skill ever could.
And the homeowners in those neighborhoods where the flippers are active will likely see a huge benefit and quick recovery on their equity. Next come the owner-occupants who contribute to their community. It’s good.
These people played it well. They are independent thinkers and didn’t follow the permabear herd group think. That’s where money is made, going against the grain.
Kevin,
Of course she added value.
It was undervalued in the first place. Her team saw (guessed?) the true value and then invested their capital. Whether they became flippers, landlords or owners is immaterial.
I see it all the time in my area. Slighty run-down foreclosures offered at “deal” prices. A month after closing it’s back on the market at $140k higher price with only new windows and pergo floors. The point is that a normal buyer could have gotten a deal and fixed up the place and NOT popped it back on the market at a higher price.
“$278 and $7 back to the buyer”
Same old sleazy tricks, different day.
Watch for upcoming story on Nightline when Jim gets to re-sell (again) these crappy shacks from these new destitute ‘owners’ (or maybe even these genius all-cash investors) to the next pool of greater fools.
Unbelievable. The dog is a nice touch though.
You’re ignoring what this entire article is about. People who fixed a house and added intrinsic value to the house. You said flippers need to die.
What did the flippers do wrong?
They stuck their neck out there at a time when people thought they were crazy…buying up places that were fairly run down.
They then upgrade those houses very nicely while watching overhead, expenses with materials, and time. They were going to keep them long term but the market heated up and they had a good product to sell.
Another set of flippers could have come in and paid with money they borrowed, taken longer, not been as cost effective and only made a slight profit if any.
These people did everything right in timing, location, refurbishing, and in the end they get to make some money.
What the hell is wrong with that?
Yo, flippin it good and all that, but you could have just bought a professionally managed liquid REIT such as this one from Vanguard:
FUND SUMMARY
The investment seeks to provide a high level of income and moderate long-term capital appreciation. The fund normally invests approximately 98% of assets in stocks issued by equity real estate investment trusts (REITs) in an attempt to track the investment performance of the Morgan Stanley Capital International (MSCI) US REIT Index.
you would be up 100% from March of this year, with total liquidity, and a $7.95 commission from Schwab (Sorry JTR)
http://finance.yahoo.com/echarts?s=VNQ#chart1:symbol=vnq;range=1y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Yo, RE ABOVE POST….and I forgot the best part….you NEVER EVER HAVE TO DEAL WITH A CONTRACTOR!!!!
If there ever was a sign that there’s more trouble ahead for local real estate market these flipper stories are it. This is the exact kind of frothy exuberant, make a quick buck, herd mentality that old Greenspan Magoo warned of. Don’t hate the flippers at least they have something to lose in this game and thanks to “cash is king” there are far fewer flippers then there were a few years ago. Not sure when the next leg down arrives, maybe troubles in the MI industry and repercussions for FHA loans will start it off.
I don’t get all the haters.
Rob Dawg, in the past didn’t you talk about selling some properties at the top of the market? How is this different?
Great points, UC Gal.
They did a quality job and whoever buys this quality house will likely stay there a long time. I would be thrilled if this couple bought and did the same quality rehab in my neighborhood.
Rob Dawg, in the past didn’t you talk about selling some properties at the top of the market? How is this different? – keithl
Good point. I was basically “forced” to sell because owning became such an insane prospect going forward. I really didn’t want to sell but I also saw what was coming.
This is different for the same reasons it is unethical to gouge for food when there’s a hurricane.
Rob Dawg, the only difference is you gouged for food when you ‘saw’ the hurricane coming and before it hit land. Effectively, it is still a hurricane-induced gouging. 😉
Jim has the most dangerous job in Southern California (what with all the cougars)…
We got a brief mention in the Nightline piece last night called “Home Sweet Home” – there isn’t a direct link, but it’s in the middle column under ‘Only on Nightline’:
http://abcnews.go.com/Nightline/
It includes an in-person interview with Robert Shiller talking about home-buying.
Jim has the most dangerous job in Southern California (what with all the cougars)… – Matt
Mrs. JtR is such a fine lady even a dumb frat ex-president would be crazy to be distracted. Yes, dangerous but he’s a professional.
If I really wanted to buy one of these houses, it might be worth some money just to not have to deal with a bank-run REO or short sale transaction…
Buy for $160k
Put $40k + another $10k misc. into it
Selling fees $10k
TOTAL = 220k
Sell for 300k
80k Profit
take 1/2 off for taxes = $40k net profit
BUT WAIT – what about your time and your risk? That’s not worth it to me. They got lucky as the market is stronger but could easily turn.
$40k profit and all your time and risk? FORGET IT!
Here’s the direct URL Jim;
http://abcnews.go.com/video/playerIndex?id=8413830
“There is something wrong with people adding zero value to the system ….Flippers need to die.”
Nonsense. They bought houses when everyone was selling and now selling when everyone is buying. They add liquidity to the system and help stabilize prices. The fact that they are making money is proof that they are adding value to the system.
http://en.wikipedia.org/wiki/Speculation
Read the section on “The economic benefits of speculation”
Kevin:
Any people who was bidding on that house could have raised the price to buy the house and fix it up. They (the featured flipper) won because they bid the highest amount with serious down payment.
You don’t necessary to have all cash to win the bidding war. As you can see, they lost 20 something times in bidding wars. Who won those houses from banks ? I guess there are quite a few “normal buyer” with 20%+ down.
Unless, for the “normal buyer”, you mean people putting 3% down, then you are crazy to buy a run down house when you have no cash.
“Mrs. JtR is such a fine lady even a dumb frat ex-president would be crazy to be distracted. Yes, dangerous but he’s a professional.”
I suppose (but this Flipperette is pretty hot).
I’m with Kevin and Rob.
Housing/shelter is a basic necessity, and flippers are raising housing costs for the poor people who tend to live in these neighborhoods. That $100K profit is ~$600 added to their monthly housing cost, each and every month, for thirty years. That’s $216,000 over thirty years…that they had to pay for $40K worth of upgrades. It will also add over $100/mo in additional taxes, that will continue to exist for as long as they own the home. Something’s not right with that.
If we care anything at all about encouraging home ownership, we’d drop any Prop 13 protection and the mortgage interest deduction for second/investment homes (apartments and multi-family/rentals would be exempt, and SFH owners could be exempt if they agreed to rent control), and increase cap gains on selling a home within two years to 50%.
Home ownership, done right, really does benefit a community. It would be nice if poor people could buy affordable homes and upgrade them (or not) to their own liking. However, forcing poor people to pay more so that rich people can make a profit is totally immoral, IMHO.
“I suppose (but this Flipperette is pretty hot).”
Amen.
Looks like Ted ducked out of responsibility for Chappaquiddick after all!
The rich get richer and poor get the picture. Housing bubble #2: with banking holding back inventory and distressed home owners squatting for 18 mos. at a time, “regular” buyers getting beat down by cash buyers (investors), and government stimulus, you have the laws of supply and demand manipulated again in housing. These elements, and fragments from the first housing bubble, are contributing to adverse supply conditions that are now driving up pricing again. Somewhere down the road when the majority of the US population is retiring and selling to finance their retirement, interest rates at 10%, and the US dollar fallen off a cliff, will we see people scared off from flipping – oh wait!, you will always have foreign investor willing to pay cash.
“If we care anything at all about encouraging home ownership…”
That’s how we got into this mess in the first place. Fannie Mae, Freddi Mac, tax subsidies, all distort the market and place people into overpriced homes with huge debt burdens. There is nothing wrong with renting, you might actually come out ahead.
http://michaelbluejay.com/house/rentvsbuy.html
CA renter:
So, how come the buyer paying for $270K or above did not bid for $170K in march with 20% down ?
If they did, then they would have won the bidding war ?
There is got to be something stopping them.
1. No money to repair ?
2. No experience to rehab ?
3. Too risk to pay that much ?
What ever reason you can think of, that would be the reason why the flipper added value.
Why should the “normal buyer” won the house and then use it as ATM and walk out of it when underwater, instead of letting flippers do their job ?
Who is to say they have more right to make money than flippers ?
Back to Todd at #31
I agree – they got lucky and the market turned beautifully.
Anyone would be crazy to set out to flip properties with so much risk for so little return. A couple of bad comps nearby and you’re toast, unless you’re fine owning rentals long-term, because that’ll be what they’ll be.
Just talked to a friend who was at the courthouse this morning for the trustee sales.
1. He said there were 60 people in attendance!
2. The property he was interested in comped out at $325,000. He bid up to $250,000, then bailed out. The eventual winner paid $300,000!
Pepsi,
I don’t know exactly why they (or some equally deserving family just looking for a HOME) didn’t bid in April, but they might have bid on it, and lost it to the flippers. Remember, the flippers made 28 (?) offers, and only got five. There were bidding wars then, too. If the flippers have cash, then they will often be able to out-bid the regular buyers. Also, FHA won’t loan on houses that are inhabitable. Not sure if that was the case here, but that does keep “regular” buyers out of a number of fixers.
You’re also making the assumption in your last paragraph that **somebody should be making money on housing.** I don’t think people should make money on housing. Houses are for living in, not flipping.
I’m not suggesting the flippers didn’t add value. They added $40K+/- value to that home. Where I have a problem is with the profit for them, and all the fees/commissions that were paid to other (usually wealthier) people involved in the extra buy/sell transactions.
BTW, I made an error in my last post. The extra $216,000 + extra taxes over the period they own the home is what the poor buyers are paying so for the flipper’s **profit.** The $40,000 in upgrades is in addition to that, but one could argue that at least the new owners got $40,000 worth of value added.
correction again: FHA won’t loan on homes that are UNinhabitable.
If FHA won’t loan on homes that are uninhabitable, then it is not the fault of the flipper. And the rule is there for a reason.
Are you advocating that people that has only 3% to buy an uninhabitable house ?!
Well, that is nonsense. If the house appraised for $280K, and assumed the normal buyer get it for $170K, and did whatever the flipper did, then they (or their children) MAKE money, too.
Are you saying no one should never sell their house for more than what they paid for ?
I think you basically saying, people with little money should get a loan from FHA, slowly fixing the house for decades and eventually sell the house for a profit or using it as ATM, is the right thing to do.
On the other hand, if you do all that in 3 months, you are cheating ?!
For those of you objecting to people making money off this…
Just curious, how about the guy who charges you $1 for a bag of chips at his grocery store for profit?
He’s flipping food for a profit. Lots of various other companies are making a profit off of it too.
Still object?
How about the fact that he took out a loan, and gambled his financial future opening that business? How about all the time, energy, luck, research, previous failures, etc involved before that $1 bag of chips was sold? What about all the risks constantly involved? Anyone who has ever run their own business can associate I’m sure.
Regardless of where/how this lady and her dog got the ~$1,000,000 to take this risk – I just don’t see how you could object unless you also object over that $1 bag of chips.
No, I think ALL buyers should be required to have 20% down, with the possible exception of VA buyers, because they’ve **earned** the right to get a lower rate/lower down payment.
It would be preferable if lower-income buyers could get rehab loans so they could fix things up to their own liking.
Again, I don’t think anyone should necessarily profit from housing. If prices rise over many decades, the culprit is more likely inflation, which technically isn’t “profit” — no matter how hard people try to convince us otherwise.
FHA does have a rehab loan that could work with some properties that could be deemed “uninhabitable.” There’s nothing wrong with that route if it’s within your means.
I’m going FHA for several reasons, but I don’t plan on my payment being larger than my rent plus my car payment (car was just paid off.) Just because I’m not putting 20% down does not make me irresponsible.
not putting 20% does not really mean you are irresponsible, but due to “information imbalance”, the lender can not tell, and have to judge you by that, or asking you to put more of your money into the game.
Just consider it as some kind of insurance they want you to buy. (also due to the difficulty in mortgage insurance market)
its hard not to side with the flippers on this one. nowadays they are putting all cash down on these properties. its their money and their risk. we also forget that the supposed “consumers” are being heavily subsidized by the government and that no one is seriously purchasing a home out of need for “shelter”. if you are looking to buy a home you are already a step up from renting and the basic needs of shelter.
either way, if it wasnt for the government back-stopping 80-90 percent of all new mortgages, there wouldn’t be many flippers or consumers — just a crapload of empty houses.
As someone who would LOVE to buy a fixer herself (with 20% down) to live in and not flip, I still don’t get all the upset over this story. Yeah, investors are affecting the market for “regular” buyers. But if there’s a problem here at all, it’s with buyer mentality – I don’t know anyone personally, myself excepted, who’s interested in buying a house that needs any kind of overhaul. And my friends are willing to stretch themselves (and the FHA) to get that perfect property. They’re still stuck on bubble pricing, and anything less looks like a deal. Just because I won’t buy at that price, doesn’t mean others won’t, and getting angry because some people are savvy (or lucky) enough to invest their cash in something that appreciates after they fix it up seems pretty pointless.
Believe me, I’m irritated that I have to compete with all-cash investors for properties, and wish real estate wasn’t a commodity people could take advantage of in the short term. But I can’t fault them for doing it, especially since there’s no way to know if the market will go up or down at this point. They took a risk, it paid off.
If I bought a bicycle, all cash, put on new brakes and gears, gave it some paint, and decided I wanted to resell it, you’d expect me to make a profit, no? Shelter is a necessity, but ownership is not – if you want guaranteed homeOWNERSHIP for all, move to Cuba. Sheesh.
In a related story, I’ve got my eye on a property in the OC that I suspect may end up chasing the market down to investor levels. It’s extremely well-maintained, but hasn’t been upgraded in probably 20 years. The sellers are asking about $20,000 more than two or three houses in the neighborhood that have far more recent upgrades. I’ll be really interested to see what happens to it – $100,000 less, and I bet an investor would grab it in a heartbeat (as would I). To me, it’s a signal that even at the lower end (under $500,000), some sellers are still fooling themselves about what they can get.
IMO, the price these properties are selling for when the flippers buy them ARE their true value. I don’t want to hear their “value added” story. The value added to a house when you spend 40K to fix it up is 40K, not 80K or 100K. The rest of the houses in the neighborhood aren’t getting fixed up, so you result in an end buyer who overpays for the ol’ Most Expensive House in the Mediocre Neighborhood. If a buyer finds themselves participating in a bidding war, that’s probably an indication they’re heading towards overpaying for the property. I just wish Americans would become savvier financially, they’ve been paying sticker price for everything for too long now.
These comments are hilarious… these houses are in crappy neighborhoods, and were trashed, absolutely trashed, when the flipper took the risk. Bio disco discount?
The new buyers aren’t getting a terrible deal – this flipper has a sweetheart deal with a contractor, and is getting below market rates for all the upgrades. You’re sure the work is being done with permits, so you’re already 90% better than your new neighbors. Plus, you can actually get a loan on these new places, as they have power, water, and floors.
Just about everyone that reads this blog could have bought at $170k… no point in being bitter about your lost opportunity. If you’re here, you understand how goofy the market is.
These are not sweetheart deals with the contractors – not at the mark-up these buyers are paying in the final deal. IF they hold onto the properties for long enough, then they could start qualifying as “ok” deals, but why start below zero like that in the first place? No issue here with what the flippers “should, shouldn’t” be doing. Long live the free market. My point is buyer beware – I’ve rarely witnessed the middleman adding as much value to something as what they try to sell it for. Again, if there are bidding wars happening, that translates into too many buyers, too few sellers, which means seller’s market. There is a REASON why many people wouldn’t buy into those low end neighborhoods even at auction prices – they don’t trust in the future value of those properties.
Kevin needs to be kicked off this site and Jim needs to hire sdnerd. Too many haters out there. These people took a huge risk and made a return, we should all be proud.