The Flip Is Back

One of the things that has come back into our stabilized market is the investor who picks up a home on the cheap and turns it around for profit. The common term that we use is "flipping". It never really went away - even in 2006 & 2007 when prices felt like they were in free fall, we had a few brave souls looking for and finding the occasional opportunity to turn a profit. Of course, it's a little dicier maneuver in that kind of environment.

Now that prices have flattened out -and maybe even started to inch back up - we have a few more players in this game. In our market we have three or four pretty active investors buying and flipping properties at the moment, and a few more doing one here and there. We've spoken to a couple of potential investors who have some interest in these opportunities as well. We even considered doing it last year ourselves on a small basis, and probably would have done so if we hadn't found the long term investment that was our ultimate goal first.

The basics are pretty simple. Buy low, sell high. In most cases, these investors are adding some value and taking a profit. I've heard a few people grouse about the practice, but if you ask me it's as American as political sex scandals and apple pie. Where would we be without risk takers?

There are a couple of different ways that people are going about this. First, we have some investors who pick up listed properties at great prices, usually but not always REO properties. These are usually very rough and need some rehab. So the investor gets the needed work done in a reasonably inexpensive fashion, and then puts it back on the market as quickly as possible. This is usually the less risky of the two methods, because you can do a little bit of investigation during escrow and you're getting title insurance.

The riskier method is to pick up a property at a trustee's sale at the courthouse steps. I talked about this a little bit when I wrote about our investment adventure last year. Bottom line, it's cash (well, cashier's check) on the barrel head. No inspections, no title insurance, no contingencies, no loans, no escrow period. The hammer falls and it's yours. If it has a bad foundation? It's yours to fix. Any back property taxes or liens that weren't wiped out by the foreclosure? Yours. You get the picture. So the people who are doing this with any regularity are pros - they do their legwork on properties up front as much as they possibly can. And even then, they get the occasional surprise. The upside, however, is that these are usually picked up below where they would be available if listed, and there usually isn't a lot of competition. Sometimes they need to put some more money into the house, and sometimes they get off without much rehab expense at all.

From a buyer's perspective, it's really not much different than buying any other property, except that in some cases it can be problematic to get an FHA loan on one. A few years ago, FHA put in a rule that said that they wouldn't insure loans on properties that had been owned for less than 90 days. There had been some fraud back when the market was red hot (but then, when isn't there some fraud?). Early this year, they changed those rules to allow this practice, but they still had some restrictions. And many lenders weren't willing to go back to writing FHA loans on flipped properties, although there are some who do.

I did a quick search through our MLS this afternoon, and at a glance I could identify 5 active listings and 7 pending sales that I know are flips, and 11 sales since the beginning of the year. Most of these have been picked up on the courthouse steps. So far this year, we've had 25 houses in the Lompoc Valley go to investors at trustees' sales, and 8 just in July. It would appear that this trend is going to grow. It's not likely to become a huge segment of our market, but unless we start to see a downturn, we'll have these opportunities available.