House Flipping Has “Jumped the Shark”

Wolf here: occasionally I highlight comments that add a different angle or flavor or an illustration or more depth to an article published on Wolf Street. This comment is by Melissa Terzis who, as her bio at the Huffington Post  states, “has spent the majority of her career in Real Estate working in land development, home building and residential sales.” Her focus has been in the DC area. Her comment is in response to my article, Last Time this Happened, the Housing Market Crashed.

By Melissa Terzis:

Well, I continue to find myself nodding in agreement with everything you write about the housing market. What I’ve seen on the “front lines” of the market definitely supports what you are saying. I can’t speak about other markets, but the DC market – a longtime darling of the real estate industry for its “recession proof” reputation – has cracks in the facade as well.

Investors: The true investors, who know what they’re doing and who live and breathe this every day, were quietly buying up properties here in DC in 2009-2012 and prepping for a turnaround. They made the most money by flipping. They buy off-market, going door to door, and offering people who own their homes outright but have no cash on hand a “nice sum” of $250,000 cash to get out. They renovate the house, putting in $100,000, and flip it for $600,000. This was going on throughout 2012 and 2013.

When the straggler investors arrive, and you get calls from everyone and their mother who watch HGTV, see “Property Brothers” and think they can do this too – that’s when you know that it’s done. Flipping has effectively “jumped the shark.” Or when you get calls from investors in other cities, who don’t realize how it works in this market – that you can’t just toss renters out on their ear – that’s a sign that the tide has turned.

Because inevitably by the time the rest of the world knows that investors were making 60% profits flipping houses, everything else has self-corrected to remove such a profit margin from reality. Sellers aren’t foolish enough to part with their only asset for $250,000 cash when they should have received much more. So the real investors leave and the wanna-be investors arrive, and they just can’t make those numbers work.

Sellers: Many sellers in DC are pretty stubborn, still maintaining the fantasy that their house is worth 10% more than it was last year. Pretty much what you said in your article on Millennials is spot on: “Sellers are the last to accept the trends as they cling by their fingernails to some notional value of their home and to the tens or hundreds of thousands of dollars in wealth that they thought they already had in their pocket, only to see them evaporate.”

Buyers: Buyers who are still in the market right now are holdovers from spring or even last year, and they have a higher bar than many who went before them to the settlement table. (Some agents might call them “picky.”) The buyers now don’t want to fix up, they don’t want to renovate, and they won’t overpay or get involved in a foolish bidding war. Anyone who was willing to toss money (their own unearned equity!) at an overvalued home just for the purpose of buying while “rates were at all-time lows” might be left holding the bag. Unless they walk away – as many did who purchased in the previous run-up in prices.

Have you seen the Joshua Pollard letter? (Wolf: Yes, we wrote about it here Things Worse than Slow Growth Await the US Economy). Love your take on the market. No rose colored glasses on this site! By Melissa Terzis on Last Time this Happened, the Housing Market Crashed.

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  3 comments for “House Flipping Has “Jumped the Shark”

  1. matt says:

    Great response and spot on. I live in the Nicer area of the 21040 zip of MD north of Baltimore. Many of the homes have been tried to be flipped and have sat for months before being sold at a loss. One home around the corner from me has been up for sale for over 3 years now with not one taker to even look at it . Some homes have gone for sale and sold in a few months while others you know are foreclosed by the mail that continuously sits in the mailboxes day after day. Now talk of another BRAC at APG? Add this to the mix of the collapsing housing market that the media continues to ignore on a daily basis and a recipe for disaster is upon us.

  2. makes_sense says:

    “Unless they walk away – as many did who purchased in the previous run-up in prices”

    and there you have it right there, during the last run up when i talked about how insane this all was every single person said exactly that…and why not? if you can pull the trigger and pretend to make payments and then walk away with no recourse why not just do it? and our laws allow the fraud.

    real estate = the government protect industry.

    nobody gave a shit when my entire industry was gutted and shipped to china yet real estate is treated as the holy grail industry and must be protected and subsidized no matter what, i personally knew someone who lived in their foreclosed house for 48 months….. 48 FUCKING MONTHS!!!!!! without making a house payment or paying property taxes.

    lets face it, in the USA if you play by the rules you are a sucker and a fool!!

  3. LeftCoastIndependent says:

    Well, out here on the Left Coast, Pac.NW to be more precise, prices are still creeping up. But then again, in 2008 we were the last to feel the correction in R E prices, and that may be the same scenario this time too. I’ll let everyone know when prices start heading south here. But we are at the point where fixers and foreclosures have gotten so expensive, it’s impossible to make a decent profit from flipping them, but still a bargain if you want to rent them out and go long. BTW, if anyone is interested in RE investing, Central Oregon ( Bend area) has a rental vacancy rate of one half of one percent.

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