I read an article by Scott Thompson in the April 2010 edition of the National Association of Realtor’s Realtor magazine entitled “Short Sale Ethics: 6 Temptations to Avoid.” One of the recommendations was to avoid selling to flippers. “Unless the investor in a flip is prepared to add substantial value by fixing up the property, don’t participate in a flip. Short sale flips benefit only the investor who’s clipping off money that could go to an already bleeding lender.”
I do not understand why anyone would make such a recommendation.
I am an investor. I purchase a lot of properties. Many of them are flips. We are doing a lot more flips now than ever before because there is just so much “junk” on the market – so much that needs renovation.
One of the concerns in the NAR article is that “flip” means you are taking advantage of the lenders, the seller and the buyers. I don’t believe we take advantage of anyone.
First of all, most of our flips are not short sales. Most of our flips come from sellers who have allowed their properties to deteriorate to a point where they cannot be sold to the retail market. Why? As many reasons as there are sellers. Some people, amazingly, live that way. We have purchased homes from sellers who are living in them and we, literally, cannot walk all the way through because of trash and odor. Yes, I said they are living in them.
Some are from landlords who have not done any work but just let them deteriorate around tenants (slumlords, I call them). Now they’re done with the house and, again, can’t sell it to the open market. One purchase was from a landlord who literally lived across the street from his rental house and, when we were buying, he swore he had no idea how badly the tenants had destroyed his property. Interesting.
At any rate, no lender was harmed by us in any of these transactions.
The sellers? They’re thrilled that someone is taking the property off their hands. By definition, a flip is in pretty bad shape when we buy it. We have to be able to buy low enough that, even after $30,000, $40,000 even $50,000 out of our pocket for repairs, we can sell at a discount to move it and still make a profit. Not many retail buyers have this amount of cash to sink into a new purchase.
The buyers, the people we sell to? Again, we can’t be harming them or they wouldn’t buy, would they? They have plenty in today’s market to choose from. Why do they choose our houses? Because they’ve been renovated which means the buyer will have no major repair costs for 10-15 years. They typically get a house with new roof and HVAC, often times with new plumbing and electrical as well.
The buyers have an inspection so they know the condition when they buy. Add to that the fact that we sell well below market value because we want our houses sold, not for sale.
This, to me, means a big win for everyone. Why does the NAR warn against this? Realtors can make a ton of money working with investors, especially if they hook up and are really willing to work for an active investor.
I know, in the not too distant past, “investor” had a really bad stigma. I rarely used a realtor to buy or sell because realtors weren’t interested in the fact that I had to offer low to be able to do all the work and sell at some profit. (Why would I do this if I couldn’t make a profit?) And realtors wouldn’t show my houses because I’m an investor.
In the past 12 months, the market being what it is, realtors show our houses all the time and have brought buyers to almost every house we have sold in the past year. We always pay their commission. I would think the NAR would ENCOURAGE realtors to increase their business by hooking up with investors.
If we weren’t out there buying the junker properties, the “flips”, there would be even more deteriorating neighborhoods and house values would be even lower. We believe, absolutely, that we help the real estate market.
May 18th, 2010 / 9:48 am
Your warning is right on, Jeff.
I don’t know why people expect to get into such a high dollar industry and make profits without training. Every job requires training. Many people have failed as rehabbers because it looks so easy on the tv shows. They don’t show real costs.
Thank you for your comment!
May 17th, 2010 / 7:33 pm
Why not work with flippers? They are a great source of business and more importantly, most that I know invest money improving the property, and subsequently the neighborhood in flipping the properties. Be careful thought: In many markets, I have heard of inexperienced investors who have to hire contractors to have work done, actually losing money on flips, because the properties needed more repairs (and cost) more than were anticipated.
A good realtor should be able to advise a buyer an approximate ballpark “as is” and “as repaired” value.
May 12th, 2010 / 10:13 pm
Another great point, Paul, the neighbors love us!
And the houses that the lenders allow to sit… that’s a crime. We’re now re-negotiating with a bank on a home we’ve been offering on for a year. Our current offer is $20,000 less than a year ago and they may take it this time.
Uncle Sam needs to recognize what we investors do and our value to the marketplace. We should be getting some of the subsidy that’s being handed out! The investors, as you say, help everyone.
May 12th, 2010 / 10:04 pm
I too am a real estate investor. Having “flipped” two houses in the past three months (okay, one was a 15 month lease option excercised), both in the same neighborhood, I truly believe that I add value and that there is a place for real estate investors who operate with integrity.
Both were REO properties that needed work that a typical retail buyer would not have the time or resources available to perform. The lenders benefited by being able to move these non-performing assets and focus on their core business. My buyer’s agent, the listing agents, home inspectors, and appraisers benefited by the transaction. The tradesmen and suppliers benefited through the rehab. The buyers were both thrilled to purchase a clean, fresh house in better shape than the surrounding properties. Two neighbors that I talked to were happy to have the vacant houses repaired and occupied. In addition, the sales will help increase the comps for the neighborhood helping to elevate dozens of neighbors property values! Many people were involved and all benefited, and I still turned a tidy profit on both properties. The problems occured well before I became involved – with the previous owners and perhaps poor lending decisions. I brought the solution for which there should be a fair reward in return.
In contrast, I had made an offer on a third house down the same street 11 months ago. That house was vacant, in default, needed a lot of work, with the lender open to accepting a short sale. My reasonable (to me) offer was not accepted. The house is still vacant and listed for sale. The roof had developed a leak with water damage developing over the months. Sitting unconditioned for over a year, who knows what other moisture and mold issues have developed. What a shame an investor (me) was not able to help solve this situation.
Paul
May 12th, 2010 / 10:03 pm
Yours is a very interesting perspective, Ray, but since the author is writing to Realtors, not to lenders, I don’t think that is the meaning of this warning.
May 12th, 2010 / 7:51 pm
I think you missed the major point of the original comment: “Unless the investor in a flip is prepared to add substantial value by fixing up a property.”
Everything you have mentioned meets the criteria of adding substantial vlue and fixing up the property.
The “flips” he was talking about are not the investors working on a house and selling it, but the older, “mortgage flips” that were used to commit mortgage fraud by creating a false paper trail of sales and artfiicially inflate property values.
May 12th, 2010 / 5:01 pm
Yes, it might be.
For the first time, I think investors are getting the positive credit they deserve. Two years ago, realtors did not show my listed properties because they were basically “for-sale-by-owner”. Now, our for sale properties are shown constantly.
One positive result of all the mess; we seem to be playing together much better!
May 12th, 2010 / 4:13 pm
Thanks Karen,
I definately agree the investor should be able to make a profit. I fund the investors purchase for short sale flips, so for disclosure I have a vested interest. However, the short sale investor is performing a valuable and usually painstaking service in getting through the negotiation process; prior to which most realtors will not show the property. It is no different from any type of wholesale business where the wholessaler is in business to make a profit.
The bottom line still is these investors help to move product that otherwise may go to REO status, then may sit and collect dust for months to a year while bringing neighborhood values even lower. It is in all of our interests to move product to stabilize a weak housing market. It might be this is a bit too logical for some to grasp.
May 12th, 2010 / 3:22 pm
So well said, Ted.
But, why shouldn’t the banks be OK with the investor making a profit. Everyone has to profit or the deal doesn’t happen. Even with a short sale, the banks are making profit. Most of the time, they’re getting paid by the mortgage insurance and they get money from the government for shortfalls. Most banks make quite a hefty profit from short sales.
Quite interesting times.
Thank you for your comment.
May 12th, 2010 / 1:23 pm
Karen,
Very good post. The position does not make sense, including for many short sale investor deals. As we all know the short sale cannot start without an offer. Thus, each day that passes moves the homeowner closer to foreclosure. Also, many if not most realtors will not show properties (out of experience) that are pending short sale applications or decisions. In this market with foreclosures on the rise (and I believe likely to continue through 2011) any combination of players that help move property is in everyones interest, including the banks. It is undersstandable that the banks do not like to see the short sale investor making a profit, but isn’t it really about moving inventory at this point. As inventory continues to increase from currently near record delinquency rates we all run the risk on substantial decreases in value if and when mass amounts of that inventory have to be dumped on an already strained market.
May 11th, 2010 / 9:48 pm
Stokes: I love your point that, by the time the real estate investor steps into the investment, the “problem” has already occurred. We don’t cause the problems, we step in and solve them.
Thanks for your comment!
May 11th, 2010 / 4:10 pm
In this economy–or any phase of the economy—Any Realtor who hooks up w/ an ethical,- successful investor, should thank their lucky stars (& Wallets) -for the opportunity to learn from another type of professional -A Real Estate Investor! I am STUNNED -that this writer even “went there” – with such a crazy remark!! Aren’t we all a bit capitalistic toward our investments????–Whether we are the homeowner , lender, Realtor,or investor?? Isn’t it still the basic premise to make a profit- in business?? The Investor is only trying to “facilitate” an otherwise –“deal gone wild” & salvage an opportunity -that may not have existed without the investors knowledge & intervention. I don’t think the good and ethical- R.E. Investor is out to “Rob” anyone of their fortunes. At the point where most R.E. Investors step into an investment situation like this-the “Problem”-has usually already occurred. The professional R.E Investor is just another source or tool to provide a needed service within the broad-Real Estate landscape.
May 11th, 2010 / 3:09 pm
Graham:
Realtors need to recognize that, when they hook up with a good investor, it can be a lot of repeat business. Maybe less each transaction, but multiple transactions.
Thanks for your comment.
May 11th, 2010 / 3:07 pm
Charles:
We have a number of realtors in our coaching program.
I always tell them that, if they want to make good money, it is in investing. You’re right, we always need to take care of the realtors.
May 11th, 2010 / 12:56 pm
Ditto to what Brent said. I also work with investors, some seasoned some novices. I like to think a REALTOR adds value to the front and back end of the deal. I am working with two investors right now that are looking for their first property. I have others that just want a second opinion and what the retail price should be. Some will put a FSBO sign in the yard for a few weeks and if it doesn’t sell I list them. Most of these properties will not generate huge commissions but if you get something on both sides then it helps and investors are repeat customers, provided you are helping them make money. Bottomline is that I like working with investors, which I am one, because they are a breed apart. It is truly satisfying to take a house that no one esle would touch and probably could not get financing on and turn it into a solid home that someone can enjoy and like you said help improve the community. Not to mention the creative financing that some investors offer buyers, as long as the legislators don’t mess that up.
Thanks
May 11th, 2010 / 12:54 pm
Karen:
As an investor, I agree with your perspective. We are working harrd to clear out inventory and renovate older sub-standard housing. I can also see the “Realtor” perspective. It may honestly be jealousy! My wife is a licensed agent and has worked very hard recently for some small commissions. Commissions lower than most all of the wholesale fees we collect on contract assignments. As investors, we need to make sure we are always adding value to a transaction and act with integrity and honesty. Thanks for bringing this story to my attention!
Charles Fischer
May 11th, 2010 / 12:34 pm
Thanks, Brent. You and I are certainly on the same page.
Thanks for your comment!
May 11th, 2010 / 12:05 pm
I am in investor friendly REALTOR and work with many investors, some of which are flippers. I include myself in there as an investor and honestly feel that invetors add value to properties that otherwise normal buyers could not purchase or finance. They improve the neighborhoods and communities and preserve real estate values. The NAR article is off base.