March 14, 2005: CNN's article on house flippers: "Even a small downturn could wipe you out"

[Amerigo Vespucci]

They call them flippers

Buy. Sell. Profit. Repeat. Investors are flipping houses to build wealth. Here's what you can learn.

March 14, 2005: 5:16 PM EST

By Jon Birger, MONEY Magazine

Some facts to keep in mind.

Speculation makes markets riskier. That's what concerns David Berson, the chief economist at Fannie Mae. He's still bullish on home prices but worries that speculators may overinflate white-hot markets.

Historically, home prices have declined very infrequently in the U.S., in part because typical homeowners don't treat their houses like stock investments. They don't sell in a panic just because their neighbor fetched only 90 percent of his asking price.

"But the nature of speculators," Berson notes, "is that they do pull out when prices stop going up."

Even a small downturn could wipe you out. Vegas or Miami or San Diego real estate surely won't lose all of its value like an eToys, but the potential risks for investors are just as dire.

A flipper who puts down $40,000 to buy a $400,000 home would lose the entire down payment should the market decline just 10 percent; throw in closing costs, 12 months of mortgage payments and a 6 percent realtor commission to sell, and the flipper could easily be out $80,000 on a $40,000 investment.

Hard-core flipping is obviously not for everyone. If the market chills, you'll face the ignominy of making monthly mortgage payments on a property you can only sell at a loss. That said, the risks are mitigated when you live in your investment for at least two years. Not only are the potential tax benefits terrific, but your mortgage payments cover an all-important cost of living: shelter.

http://money.cnn.com/2005/03/14/magazine/flippers_0504/index.htm

[uppityperson]

1. Gambling involves risk. The people I feel sorry for are ones who sold/bought due to other reasons

like moving for a job or some such. I have a family member who is stuck with a house because moved for job 5 yrs ago, needs to job move again and can't sell unless wants to take a huge loss.

For those who gamble, they know the risks and bah to anyone who drives the market up, or down, so they can make money off other's losses.

[Amerigo Vespucci]

2. I have a friend in Atlanta whose home is sitting unsold...

...he's originally from the SF Bay Area, moved around in different jobs for a decade or so, first to Florida before taking a job in Atlanta, then recently took a job back in California.

He left most of his furniture in the home so it would "show better" to prospective buyers. That means he's renting a townhome here and the furniture to go in it while working in California and attempting to sell his house in Atlanta. This has gone on for 8 months.

[Warpy]

4. Meanwhile, he's taking how much of a loss with combined

rentals of townhome and furniture?

Do him a favor and tell him to lower his asking price a full 10%. Even taking a loss and getting out from under his multiple rental costs will be advantageous in the long run.

[Warpy]

3. Even if you rent it out

to cover the mortgage, you'll be OK. It's only the flippers who bought properties that were turnkey who are SOL and to hell with them, anyway.

Around here, a third of all new construction was sold to people who thought they'd sit on it for a couple of years and make a fortune. Unfortunately for them, that new construction was being done to satisfy a speculator's market and not the real market so not only did prices fail to rise, they are now all sitting around with these enormous white elephants of upper end yuppie housing that are not moving anywhere but into neglect and disrepair.

People who rehabbed shabby properties and sold for a profit were providing a valuable service, returning substandard housing to the market as properties that will be salable for some time to come.

People who speculated on new housing provided no service, held housing off the market and unoccupied in a country where more and more families are homeless, and who deserve no bailout when the market failed to materialize.

[uppityperson]

5. Not only the flippers who are SOL

My family member (mentioned above) has had house on market for 2 yrs, has dropped price over 10%, can't walk away. Thanks flippers and speculators!

[uppityperson]

6. huh, got a bug when posted and this doesn't show up in my du

oh well.