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I've come to believe flipping is a major problem, at least in my locale. A $300K house gets $50K of "improvements", then the investors needs $100K profit after

I've come to believe flipping is a major problem, at least in my locale. A $300K house gets $50K of "improvements", then the investors needs $100K profit after commissions are covered and so we're in the $500K range for the next buyer and very little value was added. It's often the proverbial "lipstick on a pig" house after the renovations. There's little to no regulations on flippers. They can be DIY people that have never swung a hammer or people that cut every corner possible to squeeze out every cent of profit. Often, buyers of flipped properties are doing major repairs in the first 2 years as things behind the walls was not done correctly. It's a very common tale of people completely renovating their newly renovated bathrooms and kitchens (yes, the most expensive rooms in your house) because the flippers did not take the time to properly waterproof behind the tiles. Or they did not properly mortar the tiles for adhesion and they are now popping up.

onlyrealcuzzo 5y ago
How is that the flipper's fault? Ultimately, a regular home owner is buying the finished product. If they are willing to pay more for better housing, what's the problem? Of course, they're not willing to "pay more". Interest rates get lowered, and they can keep the same payment and buy more house. The reason flipping is attractive is because Central Banks push up house prices - which flippers capture on leverage. If it weren't for house prices artificially appreciating so much (by constantly lower interest rates) - there wouldn't be any profits to be made flipping houses. Transaction costs are too high.
- conductr 5y ago
  I don’t think it’s anyone’s “fault” but it does contribute to the affordability issue. It’s basically introducing a middle man into the industry that needs his own markup. It’s capitalism in it’s purest form. But also a form that has detrimental consequences to average people wanting to purchase a home. And, that’s where I start to believe it’s a form of malicious compliance to accept it as status quo. However, the quality of work topic is a major issue and extremely common. It raises the cost of ownership going forward.
  - onlyrealcuzzo 5y ago
    How is this different from the middle man at the grocery store who makes pre-made salads and sandwiches and soups, so that you don't have to? People want to buy "nice" houses. But too many houses for sale need a lot of work done for them still. Enter flippers to make the market. The average person does not want to buy a house and renovate it for a year while living in it so that they can save $30k. Most people don't have the skills, time, risk appetite, or desire. Let alone all 4. With 2.75% 30-year fixed rates, it's only a savings of $120/m.
    - conductr 5y ago
      I feel like your stance is coming from a place of theory, like you're pointing out econ 101 and theory of supply and demand. From that perspective, you're correct. Flippers are filling a need/void in the market. I get all of that. What's out of whack is the flippers profit and how much market penetration they have and how they are not actually improving properties. Sure they look nice, but behind the walls they actually screwed a lot up in the process of making it "nice." Things that will cause major issues down the road. If this was known, the "value" calculation turns into a risk calculation very quick. (Home inspections are mostly a joke by the way). If capital is so cheap, why is there no convenient vehicle that allows the buyer to buy an ugly home and hire a contractor to fix it up before moving in? (Construction loans are a joke). The $300K house with $50K fixes now cost $350K which is the value that was added. The flipper added $100K of fake value. I don't see that as real value just because some sucker came and paid it. People overpay for houses even in hot markets, all, the, time. People are motivated by all kinds of things. They have time constraints, moving for a job, kids starting school, etc, etc and sometimes they just pay what they have to to get what they want. It doesn't mean it's right and having so much of people's income going towards a mortgage isn't good for anyone except the flipper. So while I understand they play a part of today's real estate industry construct, I feel like we'd collectively be better off without them. When flipping reaches a high level of market penetration (eg. a majority of listings are flipped homes) it gets more perverse. The pricing is completely made up, borderline or outright collusion is taking place, and the prices do not reflect value. Housing is a need, so somebody is paying the price and thus meeting your definition of "value add" but it's not real. > How is this different from the middle man at the grocery store who makes pre-made salads and sandwiches and soups, so that you don't have to? It's not. But his prices likely reflect something reasonable. And if not, I have infinite optionality. Without optionality, it turns into the ballpark where a hotdog cost $15
- JeremyNT 5y ago
  Flippers have capital (or the ability to be extensively leveraged) and they can quickly gobble up the unimproved inventory such that there is very little "unimproved" inventory available for regular homebuyers. They even spam people with unsolicited offers and try to buy unimproved houses before they hit the market at all! The time that flippers spend "improving" a house is time that the house isn't on the market at all for a potential resident. Don't think of flippers as individual actors on small scales repairing and reselling a house here or there, think of companies that literally buy whole neighborhoods (hundreds of houses) and rent some of them out while they tear down or "improve" the rest. They can afford to keep the rental price high and/or let it sit vacant because the real money will be in the eventual sale. You're right that they "gain" partly from inflation, but that's only one piece of the puzzle. It's a combination of large operations (and a large number of smaller operations) that essentially act as a cartel that effectively limits the supply of available homes for purchase.
- blitzar 5y ago
  > How is that the flipper's fault? Ultimately, a regular home owner is buying the finished product. The flipper is just making money via arbitrage. The 'profit' they make is simply: (holding cost + holding risk) * time + value of improvements + cost of hassle of renovating
jjav 5y ago
> I've come to believe flipping is a major problem, at least in my locale. A $300K house gets $50K of "improvements", then the investors needs $100K profit after commissions are covered and so we're in the $500K range for the next buyer and very little value was added. That's not quite how it works though. How much the investor spent in changes is not relevant. What matters is how much the next buyer values those changes. If the investor bought the place for 300K and spent 50K on giant pink flamingo statues all over the yard, the next buyer will likely offer less than 300K. Only if they spent 50K on improvements that the next buyer feels are worth it an increase the value, then they'll offer more. But in that case, value actually was added.
- onlyrealcuzzo 5y ago
  > What matters is how much the next buyer values those changes. Flipping doesn't really exist when appreciation is low. Remember how no one was flipping houses in 2010? And then in 2012, suddenly everyone in their mom started flipping houses again? It only makes sense when asset appreciation is high. You'll find that most of the "value added" is simply them holding the house for 6 months and capturing appreciation (on leverage).
  - conductr 5y ago
    Why then is holding cost such a major concern of every flipper? Each market is different, maybe you've seen that level of unadultered appreciation, but I never have and I live in pretty high growth place my entire life. In my opinion, the "value added" is more correlated with what new construction on the similar land would cost. As lumber prices went up last year, existing homes went up too because the cost of building became higher. Essentially, a flipper wants you to feel like you have a new home at a discount and you'll pay the optimal amount for it.
- conductr 5y ago
  > What matters is how much the next buyer values those changes. The next buyer usually feels like the home is over priced. Because it is. They know it is, but they lack optionality because a majority of the active MLS listings are flipped homes. Think of it as they are forcing the next buyer to pay as much as they can possibly afford. Sure, low interest helps the "afford more" but it doesn't mean they are comfortable or happy spending that amount. It doesn't mean they necessarily value it either. They may have been happy with the original condition at $300K but they never saw that option. It was an off market transaction. > Only if they spent 50K on improvements that the next buyer feels are worth it an increase the value, then they'll offer more. But in that case, value actually was added. Sure they feel $50K was added. But not another $100K of profit for the flipper who only held the property for 8 weeks before re-listing it. The $100K, 20% of the new "value", is completely intangible and not real. This is supposed to be real estate after all.

onlyrealcuzzo 5y ago

How is that the flipper's fault? Ultimately, a regular home owner is buying the finished product. If they are willing to pay more for better housing, what's the problem? Of course, they're not willing to "pay more". Interest rates get lowered, and they can keep the same payment and buy more house. The reason flipping is attractive is because Central Banks push up house prices - which flippers capture on leverage. If it weren't for house prices artificially appreciating so much (by constantly lower interest rates) - there wouldn't be any profits to be made flipping houses. Transaction costs are too high.

conductr 5y ago
I don’t think it’s anyone’s “fault” but it does contribute to the affordability issue. It’s basically introducing a middle man into the industry that needs his own markup. It’s capitalism in it’s purest form. But also a form that has detrimental consequences to average people wanting to purchase a home. And, that’s where I start to believe it’s a form of malicious compliance to accept it as status quo. However, the quality of work topic is a major issue and extremely common. It raises the cost of ownership going forward.
- onlyrealcuzzo 5y ago
  How is this different from the middle man at the grocery store who makes pre-made salads and sandwiches and soups, so that you don't have to? People want to buy "nice" houses. But too many houses for sale need a lot of work done for them still. Enter flippers to make the market. The average person does not want to buy a house and renovate it for a year while living in it so that they can save $30k. Most people don't have the skills, time, risk appetite, or desire. Let alone all 4. With 2.75% 30-year fixed rates, it's only a savings of $120/m.
  - conductr 5y ago
    I feel like your stance is coming from a place of theory, like you're pointing out econ 101 and theory of supply and demand. From that perspective, you're correct. Flippers are filling a need/void in the market. I get all of that. What's out of whack is the flippers profit and how much market penetration they have and how they are not actually improving properties. Sure they look nice, but behind the walls they actually screwed a lot up in the process of making it "nice." Things that will cause major issues down the road. If this was known, the "value" calculation turns into a risk calculation very quick. (Home inspections are mostly a joke by the way). If capital is so cheap, why is there no convenient vehicle that allows the buyer to buy an ugly home and hire a contractor to fix it up before moving in? (Construction loans are a joke). The $300K house with $50K fixes now cost $350K which is the value that was added. The flipper added $100K of fake value. I don't see that as real value just because some sucker came and paid it. People overpay for houses even in hot markets, all, the, time. People are motivated by all kinds of things. They have time constraints, moving for a job, kids starting school, etc, etc and sometimes they just pay what they have to to get what they want. It doesn't mean it's right and having so much of people's income going towards a mortgage isn't good for anyone except the flipper. So while I understand they play a part of today's real estate industry construct, I feel like we'd collectively be better off without them. When flipping reaches a high level of market penetration (eg. a majority of listings are flipped homes) it gets more perverse. The pricing is completely made up, borderline or outright collusion is taking place, and the prices do not reflect value. Housing is a need, so somebody is paying the price and thus meeting your definition of "value add" but it's not real. > How is this different from the middle man at the grocery store who makes pre-made salads and sandwiches and soups, so that you don't have to? It's not. But his prices likely reflect something reasonable. And if not, I have infinite optionality. Without optionality, it turns into the ballpark where a hotdog cost $15
JeremyNT 5y ago
Flippers have capital (or the ability to be extensively leveraged) and they can quickly gobble up the unimproved inventory such that there is very little "unimproved" inventory available for regular homebuyers. They even spam people with unsolicited offers and try to buy unimproved houses before they hit the market at all! The time that flippers spend "improving" a house is time that the house isn't on the market at all for a potential resident. Don't think of flippers as individual actors on small scales repairing and reselling a house here or there, think of companies that literally buy whole neighborhoods (hundreds of houses) and rent some of them out while they tear down or "improve" the rest. They can afford to keep the rental price high and/or let it sit vacant because the real money will be in the eventual sale. You're right that they "gain" partly from inflation, but that's only one piece of the puzzle. It's a combination of large operations (and a large number of smaller operations) that essentially act as a cartel that effectively limits the supply of available homes for purchase.
blitzar 5y ago
> How is that the flipper's fault? Ultimately, a regular home owner is buying the finished product. The flipper is just making money via arbitrage. The 'profit' they make is simply: (holding cost + holding risk) * time + value of improvements + cost of hassle of renovating

jjav 5y ago

> I've come to believe flipping is a major problem, at least in my locale. A $300K house gets $50K of "improvements", then the investors needs $100K profit after commissions are covered and so we're in the $500K range for the next buyer and very little value was added. That's not quite how it works though. How much the investor spent in changes is not relevant. What matters is how much the next buyer values those changes. If the investor bought the place for 300K and spent 50K on giant pink flamingo statues all over the yard, the next buyer will likely offer less than 300K. Only if they spent 50K on improvements that the next buyer feels are worth it an increase the value, then they'll offer more. But in that case, value actually was added.

onlyrealcuzzo 5y ago
> What matters is how much the next buyer values those changes. Flipping doesn't really exist when appreciation is low. Remember how no one was flipping houses in 2010? And then in 2012, suddenly everyone in their mom started flipping houses again? It only makes sense when asset appreciation is high. You'll find that most of the "value added" is simply them holding the house for 6 months and capturing appreciation (on leverage).
- conductr 5y ago
  Why then is holding cost such a major concern of every flipper? Each market is different, maybe you've seen that level of unadultered appreciation, but I never have and I live in pretty high growth place my entire life. In my opinion, the "value added" is more correlated with what new construction on the similar land would cost. As lumber prices went up last year, existing homes went up too because the cost of building became higher. Essentially, a flipper wants you to feel like you have a new home at a discount and you'll pay the optimal amount for it.
conductr 5y ago
> What matters is how much the next buyer values those changes. The next buyer usually feels like the home is over priced. Because it is. They know it is, but they lack optionality because a majority of the active MLS listings are flipped homes. Think of it as they are forcing the next buyer to pay as much as they can possibly afford. Sure, low interest helps the "afford more" but it doesn't mean they are comfortable or happy spending that amount. It doesn't mean they necessarily value it either. They may have been happy with the original condition at $300K but they never saw that option. It was an off market transaction. > Only if they spent 50K on improvements that the next buyer feels are worth it an increase the value, then they'll offer more. But in that case, value actually was added. Sure they feel $50K was added. But not another $100K of profit for the flipper who only held the property for 8 weeks before re-listing it. The $100K, 20% of the new "value", is completely intangible and not real. This is supposed to be real estate after all.