Affects of House Flipping on Credit

[Jacque383]

Hopeful,

I agree with you, the downturn in the market is only temporary. Real estate has always been cyclical. It always will be and you always have to be prepared.

It’s interesting this downturn, the investors I know are still making money the way they always did, but the successful ones are being much more picky about the houses they are buying (they are only buying at WELL below FMV). They are also doing what I am doing - moving more into a holding pattern with their properties and waiting out the market corrections. Others are looking at other areas in the country that are still appreciating or investing more heavily in the lower end of the market, like mobile homes, where there is a lot more movement.

Basically, the "slow" market is weeding out all of the weaker investors who were only able to make money because of the great appreciation we've had for the last few years. When the dust settles only the solid successful investors will be left standing.

[Anonymous]

This downturn is also beneficial to many would-be homeowners who may have been priced out of the market. It is encouraging that so much emphasis is being placed on the low end of the market. During the recent boom homes that otherwise would have been rentals have been snapped for flipping, but the prices have been way beyond anything you would expect. For example, I lived in the lower Greenville Avenue area from 1999-2006. When I first moved into a rental home, homes in the area could still be bought by working people. Then the young professionals moved in and "gentrification" occurred. Homes were bought cheaply and then transformed into really beautiful homes. The gentrification really improved the neighborhood, but with the average Craftsman and Tudor home priced over $300,000, working families could no longer afford to live there. So that's when builders began selling homes way outside of the Dallas city limits, some as much as 50 miles away, to lower income families. Of course, these developments were far away from any kind of mass transit, so the lower income families needed to buy cars, etc. I'm not saying it's a bad thing...that's just the way it worked. With people like you coming in now and transforming homes in neighborhoods that had previously been neglected by the market, maybe some of these families can stay in the city (with all of its advantages). One of the reasons that mortgages became so crazy (piggy-back mortgages and outrageous ARMs) was because the average family couldn't afford the mortgage payment on high-prices. You're right; this is just the necessary "correction" that the market needed and it will be a good time for families to buy and invest in the future. And with the corresponding increase in lending oversight, families that do buy now can feel assured that they can really take on this debt and live with some semblance of peace of mind.

[Jacque383]

Darr and HighCredit,

I meant to give you this website: http://www.rehablist.com/....

It has lots of information.

[Jacque383]

Hopeful,

I agree with you...although I don't think this "correction" is anywhere near the likes of what we've seen in the past. I think it's much worse honestly.

While I'm no economist, my take on the subject is that it depends on whether this stock market "correction" is the tell tale beginnings of a much broader recission that is coming in the economy, which will trickle down to those median income home buyers. If that's the case I suspect interest rates will stay about the same and/or may fall a bit.

However, inflationary concerns, which have been masked for quite some time could force interest rates to rise. If this occurs, the housing slump (boat) will take on more and more water and find it difficult to stay afloat for quite some time to come.

I don't believe the public is getting the true story about the sub-prime crisis and it's far reaching effects. From what I'm seeing, this slump is only just the very edges of the beginning.

Just my humble opinion.

Message Edited by Jacque383 on 07-28-2007 08:37 AM

[Anonymous]

No, the public is not being informed about the severity of the housing industry.  That's because the media (television and print) is financed so heavily through advertising by home builders, home building products retail stores (Home Depot, etc.), and others whose livelihoods are conditional upon people buying and selling homes (including, real estate agents).  News stories about the falling real estate market doesn't make these people happy.  If people stop buying and selling homes and stop doing these makeovers, then a whole lot of people are going to be out of work.  (Banks included since they depend upon interest from mortgages and home improvement loans to make profits.)

It's the same way with Wall Street.  Everything you hear about Wall Street is filtered by people whose livelihoods depend upon people buying and sellings stocks and bonds.  If people stop buying and selling stocks and bonds and, for example, just put their money into savings accounts, a whole lot of people on Wall Street are going to be hurting.

You can find the truth about what's going on, but you have to look for it.  That's what makes the internet so great.  You certainly can't get the truth from watching the nightly news OR reading the Wall Street Journal.  You need to filter for yourself the news that you are getting.  Any Sunday you can turn on the television and watch some sponsored show about new homes for sale and what a great investment those homes are.  What's actually happening at the DR Horton developments here in the Dallas area is that some of the homes sold in the last two years are standing practically alone in a sea of unsold homes -- in order to move the inventory, DR Horton is having to offer incentives (which are really price reductions) such as luxury upgrades; they can't just lower the home prices because that upsets the people who bought the homes at full price.  Unfortunately, in a buyer's market, a buyer doesn't necessarily want to purchase a new home when half the homes surrounding him are vacant.  It doesn't give much confidence about the future.  Of course, if you have the money, now would be a great time to buy one of those homes as long as you can afford to hold onto it for 8 or 9 years, because certainly the real estate industry will rebound by then.

I really, really think that we are going to have to go back to the mindset of the 1960s where you bought a home after spending years saving for a downpayment and then you bought only as much home as you can afford.  Forget buying 2.5x your salary; I think prudent buyers purchase homes at 1.5x or 2.0x their salary and they put at least 10% down.  That involves hardship -- but that's the way we used to do it and it seemed to work ok for our parents and grandparents.

One last thing:  anytime there is any kind of "boom" period you can always assume that it is going to act like a Ponzi scheme.  Doesn't matter whether it was land speculation in Florida in the 1920s or the dot.com speculation in the 1990s or the crazy real estate markets in the 2000s:  the people who get in first always make their money (and if they are smart they get out before it starts to collapse) and the people who get in last always lose their money.  That's why I worry so much about these people who are just now starting to flip houses.  (And it's why I'm really disgusted by that TV show "Flip This House" which seems to show homes being appraised at much higher prices than when they were bought (which is fine), but which never shows how long the house stayed on the market after it was finished.  Just having a big appraisal doesn't make you money; you have to sell the home to make the money.)  I just hope that people who are getting into flipping know what they are doing.

[Jacque383]

Hi Hopeful,

Sorry it took me a couple of days to get back to you. Houses kept me busy, as well as a couple of dates with someone whom I thought might be interesting. Turns out that I don't like being called 14 times a day to be asked where I am and what I'm doing. Nor do I like the feeling of having to babysit. I'm far to busy to deal with that kind of neediness...I'm sure he'll be a nice guy for someone, just not this girl. I've been a trophy wife once before not going there again no matter how many men simply want someone to stay home and raise kids. Okay, I'm off the subject.... 

I am in total agreement with you on a lot of what you’ve written. You're in Dallas...now there's an interesting market... We have builders (Seattle area) that are offering to owner finance or lease/option the homes in order to get people into the neighborhoods. At the same time they are refinancing out of the high interest “spec” home loans.

I’m not so certain that the banks care whether they are flooding the market with REO’s, whats your opinion?  I think some of the banks are still in denial. Wells Fargo for instance is probably the worst bank to deal with on REO’s.

Real estate seems to be like any other supply and demand business; there are times when either the buyer or seller are favored, based on inventory and other circumstances. Now RE is out of favor, prices have escalated over the past half dozen years based on easy available credit, and frenzied demand. So I suspect what will happen over the next several years is an adjustment to current market conditions. Lower prices are in the cards, like it or not.  This makes it extremely difficult for those with loans needing to get out to sell for what they even owe on the homes. Not only are prices falling, but the appraisals to refi or resell are falling.

However, lenders are not about to sit on the inventory in hopes that the market will heat up again. They can't, as they are mostly publicly traded entities, that have charter requirements for handling inventory that they must follow. They will simply sell the property for the highest and best price they can, therein liquidating their inventory. It that comes at 50 percent of what they have invested, then they take a loss. This is offset by the years past where they took NO losses, as they were able to foreclose, and due to the ridiculous market we lived through, they could sell anything for the price they asked, in nearly any condition. The times have surely changed.

Just all part of the RE cycle, and I know that there will be some opportunities. They probably aren't in buying REO's in large numbers, that need work. Just remember the old saying about trying to catch a falling knife, it will draw blood in most cases.

So starting  the flipping business right now is difficult UNLESS it’s well thought out. Buying low and having more than one exit strategy is key. When it’s a declining makret flippers have to buy at a number that is a slam dunk.

Or you don't buy. Just like when you are in an electrical storm, you take cover. All too many folks today are pretending that it isn't lightning out there, and continue to stand in this storm... That is lunacy.

Buy low and sell low, (the second low being a little higher than paid). Other than that you find big problems provided that you have an inkling of how to solve the existing problem. Title issues, partial interests, liens, etc... These are all opportunities.

I know every RE course out there says that real estate flipping or buying works in all markets at all times...but that is not my experience. Most seasoned investors I know sold in the last couple years and are waiting to buy. (Of course they sold to folks that were "getting into investing" and called themselves investors).

Of my properties, I sold what I need to sell in 2005 – 2006 and now I am waiting for the prices to drop. I am in and around the Seattle Metro area so price drops are already happening but they have a long ways to go.  I don’t think we’ve seen the worst of it yet.

I have found a few good deals this year since I sold, but they are very far and few and much more work than usual. I have tied up my $$ in private secured loans. And refinanced by renting out what I did hold onto….I intend to be ready to buy in bulk in 2009 .

Anyway, good talking to you….

Message Edited by Jacque383 on 07-31-2007 01:47 PM

[Anonymous]

I read the thread of messages on the FICO score and house flipping.  I am in the middle of buying a foreclosure and having a helluva time getting a loan because it is "uninhabitable" at the moment!  I learned a great deal following your conversations on this topic - thank you!  You mentioned some Hard Money lenders that you used that you were able to close in a few days, I was wondering if you would be willing to point me in their directions - I've recently called a few, and are awaiting on approval of my applications...I've created a few spreadsheets to utilize, but I'm sure they aren't anything like what you mentioned you use.  Would it be possible to send them my way too? or point me in a direction as to where I can buy them (if they were purchased)?  Thanks so much for sharing your knowledge and experience!!!

[Jacque383]

Where is the house located?  What's it worth as it sits right now? Let me know I'll give you some names and numbers....

[Anonymous]

Interesting points made by all.

I do mortgages for a living.  My job gets harder, but I also do other things like help with retirement planning through real estate investment (doing the stuff that long-term, GOOD investors do) and such, as well as take things to a new level.  A new line of work is not an option, one, I love what I do, and 2, even in a 'down' market I make three times what I could in any other line of work.  Honestly, and I treat people with respect and dignity - hence the referrals and repeat business I get.

Anyway, real estate is not infallible, and will go up and down.  It's hard to see what the subprime market will do.  The lenders have already remedied the problem as far as what they will and won't do now, the question is what happens to the ones out there.  It won't be pretty, but it also won't be the Great Depression or Armageddon either.

[Anonymous]

The house is in Howell, NJ, and needs everything!  I'm jumping into this with both feet...I'm now dealing with Wells Fargo - with a construction loan - they told me I'm approved so I'm getting estimates for all the work - but this is the 3rd mortgage company...So I'm not holding my breath - the house is unliveable right now, but I think, all in all, it's a good investment and it'll definately give me experience - just trying to close! I've had two appraisals, $240,000 and $260,000 - majority of it in the land.  ARV around $325,000-$350,000.  Bought it at $175,000 - and there's talk that the bank (Countrywide, foreclosure) may even go lower because more and more things keep popping up that need to be done on the house...  Figuring about $80,000 to $100,000 in work needed.  I'm not looking to make a killing (obviously), but rather to get the experience and to make some money.