Flipping, bubbles and housing scams
There is always a fine line between ambition and ethics and success and morality. It was easy for these lines to become blurred when property values were increasing every day with annual never-before-seen, double digit appreciation rates. Now that the party’s over, it’s time to return to our basic human ethical beliefs, but, unfortunately, the new real estate reality could be making that harder to do.
You may not realize it but the real estate bubble that burst last year was really a bubble created by flipping, the practice of buying an asset like real estate and quickly reselling it for profit. The profit from flipping real estate comes from buying low and selling high in a rapidly rising market. Most economists now feel the real estate boom was a direct result of federal borrowing standards being relaxed leading to an unnatural demand for housing, thereby affecting the supply and opening the door for flippers.
Although the practice of flipping is not illegal, because of the easy money associated with the practice during the boom years, illegal activities were the inevitable byproduct. The Sarasota Herald Tribune did a year-long investigation into questionable flips in Sarasota and Manatee counties, examining more than 3,000 property flips. They reported 100 properties doubled in price in a single day during the boom, and some properties flipped two or three times before anyone moved in.
Many of these real estate flips were organized circles of flippers, lured by the promise of easy money, bringing along friends and relatives. They purchased at inflated dollars and obtained mortgages with little or no money down and then couldn’t keep up with the payments when the bubble burst, resulting in the large number of bank foreclosures.
Now that we’re sitting with all of these foreclosures, there are plenty of unethical buyers, sellers and, unfortunately, real estate professionals ready to pounce. One of the worst scams I read about recently is taking place in Las Vegas, and who knows where else. Individuals who currently own a home that is underwater (where the market value is less than the outstanding mortgage), but who still are paying their mortgage and still have good credit, are purchasing second homes that are either foreclosures, pre-foreclosures or short sales.
They move into the new home, rent the first home and then stop paying the mortgage. It could be a year before the bank holding the mortgage on the first property either files for foreclosure or accepts a short sale. During this time the owner is not paying his mortgage and collecting rent from the tenant. In most cases, they end up with a better home than the one being foreclosed for half the price, and don’t worry about their credit rating since they already have a mortgage on the new home. This little rip-off is being facilitated by real estate brokers who have found a way to turn over homes and still make commission in this market.
Many of the investors who got involved in flipping properties were just naïve individuals who allowed their greed to be taken over by their ethics. But some were fully aware they were artificially driving up housing prices and obtaining mortgages with fabricated information. Until we work our way through to a normal real estate market, the temptation of taking advantage of both the unnatural up and down markets will be with us. Maybe then we’ll return to a pre-bubble morality, at least until the next time.