FLIP OR FLOP: Frothy Market Madness
Published On: July 19, 2017 Posted by: Jeremy Peterson
The dramatic increase in house prices over the past five years is something we haven’t seen since the 1990’s. This remarkable momentum upward has created expectations in the minds of real estate investors of big returns with minimal effort.
A recent example comes from an owner who purchased a home I listed last year. That transaction closed in November for $137,000. After just eight months, the new owner wanted to sell the property and break even on the sale. In order to do that we would need to account for brokerage fees, title expenses, and any seller paid closing costs in the sale price. I ran the figures and that number came out to be about $152,000. In reviewing the comparable sales, I determined that the home had appreciated to about $145,000 in the 8 months he had owned it. That was disappointing news and he cited that he had listed the property on KSL for $175,000 and was receiving a lot of interest. I told him to review my information and think about it. He listed the property for $165,000 several days later with a discount brokerage and took the home off the market several days later. Did it sell? I don’t know. Will it appraise at $165,000? Probably not. We shall see.
Another example comes from my neighborhood where a widow recently passed away and her estate was being sold. Her home was a petite victorian cottage on a flag lot. The carpet was vintage (and prestine) 1970’s. The home was very well kept but dated. The home sold for cash for $85,000. The same day the transaction closed, the home was listed again for $130,000. No changes were apparent from the photographs. Will this property sale at the new list price in the same condition? Maybe. Will it appraise? Probably not. We shall see.
One of the problems faced by both of the owners of these properties is the scrutiny that flipped homes receive by underwriters. If a home has sold in the past 12 months and is being resold and the 2nd buyer uses FHA, the home home must be appraised, not once, but twice by two different appraisers. This increases the risk associated with an opinion of value coming in at the contracted sales price. Many times, underwriters will want a list of improvements made to support the value. If none are made, that doesn’t bode well for the buyer being able to get the loan to close.
So, if you are an investor thinking of jumping into the housing market to turn a quick dollar, just know that it’s not as easy as the gurus make it sound. Hope for the best, expect the worst, and follow your plan and you should be fine. Interestingly, the examples I have cited here are things we typically see in the late part of a real estate seller’s market. Expectations of gains are high. Many times these expectations are met, but at some point, and typically unexpectedly, they aren’t. The market is a fickle creature and rewards risk until it doesn’t. When you are working on your real estate investment plan, have a contigency plan in case the market shifts unexpectedly. You will be glad that you did.
In the meantime, we can learn a little about landing big jumps from the Simpsons: