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Forbes
Flipping houses: Dont believe the hype
This year's buzz in real estate is 'flipping' -- buying, renovating and selling houses in a matter of months. It's not an amateur's game -- but that doesn't stop them from trying.
By Forbes.com
The booming real estate market is driven by historically low mortgage rates, solid employment growth and brisk demand -- not wild speculation.
Flippers -- those who buy a house and quickly sell it at a profit in a hot market -- are active, but there are no definitive nationwide statistics compiled on the number of mortgages turned over in a year or less. However, the number of flippers appears to be small.
The Federal National Mortgage Association, known as Freddie Mac (FRE, news, msgs), a congressionally chartered corporation that buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market, says homeowners held a house for an average of seven years in the first half of 2004, compared with 6.5 years in the first six months of 1999.
"Investor interest in the U.S. housing market does not seem to be driving local house-price patterns," Freddie Mac says. "While there has been some rise in the investor share of overall U.S. home-purchase lending in recent years (from 7% of purchase-money loans in 1998 to 11% in 2003), the investor share has generally remained near or below 7% in most markets experiencing significant price gains in recent years."
The National Association of Realtors, a trade organization in Washington, D.C., says about 3% of all home buyers sell their home in a year or less. This statistic spikes the conventional wisdom that rampant speculation has created a real estate bubble.
Even if all those who sell quickly are assumed to be speculators -- ignoring the likelihood of common reasons for moving, such as job change, divorce or illness -- flippers are an insignificant slice of the market. The underlying reason is simple: Unlike the shares of a hot IPO that can be flipped within hours of the first trade for a quick profit, real estate is a long-term investment.
Related news and commentary on MSN Money
Speculators, or retirees in waiting?
About 23% of second homes sold in 2004 were purchased by investors, leading some to conclude that speculators are relentlessly driving the real estate market upward. However, this overlooks the cascade of baby boomers in their prime earning years beginning to think about retirement. Many boomers, real estate agents say, buy a second home with the intention of retiring there -- but most are more than happy to sell it in a few years if plans change or if the price is right.
Anecdotal evidence suggests flipping isn't a widespread practice in the current market.
"I'm sure it's happening, but I'm not seeing it much," says Roger Rife, a branch manager for Countrywide Home Loans in Coeur d'Alene, Idaho, a hot market in the lake country. "I close about 150 loans a month and might see one or two that have owned property less than six months."
Labor, material and land costs continue to rise, boosting the cost of new houses. Some speculators try to catch this wave, but it's difficult in a market such as northern Idaho because there's plenty of open land ready to be developed between Coeur d'Alene and Spokane, Wash. Builders work overtime as refugees from California flock to the area in search of clean air, outdoor activities, lower taxes and killer prices. A three-bedroom, two-bath house in nearby Rathdrum goes for $160,000.
The boom has been good for home builders, including Technical Olympic USA (TOA, news, msgs) of Hollywood, Fla., and Centex (CTX, news, msgs) of Dallas. Building Materials Holding (US:BMHC, news, msgs) of San Francisco has done well in the boom.
Watch those taxes
William Kring, a certified financial planner and principal at Kring Financial Management in Atlanta, advises his clients to adopt a two- or three-year time line when investing in real estate.
"Some who expect to flip the property in a year will be disappointed," he says. "You've got to look at commissions, taxes and fees. A lot of people come in with high expectations, but when they work through the numbers, they realize how much the property has to appreciate to make money."
Taxes can take a bite out of any profits derived from flipping, creating a strong disincentive to turn a property over quickly.
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