Residential Property Flipping and Real Estate Today

The twenty-first century has given real estate a whole bunch of new household words, from ARM to interest-only mortgage (OK, that's three words, but you get the idea). Increasingly, one of the most-mentioned words in real estate is "flipping." No longer just something Marcia Brady does with her hair, flipping is now a driving force in the real estate market.

Flipping, a.k.a. "house flipping," "home flipping," "property flipping," or "real estate flipping," is the rapid buying and selling of a single property. For instance, someone buys a house, building, or apartment, for $500,000, and then sells it six months later for $550,000.

Yes, people are actually doing this--people, as in private individuals of no particular wealth, leveraging their retirement savings or even buying using interest-only mortgages or other easy financing. Large real estate investors have been doing essentially the same thing for a long time, particularly in commercial real estate. But what's gotten the real estate world talking about flipping now is precisely that it is in the residential real estate, and involving private individuals as buyers and sellers. Flipping has transformed the residential real estate market, at least in some regions. What was primarily a series of transactions between current and prospective residents has become a speculative market driven by small investors, much like the stock or bond markets.

As you can see, the phenomenon of flipping real estate is made possible by constantly rising real estate sale prices. Not only that, the phenomenon may very well be feeding into higher property sale prices. Once upon a time, residential real estate demand depended on home buyers looking for a place to live. Flippers add a whole new layer of demand to the mix. A real estate flipper will typically be flipping more than one home at a time, so their impact is magnified even beyond their numbers. In some markets, up to a quarter of all residential real estate sales are estimated to be "flips."

Many observers, including many economists and seasoned real estate professionals, are feeling anxious about flipping. Their biggest concern is that real estate flipping may lead to instability in the market. Why?

As already noted, flippers are adding a speculative force to the housing market, causing houses to be valued over and above their perceived intrinsic worth. Indeed, in a number of high-flying markets such as Boston, the Bay Area of California, and Miami, rents have not risen anywhere near as fast as prices. Rent is usually considered to be a good indicator of the real value of real estate. To critics of rising real estate prices, stable rents mean that any rise in housing prices must be due to speculation--not necessarily just flipping, but also people who imagine their homes will increase in value. Large numbers of flippers are amateur investors. Like amateur investors in the stock market, they may try to cash out of their investments quickly if there are signs of a serious downturn. As in the stock market, lots of amateur investors all trying to cash out quickly may lead to a crash or at least a downward pressure on prices. Many flippers are stretching themselves financially to buy properties. If the market goes down a little bit, it may mean a lot of properties in foreclosure or sold at fire-sale prices. This is on top of the already large number of buyers who seem to be stretching to buy their houses with adjustable rate mortgages and interest-only mortgages. Many economists and observers generally believe that the US economy is not doing so great. If the economy took a sudden turn for the worse, it might affect the real estate markets in a very bad way. This would magnify troubles for the flippers, who would in turn pass their troubles onto the real estate markets, compounding a bad situation.

Suffice it to say, there's a lot of hand-wringing over the practice of flipping houses. After all, even if it were a sure-fire investment, there would likely be more than a little resentment at the thought of people who need housing having to compete with people who are out to make a fast a buck. But is it really that bad?

Here are some somewhat-good things that can be said about flipping:

Rentals. Some home flippers are taking the more traditional real estate investment route of renting properties--at least for a little while. With the most optimistic flippers hoping a property will continue building value for another year or more, it only makes sense to get some rental income on it while it's building property value. So, at least in those cases, a tight housing market won't be losing space. Improvements. Even before "flipping" was a word, handy home buyers would take fixer-uppers and convert them into something more valuable. While there are fewer and fewer fixer-uppers these days, it's still an important way in which flippers have helped give something back to the community. Distressed properties and foreclosures. Enterprising flippers are always looking for housing that's below-market value. This can be a god-send for anyone who needs to unload a property quickly before it's on the foreclosure auction block.

In short, love it or hate it, house flipping has become an important part of many US real estate markets at the dawn of the twenty-first century.

About the author: Joel Walsh writes extensively on real estate: http://www.ziprealty.com