From Discovery Home’s “Flip that House” to Fix and Flip magazine to a plethora of how-to Web sites and books, the message that buying, fixing and quickly reselling houses is a good way to make fast money permeated our culture during the recent real estate boom.
In fact, house-flipping has been blamed for some of the price inflation in the market. But precisely because of that price inflation, along with the slight rise in interest rates, people involved in real estate in Rhode Island say flipping has declined sharply since 2005.
“Right now, nationwide, investors are sitting on the sidelines. Investors that want to buy to flip want to buy low and sell high,” said Cecile Cohen, president of the Rhode Island Association of Realtors and managing partner of Randall Realtors in Charlestown.
“There are no statistics on this,” Cohen added, “but logically speaking, as the properties depreciate at the rate they were doing, it was not as attractive to an investor that wants to do a quick turnaround, so they started dropping out in the last 18 to 24 months.”
Robert S. Goldman, a real estate attorney and partner at LaPlante Sowa Goldman, said that he has seen a similar pattern. Starting in 2002, Goldman, who handles mainly traditional transactions, began to see more and more short-term investors coming through his office.
“Real estate has traditionally been a long-term investment,” he said. “But after the dot-com implosion the public was looking for other places to invest their money, and it became a hot commodity.”
According to Goldman, it was “hotter than real estate should be.”
“Many investors saw opportunities to pick up properties, do some restorative work, or perhaps not, and without all that much money turn them around and make a profit on them,” he said. But as the money flowed into real estate, he added, the investments became riskier.
“Folks that were investing without that background were looking to make great returns in real estate instead of the stock market and traditional routes,” he said. “The result of that on a day-by-day basis over the last five years is you would see a higher number of individuals purchasing properties, then quickly selling them for a profit.”
That influx of short-term investors, combined with low interest rates, drove home prices up, sometimes to unsustainably high levels, Goldman said. Lenders actually began to be concerned, seeing houses that had been flipped as potentially risky properties.
“Over the last year or two, we started to get a ton of requests from lenders asking for a 24-month chain of title,” Goldman said. “The reason for that is they want to know if that property has been the subject of a lot of transactions, refinances or sales. They want to know is this property being flipped by investors, because they’re concerned about what they are lending on in the event they have to foreclose.”
The flipping business itself was hurt by its own popularity, Goldman said. Smart investors got out early, while others have gotten stuck with properties they may not be able to sell at a profit.
“When you do that stuff, it’s great at the beginning of the trend, but when you get stuck at the end holding a deck of cards, that’s where it gets problematic,” said Goldman. “Sometime around the summer of 2005, flipping started to drop off, and for the most part they have all dropped off and are trying to get out of the properties that they have. But if you bought real estate in 2005 and you want to sell it now, you’re probably going to take a hit.”
Cohen said she believes the short-term investment cycle has come to an end and prices can now stabilize.
Real estate, she said, “was never meant to be buy, flip, pocket the money and run. But things in the market seem to be stabilizing. Real estate is cyclical, and we go through periods where things go up, and then they return to a normal market. It seems like investors might be more likely to play in the stock market right now.”
But Goldman thinks that may not be the case for long.
“Now the tremendous opportunity that’s going to come down the pike is when properties are foreclosed upon and investors can buy it from the bank at a far reduced rate,” he said. “The bank is not in the business of owning property, and they’ll get to the point where they want to bail out of it. But that also has the risk of further eroding the marketplace.”
