The real estate blog.

Ah, it seems like it was just yesterday when A&E TV was premiering Flip This House and the TLC Channel was launching Flip That House. Notice these were two different shows – I guess targeting two separate target audiences who were interested in either this hosue or that house. Free markets bring choice to the consumer, ain’t America grand?

Well now that the housing market is starting to slow in some regions flipping is starting to lose its shine. Perhaps one of the most telling pieces of evidence that the pendulum is starting to swing is that allegations of fraud are starting to pop up even in the sanitized, staged world of reality TV. One Flip This House participant evidently didn’t even own the properties that he allegedly was flipping for big bucks. If you can’t believe what you see on reality TV then whom can you trust these days?

So these are additional bits of evidence on a fact that we already knew: flipping isn’t investing, it’s speculating. Not that there’s anything wrong with that, as they say on Seinfeld, but it’s important to know that flipping is a speculative technique that works well if the market is flying and you have a healthy risk appetite.

Flipping is glam and flash – high rollers and big bucks. But that’s so 2006, so what trend are they going to selling us next?

Well one man’s pain is another man’s profit, so expect the spotlight to fall on the short sellers and pre-foreclosure artists. Not as glamorous as the fast rolling world of the flippers since it requires the investor to manage the unpleasant task of dealing with folks who are having their home foreclosed, but in an environment of stagnating prices and embattled mortgage holders short selling can work.

Quick primer: The bank doesn’t want to get stuck with a foreclosure. I’m always annoyed when I read these exposés about banks licking their chops to kick grandma out of her house and sell it at the auction block the minute she gets behind on her mortgage payments. In the eyes of a bank a foreclosure is a black eye; banks don’t want to own real estate, especially a house that has been trashed by a aggrieved foreclosed owner.

If the owner is getting foreclosed on a house with zero or negative equity then there is little he can do. Say his house is worth $150 thousand and he owes $160 thousand; trying to sell won’t help.

Enter the short seller. He cuts a deal w/ the owner to give him the house and simultaneously cuts a deal with the bank that he’ll pay, say, $125 thousand for them to release the lien. Voila, everyone is happy: the investor gets a quick $25 thousand in equity, the previous owner avoids the indignity of a foreclosure, and the bank avoids the time, cost and expense of trying to unload the property – a process that probably would have cost them more than the $35 thousand it just wrote off.

Note that this is nothing new. People have been doing it for years. But it about to be the new thing which will be promoted online and in the media.

If the flipping phenomenon was vulnerable to fraud, this one will be as well. Two reasons:

It’s hard: Making money flipping houses in a booming market is as easy as falling off a log. All you need is guts and the right level of risk appetite. Making money off of pre-foreclosures and short sales is hard. There are a lot of moving parts to these deals and pulling them off requires knowledge, negotiating skill and patience. Dealing with vulnerable people: Short sellers promote themselves as investors who help people. And indeed many of them are good, decent people. But investing isn’t an altruistic pastime, and when a dishonest investor comes into contact with a troubled owner who is looking for a lifeline there is a potential for bad things to happen.

I’m trying to look into the crystal ball on this one. I’ll revisit in a couple of months…

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