Cash purchases of homes in the U.S. have reached an all-time high representing one in three purchases. And while many of those are people who are buying a personal home or second home, a significant number are purchasing the homes as investments either to offer as rentals or to “flip”.
The idea is to buy low, make some improvements and sell quickly at a good profit. But while there have been fortunes made by flipping, there are also perilous downsides. Just ask Bank of America, which recently agreed to pay nearly $17 billion to settle claims from the government that it sold risky, mortgage-backed securities to investors before the housing bubble burst in 2007. With many of those mortgages, homes were being flipped so often it ended up with dizzying consequences.
As home prices have retreated significantly across the country, flipping is starting to become popular again. But real estate sources contacted say Mississippi is not quite as “flippant” as states where average real estate values are much higher.
“This is not a flip state,” said Cynthia Joachim, broker associate with Coldwell Banker Alfonso Realty Inc., Gulfport. “You buy in states like Mississippi, you buy to hold. We don’t see much flipping here because we don’t have the business climate for it. For a flip market to work, you need a constant flow of buyers moving quickly. Real estate is best as a long-term investment. It was never intended to be a liquid investment. When it is treated as a liquid investment, that is dangerous for investors and the economy.”
Joachim said there are people on the Coast who thought flipping was the game to play, and they got hurt; they had trouble getting their money back, let alone a profit.
“It is an economic process that can make someone a lot of money, but there are a lot of variables,” Joachim said. “You must not have a huge aversion to risk. And there are significant tax consequences. Sometimes people think they can pay $50,000 for a house, and sell it for $100,000. Then, after fixing it up, they have trouble getting $60,000. We don’t have the kind of mentality that when other areas are booming, we are booming in the same path. People read all these reports about flipping in Southern California and South Florida. These markets have some inherently strong economic qualities about them. They have tremendous international markets. New Orleans is the same.
“Flipping is not for everybody and not for every region. As long as property values are appreciating, flipping works. When property values are falling, you don’t know when to buy and you can’t know when to sell.”
According to RealtyTrac’s most recent report, the rate of flipping is slowing down from the levels seen in 2012 and 2013.
Most home buyers being seen by Ken Austin, brokerowner Mississippi Coast Realty, are people who are buying to thicken their rental pool.
“I have not seen a lot of people house flipping,” Austin said. “I saw a lot of foreclosures and 90 percent of the foreclosures we sell are for rental properties.”
Tommy Morgan, owner of Tommy Morgan Inc., Realtors, said the Tupelo and Oxford area are experiencing hot markets which make both purchasing a house for investments or for flipping more attractive to investors. But he has seen more of an increase by investors planning to hold the properties for rentals than people who purchase for house flipping.
Flipping usually takes significant cash for the purchase and any repairs or upgrades that are necessary, a willingness to take risks, and an ability to wait if the home doesn’t sell quickly.
“It’s important to make good choices and good investments,” Morgan said. “If purchasing a flipped house, it’s wise to know who the seller is and their reputation.”
Kris Davis, broker/owner, Re-Max Partners, Starkville and Columbus, said they have seen some success in the Golden Triangle area with investors flipping houses.
“We do have investors in our area who make it a practice to purchase homes that may be in foreclosure or in disrepair with the intention of renovating the home for resale,” Davis said. “These investors are able to purchase the home at a reduced price because the repairs that are needed prevent the home from qualifying for a traditional mortgage. Investors purchase by cash or an in-house bank loan that does not have the same requirements for the condition of the home.”
Once purchased, the investor may make cosmetic changes like paint and flooring to update the home or may complete a much more involved renovation with a new roof, new appliances, and extensive repairs to the structure. After these repairs are complete, a traditional buyer is then able to purchase the home with a home mortgage because it will meet the necessary requirements for the condition of the property.
“The home is easier to sell because the repairs have updated the home and removed the need for the homeowner to take on the repairs and renovations,” Davis said. “Homebuyers these days have expectations for a home to be in tip-top shape. Investors may stage the home with furnishings to make it even more attractive to potential purchasers.”
Regardless of whether a home has been renovated by an investor or is being sold by the current homeowner, Davis said they always recommend a home inspection.
“A prospective home buyer will want to make sure that there aren’t any surprises behind the walls like electrical, plumbing, HVAC or roofing repairs,” she said. “Placing new carpet in a home may appeal to a buyer when they enter a home. However, they will want to make sure that the new carpet isn’t covering a problem like a rotten subfloor below.”
She sees that most investors do their homework before making a purchase: They are familiar with the comparable sales in the area and have an idea of what the property will sell for after renovation. They factor in the repairs that will be needed and a profit for themselves. Renovations can take from a few weeks to several months. The longer the renovation takes, the more it will cost the investor in interest on the loan and in time to oversee the project.
Sometimes there is more at play than just a hunt for profits.
“Some investors have a passion for taking a property in disrepair and restoring it to its former glory,” Davis said. “In fact, they may purchase additional properties within the same area to renovate and make an improvement in the overall neighborhood by renovating multiple properties.”