Monday, January 21, 2013

The "F" Word

Not too long ago I went on a little vacay with my husband and some friends from grad school. We drove down to Key West for the weekend for a little R&R. It was a group trip and so there were some people there I had never met. One of the guys (a friend of a friend) asked me what I did for a living and I explained that in addition to working with clients renovating their homes I also worked with investors who purchased distressed property, renovated it, and resold it. He thought it was pretty cool and said that it was something he was actually interested in doing. Another girl I hadn't met before, his sister, overheard this and got up from her sun bathing position to vehemently rip me a new (((you know what)))! "You FLIP houses?", she said. I said, "Yes".

Her stance on "FLIPPING" is that it ruins the market. She proceeded to lambaste me, explaining that "people like you" hurt the market. She continued to state that we are the reason that the market is the way it is today. While I believe that everyone is entitled to their own opinion, I must respectively (unlike her retort) disagree.

Look... in any business there are bad apples. People who do not do the right thing and make the majority of people who are doing the right thing look bad. This is true in contracting, real estate, and every other industry. And then there are those of us who stick by a sound code of ethics and go about each day ignoring the negative and believing there is good in the world. However, some people wear their opinions on their sleeves or shove them down other people's throats. So, I tried to reason with the girl from Key West but she did not want to hear it.

My rebuttal... house "flippers" for lack of a better term, actually help the market. We do not take houses away from people who could otherwise purchase them with a home loan. Why? Because people who obtain a mortgage for their home purchase cannot purchase the types of properties that we do; these properties would never pass an inspection or appraise for a fair market value. We are not buying houses that need some paint or maybe some carpet replaced. We are buying houses that are in severe disrepair or have specialty issues that a normal home buyer would have no idea how to fix or even where to start. For example, the last house we purchased had: no floors in one of the bathrooms; open electrical wires throughout the entire house; no electrical panel to regulate the power; multiple roof leaks; and no functional showers or bath tub. Additionally, it also had a dangerous and structurally unsound exterior with multiple holes in the walls. When all was said and done the house needed to be completely rewired, re-plumbed, in addition to several structural repairs, with renovation costs over $100,000.

So imagine a street with ten houses, a nice neighborhood with two of these houses in foreclosure. Since the people who lived in them before the foreclosure were experiencing hardship they did not have the opportunity to invest money into their home for a very long time. Vacant houses, exposed to the elements without care from anyone fall into disrepair very quickly. Not only can this bring crime and vandalism to a neighborhood but what is happening to the property values of those other eight houses? They are falling, and quickly, because now the neighborhood is in decline due to the foreclosed, vacant homes.

Here is where the "flipper" comes in. Investors are people who have cash. They are able to purchase the property, renovate, and resell it. Because a cash buyer does not need an inspection or appraisal in order to purchase the property they are able to purchase a house in any condition. Most investors look for a ten percent return on their investment. This means if they put $100,000 into a house they would like to make $10,000. When you think about the time, money, and risk involved, ten percent is a very fair return on investment. This differs for every investor of course but from my experience this is the norm. So they will purchase a house at a discount (as compared to market value), because it is in disrepair and then renovate it, and resell it at fair market value. The neighborhood is now stabilized without the possibility of additional price drops because the foreclosed homes have been renovated thus all of the houses on the street are now at the same standard (relatively speaking).

Look... I am not trying to claim Super Hero status here, this is a business like any other business. The investors I work with are looking to make a profit; however, they also assume a lot of risk and they have a solid moral compass. They choose to turn a quality product without cutting corners. They have experienced profits and losses like any other business, but in almost every circumstance the house is sold to someone who finances the property with a FHA or conventional mortgage. They were able to purchase a house that was completely renovated, passed inspection, and appraised at fair market value.

My argument with this person fell on deaf ears. She had her opinion and was sticking to it! I felt bad... I was trying to defend my passion but to her I was the bad guy. At the end of the day it doesn't matter what other people think, you have to do what you love with strength and passion. So the moral of the story is; house flippers are people too and no matter what others think you should never let anyone get in the way of your passions and dreams. Cheesy but true!

Blog post by Aja De Los Santos, GM & Head Designer at Investcove Properties

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