Finally! In this week’s Time article, “Home Flippers Are Back in Florida. A Good Sign?”, Thomas Collins writes:
The current crop of investors, analysts say, are playing a crucial role in reviving the housing market . . . Somebody’s got to clean up those messes, and that’s what the good flippers do, observers say. They might try to sell right away or rent the houses for a while. Either way, it’s good for the whole neighborhood . . . “They’re vital,” [says a housing consulting firm] of the good flippers. “I can’t think of a conceivable way that we could turn the market around without them.”
What nice recognition of the important role investors – yes, flippers, play in the fixing of the economy!
The focus of the article admittedly is rehabbers who purchase properties, fix them up and then re-sell them. I suggest that the “good flipper” label also extends to those investors who add value not just through fixing broken kitchen appliances and pipes, but also to those investors who fix the broken timing and logistics of transactions that keep properties out of foreclosure and off REO inventory by flipping short sales.
The problem that most sellers and real estate agents have with Short Sales is that they take a long time, are unpredictable, and when there are multiple liens on a property, can get very complicated and frustrating. The frustration and complications cause many Short Sale attempts to fail and houses to go to foreclosure.
For example, I asked a real estate agent this morning, “so are you listing any short sales?” Her response:
– no, I try not to mess with Short Sales, I tried it twice and here’s what happened. I had good buyers who liked the houses, but it took months for the bank to respond and when they did they kept asking for more money. My client agreed, and then we had a problem with the second mortgages…it went on and on and finally, my clients gave up and went and found another house where they didn’t have to mess with the short sale. Since then, I just don’t want to mess with short sales.
With short sales flipping, even if there are no physical repairs – no pipes or appliances that need fixing, the good short sale flipper brings value to the equation by fixing the inefficiency and impracticability of selling a short sale directly from a distressed seller to retail buyer.
The real estate investor – who understands short sales, is patient, does not need to “move in the house before school starts”, and who has funds ready to close the transaction whenever the bank decides to get around to approving the short sale – that investor can deal with the frustrating and long process with the bank that a retail buyer is not likely to put up with.
Then, when the good flipper has fixed that inefficiency in the market by riding out the process and cleaning up messes on title (call them non-physical repairs) the flipper can restore the property to the retail market and sell to a retail buyer. The property now can command retail market price where it could not before.
It’s no different than everyone of us who has ever traded in a car to dealer. You realize when we say “trade-in”, we are actually agreeing to sell our car at a wholesale – below retail price to a professional car flipper. The dealer/car flipper may wash the car, do repairs or not. He may not even touch the car – adding no “improvements” – then he flips it within hours of our selling to him.
The car flipper earns a profit on the difference between what he purchased it for wholesale and what he sells it retail because he understands the process and is willing to take the hassle and headache off the hands of the seller. Is there anything wrong with this practice? Of course not! If a seller wants full market retail price, anyone of us can certainly take out an add in AutoTrader, put a sign in the car’s window and spend our evenings and weekends taking phone calls and showing the car. If we chose to elect out of that hassle, we can chose to sell the car at a wholesale price to a professional car flipper who understands the business – so we don’t have to.
Banks and anyone else who would suggest that there is something inappropriate about flipping a short sale (without ‘doing anything’) fail to acknowledge the reality that you can’t get the benefits of a retail market without meeting the expectations of the retail market.
Expectations of the retail market include:
- responding to a buyer’s offer within a reasonable time frame of a couple of days
- being able to agree to a closing date 30 to 45 days after contract
- being willing to undertake repairs and respond to or renegotiate after inspections
- paying a listing agent and a selling agent their full commissions
- delivering clear and marketable title and clearing up all liens and encumbrances
- delivering the premises in broom-clean, move in condition
These are the very things that banks DO NOT or just CANNOT do in the Short Sale Approval process.
Until such time as lenders and sellers are can meet the expectations of the retail market, the market will demand and require the role of an intermediary flipper to bridge the gap between the short sale market and the retail market. Any effort by lenders to circumvent or impede the role of the “Good Flipper” will keep more properties from ultimately reaching the retail market and will cause more properties into foreclosure further swelling the vacant REO inventory.
The short sale flipper bridges the gap created by the lender’s inability to meet the expectations of the retail market and by returning properties to the retail market faster than the REO process, short sale flipping is good for banks, neighborhoods, and the economy.
2 Comments
While I agree that banks are not capable of processing every aspect of the short sale, don’t you think that this role you are referring to should (and is supposed to be) filled by a competent realtor?
I have successfully flipped short sales myself and have gone back to operating my retail negotiation company. My “profits”, while relatively small (1000 – 2500 per file), never get in the way of the transaction, whereas a double close adds multiple obstacles that exist simply because someone is trying to create a profit spread thats directly in conflict with the lenders interests.
Is it truly in the best interest of the seller to exclude an important pool of buyers (IE. FHA or any other lenders with seasoning requirements) to secure that profit spread? Or perhaps when you are running against the clock to list the property well above the negotiated price?
Recently I received a letter from the Attorney General office discussing this type of investing, you’d be suprised at what he had to say.
What are your thoughts? Can someone in my position begin “investing” in these short sales without breaching fiduciary duties to my clients? In WA. State, any distressed property buyer is considered, to a certain extent, fiduciary by law .
Your thoughts?
Kevin
Thanks for your Comment – some great points.
First, to the extent that property can be sold directly from a seller to an end-buyer and the transaction facilitated by a licensed agent without an investor – I agree, it should. Or, in the context of my article – to the extent that a seller and lender CAN meet the expectations of the retail market – they should and, in my opinion, there is no need for an investor and no value that the investor brings to the table.
However, the conversation with the agent highlighted in the article is an example of how many (if not most?) short sales just can’t make it successfully to the retail market – the retail buyers do not have the patience or stomach to get through the (usually) lengthy and frustrating process.
Realtors alone can’t do a deal no matter how skilled – there has to be a Buyer and if the retail market can’t produce a retail buyer, then there is a legitimate role for a wholesale buyer – at a wholesale below market price. The point of my article is that when the retail market does not solve the problem – there is a legitimate role for investors to step in and do at the wholesale market what the retail market could not do.
If your question is can a real estate agent represent clients as an agent and also be an investor in the same transaction – I would say NO WAY! That’s a recipe for disaster.
I’d love to review the Attorney General letter – please email a copy to benpargman@theshortsaleservice.com.
Another point that your reply implies is that real estate investing and short sales is complicated stuff – I agree. That’s why you’ll never see me on YouTube joking about it and claiming that if you just buy my whatever you’ll be rich tomorrow. However, for those who understand how to add value where the market needs it and the law allows it – there is a lot of important work to do and a lot of money to be made.
Thanks for your Comment.
Ben