PHILADELPHIA – With money cheap and demand for housing exceeding supply, everyone wants a piece of the real estate market.
We’re not just talking about people who want to own their own homes. We’re not even talking about people buying second homes.
We’re talking about “flippers,” people who make minimal deposits, often as little as $1,000, on properties that won’t be built for a couple of years. Then, when the properties are built, they “flip” them to other buyers, usually at prices lower than what the developers are asking, and make huge profits.
Unlike developers, who have money tied up for years in projects and need to make enough to repay their lenders, flippers stand to score big with little risk.
And, unlike developers, if there are problems, flippers can walk away and not lose their shirts.
“These short-term speculators are everywhere,” said Jack McCabe, managing partner of McCabe Research & Consulting in Deerfield Beach, Fla. “In some areas of South Florida, you can walk into coffee shops and listen to taxi drivers making real estate deals in four different languages.”
Not just in Florida, but in other hot real estate markets, such as California, and even in Philadelphia.
“There are more flippers here than in Sea World,” said Jay Lamont, the host of “All About Real Estate” on AM radio in Philadelphia for the last 27 years.
That’s not to say there weren’t investor-friendly markets before – the mid-1980s was the most recent previous example. But this one is different, Lamont said – and so are the flippers.
“They differ from those of yesteryear in that they are generally younger, dumber, and move in herds like sheep to the slaughterhouse,” he said. “Today’s flippers are usually asset-challenged, so they don’t have the cash available to actually settle on the would-be flip deal.”
Mark Zandi, chief economist at www.Economy.com, said data are elusive because it’s often difficult for lenders to discern who the investors are.
Real estate developer David Grasso said: “What scares me a bit is that if interest rates spike through the roof, most of the investors will walk away.”
Walk away perhaps, but not necessarily as winners.
In Las Vegas, where they bet on everything, including housing, a lot of investors lost big last year when Pulte Homes, a major developer in that market, cut its prices 5 to 25 percent.
Pulte’s prices had been higher than other builders’, and sales of all houses there were beginning to slow. By lowering prices, Pulte hoped to compete for a bigger share, despite reduced demand.
Investors who paid the higher prices for Pulte’s houses lost hundreds of thousands of dollars; several hundred of them have sued the developer.
Market saturation, meanwhile, is possible in South Florida because of condo construction and conversions, said Zandi and McCabe, among others.
“Condo prices in South Florida have appreciated 20 to 35 percent over the last three years,” McCabe said, thanks to cheap and plentiful financing.
In 2003 and 2004, 31,000 condo units were completed, with 48,000 expected to be ready this year, and 64,000 more planned in Florida’s Dade County alone.
“So condo appreciation stalls, and then downward pricing pressures make panic selling a real possibility,” McCabe said.
Pulte’s problems have been a wake-up call for builders about how great an impact flippers can have on a market.
Many builders have legal restrictions in their sales agreements stating that properties under contract cannot be resold for a specified period.
Developer Carl E. Dranoff said he was taking steps to counteract “investor exuberance” at his 163-unit condominium high-rise in Philadelphia.
“I want this building to be primarily owner-occupied, because I believe that’s what the majority of buyers want,” he said. “They don’t want a transient building.”
So Dranoff does not allow agreements of sale to be assigned to anyone but the buyers’ relatives until after settlement. And until the building is completed in June 2007, if anyone wants to sell a unit within nine months of purchase, “he will have to sell it back to me at cost.”
“I will have no control over what happens here after the building is sold and I’m gone,” Dranoff said. “Until then, however, if there is a real estate correction, I want to be able to sleep at night.”
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