Buyers balk at markup on flips

Mood of the Market

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Mar. 15, 2010

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Mood of the Market

Tara-Nicholle Nelson
Inman News

I'm not really sure exactly when investors got such a bad name. Once upon a time, every other person I met wanted to be one. Maybe it was the imprimatur of slick, infomercial-esque get-rich-quickness that kick-started the national anti-real-estate-investor antipathy. It probably didn't help when investors, only a small percentage of whom can accurately be called "flippers," ended up squarely on the wrong end of the foreclosure-crisis finger-pointing.

Probably wrongfully so, as the last numbers I could find -- from 2008 -- showed that only 20 percent of the foreclosures in America at the time were on non-owner-occupied homes, which is disproportionately low, considering that 33 percent of homes in America are owned by investors.

All last year, during the deepest depths of the foreclosure crisis, I saw buyer after buyer get outbid -- or underbid, but still bested -- by cash investors seeking to make the most of the decline in home values. While I felt deeply for the homebuyers who lost out, I also saw how investors played a big role in mopping up the excess inventory that was depressing values, and could appreciate their role in the market's recovery.

Then, in January, the Department of Housing and Urban Development lifted the FHA loan anti-flipping guideline, which had prevented buyers from using an FHA-insured loan to buy a home that had been bought within the previous 90 days.

Now, my buyer clients and I are seeing the maturation of the investor-buy-foreclosure phenomenon, as we see listing after listing that was purchased at foreclosure auction, rehabbed/remodeled/upgraded/primped to within an inch of its life, and put back on the market for resale, at an obvious -- and sometimes steep -- markup.

At this point, I've done this so many times I could script it:

Scene: Buyers enter the house: "Wow -- this is gorgeous. They did a ton of work. Oh my gosh -- look at those appliances. Is that Wolf/Viking/Kenmore Elite (depending on price range)? Gorgeous. All new bathrooms, too?! Distressed bamboo on the floors -- I love this. They made such great choices. We basically wouldn't have to do a thing to move in!"

Buyers leave the house -- "We'd love to make an offer. Will you run the comps for us and give us the background? Ta-ta! Talk to you soon! So excited!!"

I call the buyers -- "OK, well, I've sent you the comparables. This place is actually priced $10,000 below the nearest identical comparable that sold a month ago, and of course that one wasn't remodeled."

Buyers: "Fabulous -- it's totally worth that, at least. Do you think we'll need to offer more than asking to beat out the other buyers? We're OK with doing that -- we'd go up to $20,000 over asking. Oh -- quick question -- are the owners investors?"

Me: "Yes."

Buyers: "Can you find out what they paid for it?

Me: "Sure, I can research what they paid for it. Here it is -- they bought it on the county courthouse steps for X, before doing the work."

Buyers: "They paid what?!? But that's $100,000 less than the list price!! We want to offer $80,000 below asking. Write it up, please."

As much as we give sellers a hard time for overpricing their homes because they are confused about what truly determines the value of a home (hint: it's not how much you need to buy your move-up home), buyers are equally guilty, at times. The fact that a home was rehabilitated or is owned by an investor does not inherently lower the value of that home -- especially when the improvements made were quality improvements that truly added value to the property.

Apparently, no buyer wants to feel like someone is profiting off of them. However, the sudden plummeting in a buyer's sense of what a place is worth belies the reality of even the flippiest of flippers' investment in the home. It's not always just a matter of slapping the cheapest paint on the ugliest house.

Often, the investor paid out a large sum of cash or put down a lot of money to get a loan to buy the home in the first place, at a sizeable opportunity cost when you consider what else they could have been doing with the cash. Then, they paid closing costs (anywhere from 2 percent to 5 percent of the purchase price, or more), permit fees, city inspectors, carrying costs (mortgage interest and property taxes) and advanced big, huge lump sums of cash to do the very work that made the buyers ooh and ahh.

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