Is market flipped out?
The ad delivered in the daily flow of spam brought to mind those heady days leading up to the home market crash when it seemed like every other person was trying to buy a house and then flip it.
“In need of real estate funding? Want a cash loan to flip a home?” was the Internet pitch in July from a company in Midvale, Utah.
“Get started now. Get real estate funding. No collateral,” reads the pitch. “Funding in as fast as 10 business days.”
Flipping houses is a legitimate business venture, despite some of the craziness that appeared just before the Great Recession, but for some flippers it may still be somewhat of a seat-of-the-pants business. A drive through Grand Rapids is likely to reveal at least one sign tacked to a utility pole: “We buy houses,” followed by a phone number.
The careful flippers look for homes in need of renovation, which theoretically lowers the buying price. Then they do the renovations and put the home up for sale again.
The situation in West Michigan may be significantly different than the Midvale, Utah, home market, however.
“I honestly don’t hear that there is much flipping at all right now,” said Julie Rietberg, CEO of the Grand Rapids Association of Realtors. “I think the current market conditions cause it to not be an ideal time for that. Inventory is at an all-time low.”
GRAR’s June report on Average Months of Inventory shows that in 2002, it was 5.5 months. That number began shooting up starting in 2005, with eight months of inventory on hand. From 2006 through 2008, it was 10.7, 11.7 and 13.3, respectively.
Then the home market took a huge hit, with the average months of inventory beginning to decline every year, starting with 9.7 in 2009. Last year it was 3.2 months and as of June 2015, it was 2.3 months of available homes on hand.
Year-to-date closed sales at this point in 2014 were 4,820 units, compared to this year with 5,288 units.
Prices are going up, too. The average home sale in June 2014 was $171,092; this June it was $181,980, according to GRAR data.
GRAR covers a region that includes Kent County, southeastern Ottawa County, Ionia County, the six townships in northeast Allegan County and the northern half of Barry County including Gun Lake.
“Multiple offers on listings have become the norm, and we often see homes selling above the actual appraised value. Most flippers are not going to go into the investment paying top dollar, and buyers purchasing for a primary residence are much more willing to put time and sweat into fixing up a home that may not be in great condition, just to be able to get a home,” said Rietberg.
“I wouldn’t be surprised if there is a statistical uptick in the number of homes being flipped,” said Michael Yates at Chemical Bank in Byron Center.
Yates is the president of the West Michigan chapter of the Michigan Mortgage Lenders Association.
Mortgage lenders aren’t in much of a position to know about flipping activity because flippers often pay cash for their houses or have loan sources other than banks.
“The occupancy of a home (by the borrower) is always a factor in financing,” said Yates. “There is not typically a purchase renovation loan for a home that we know you are going to flip. Most (flippers) seek that through a commercial loan or a private fund.”
“Many banks do offer some type of renovation loan program for clients who want to buy a house and renovate it, but most of those programs are designed for people buying their new primary home and wanting to renovate it, versus buying investment homes to renovate,” Yates added.
There was not a specific mortgage for flippers before the recession, either, said Yates, but there were “relaxed requirements” that no longer exist. A borrower might have gotten a construction rehab loan but never indicated the overall intent of the transaction, “and was not required to, at that time.”
Now they are, as part of the lending requirements added by the government in the wake of the sub-prime mortgage meltdown.
While the current hot house market has increased competition among home buyers — and pushed prices higher — the very fact that so many people are aggressively looking to buy a house may be an inducement to some experienced flippers, indicated Yates.
Mike Winks, executive vice president and chief lending officer at Northpointe Bank, said he is not aware of any uptick in flipping, although he noted there is at least one reality television program about house flippers.
He said flipping a house is a “viable way to invest” in real estate, and although it sometimes has a negative connotation these days, it is “really just a short-term investment.”
“Inventory is really low right now so the opportunities” for flipping are less, according to Brent Lowell, vice president of commercial and consumer lending at Option 1 Credit Union.
“There are a lot of investors out there all scrambling for the same properties,” he added.
Lowell noted that flippers are trying to come up with more creative ways of finding their inventory, such as “knocking on doors” and studying the property tax records in search of delinquent payers.
“Five years ago, you could drive down any road and find a couple of foreclosures. That’s not what’s going on in the residential side (of real estate) anymore,” he said.
Lowell agrees flipping was wild just before the housing downturn, making banks now very wary of residential properties that are not owner-occupied. Some flippers who were stuck with multiple properties on their hands after the market tanked “just walked away because they were under water on what they owed,” he noted.