Flippers rejoice! The Federal Housing Administration (FHA) will continue supporting your churn-and-burn efforts through 2012.
Prior to February 2010, the FHA effectively suppressed damaging speculator influence on prices in the housing market by prohibiting speculators from reselling single family residences (SFRs) to FHA-backed buyers within 90-days of the speculator’s original acquisition. The FHA banned speculator access to buyers with FHA-insured, purchase-assist loans in order to quell the flipping frenzy which was ravaging the mortally wounded real estate market in 2008 and 2009. [For more information on the effect of speculators on a recovering real estate market, see the August 2010 first tuesday article, Speculations on speculator suppression.]
In early 2010, the FHA lifted the ban on speculators, allowing homebuyers to use FHA-guaranteed loan money to purchase a home regardless of its previous sale date and the price on that sale. Although this speculator reprieve was set to expire in 2011, the FHA continues to allow the quick turnover of flipper-owned properties into 2012. [To read first tuesday’s response to FHA’s initial suspension of the 90-day rule, see the January 2010 first tuesday article, Reduced FHA standards will encourage speculator interference in the market.]
first tuesday take: Speculators pose a systemic danger to a recovering housing market creating artificial demand, which temporarily drives sales volume and prices upward. Accordingly, the FHA is ill-advised to continue allowing flippers free rein in this still-recovering California real estate market — simply because speculators are good for lenders’ real estate owned (REO) liquidity does not mean they are good for California’s real estate market.
The FHA has in the past rightly limited speculators from selling flipped homes in a quick resale to FHA-backed homebuyers. Hungry to make quick cash by exploiting the low prices born out of the market implosion of 2008, by 2009 speculators with aggressive bids created undue competition and elbowed-out ready and willing buyers just as they began returning to the market. [For more information on the recent scarcity of qualified borrowers in the real estate market, see the July 2010 first tuesday article, Low-ball offers slow housing sales.]
The typical speculator, interested in simply buying low and selling high, acts as a parasitic middle-man during real estate market recoveries. During recovery periods as we are now experiencing, speculators serve only to artificially inflate sales volume and prices and, in turn, pose unnecessary barriers to buyer-occupants returning to the single family residence (SFR) market.
The crux of this issue is real estate owned (REO) inventory. REO inventory in the SFR market is presently declining, but remains nearly six times higher than that of a healthy market. The FHA is rightly concerned REOs will continue to flood the market, negatively affecting prices and sales volume well into 2012. However, the answer to liquidating California’s REOs during a recovery cycle is not the speculator, who will take these easy marks and turn them into profits that in no way benefit the real estate market. Californians need jobs, lots of jobs, so Californians can qualify to buy a home. [For a clear picture of California’s REO inventory, see the January 2011 first tuesday Market Chart REO resales in California.]
Since the FHA has given up the ghost of speculator suppression in the interest of artificially spurring sales volume and prices, California’s real estate agents and buyers need not concern themselves with the seller’s acquisition date of the property in question. However, if the home was purchased by the current owner within the past several months (as shown in the ubiquitous property profile), the buyer needs to be advised of this fact as a flipper may be afoot, artificially inflating the price to the buyer’s detriment.
Given the FHA is no longer concerned about the speculator effect on pricing, selling agents must inform their buyers they are dealing with a speculator. Negotiations must be made with the speculator’s status in mind to avoid squandering hard-won purchase-assist funding by padding a speculator’s pockets with any sudden increase in the resale price of the property over a short period of time. [For more information on the agent’s role in transactions involving speculators, see the July 2010 first tuesday article, Agency duties: the flipper’s quandary.]
Re: “FHA extends suspension of ‘anti-flipping’ rule for another year” from the Los Angeles Times
Whether it’s REO sales or flipping of speculator property, the simple rule of supply and demand exists as noted by most of the comments above. What a buyer is willing to buy at and a seller is willing to sell at is the crux of the situation. Flippers need to make sure that their properties will appraise at a value in a depressed radius of the comparable sales. Buyers know exactly what they are getting into these days due to the great savings as compared to the height in the market.
FHA made a good decision to get back into the Flipping business because there are a lot of buyers that want to buy immediately. It has been my team’s experience that in our area prices below $450k are being bought by all-cash buyers. There is no trickery here, it is what spurs economies not hinders or endangers them.
I have been financing with private money rehabber/contractors for the last 12 years. We have certainly had our ups & downs at times. It makes me feel good to go into an neighborhood where we have made fix up loans. The property we financed may have a new roof,paint, wrought iron fences ,landscaping and completely rehabbed inside with new kitchen & bath cabnets, plumbing,electrical, flooring & etc. This seems to encourage the neighbors to spruce up their property and in a short time the whole block has improved & showing pride of ownership. Buyers prefer to purcase fixed up property completed by experts, that is readily financible. I feel the rehabbers are the unsung hero’s. Our motto is; We are making the Hood Good,one property at a time ! Dave
Other than a irrational prejudice towards “flippers” this article offers nothing.
The FHA change has been in effect for a while, and Banks want cash.
Speculators provide a service TODAY for those looking to act TODAY.
Wishing for stability does not make it happen. Blaming those who are actually providing stability, as a willing buyer in a crap market rather than the ones who keep it in turmoil (solvency challenged lenders, whining agents, delinquent owners, Fannie Mae, Freddie Mac, and the gov’t) is counter productive.
Excellent informations! Just the things that we in real estate needs to know !!! Better than any other articles.
Thanks for emailing the ever changing situation, laws, rules and regulation ects.
Lin
I don’t believe your characterization of speculators and their alleged negative effect on the market is accurate.
Buyers are very aware of values esp if represented by a realtor and are not likely to buy an inflated priced home.
Speculators don’t create demand. Buyers do.
Vast majority of buyers are not willing to buy a fixer which all most bank reos are.
Typically in most all flipping situations the flipper added value thru at least some rehab and so deserves to make a profit.
If it weren’t for the rehabber/speculators these bank reos would sit on the market for extended periods of time further depressing the market, not to mention creating extensive blight.
In your article you lump a lot of people together—speculators, flippers, rehabbers. I think in a future article you should go out and talk to some rehabber/flippers to see what reallyl is going on