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Tuesday, September 14, 2010

House flippers

Everyone by now knows that a big part of the reason for the current Recession (There is NO recovery occurring, no matter what lies the administration and media tell you) were the tricks and schemes involved in the housing industry.  This included lenders offering very low teaser ARM mortgage rates which would skyrocket up the monthly payments once the real interest rate set in, and lenders not sincerely or diligently  investigating who could afford a mortgage since these lenders were simply going to package up the toxic debt and sell it off to others, thus not fearing any risk of lendee default.  But beyond banks, Wall St. speculators, and homebuyers who didn't understand what they were getting into, there's another guilty party which no one really talks about- house flippers.   These people are vultures who purchase homes and then quickly resell or 'flip' to another at a higher price than which they paid. What's the problem, you ask- isn't that capitalism?   Let's really understand and break this down...

In every transaction involving the home, there is a buyer and a seller and usually both parties are sincere in their goals- the seller wishes to sell because he/she wishes to live elsewhere, and the buyer purchases with the intent of wanting to live in that domicile.   If an asking price of a home is $200k and that is agreed to, then everyone is happy.  Now let's bring the home flipper into the equation-

During the 2000's, you had very low mortgage rates offered as 'teasers' lasting 24-36 months, then would springboard up to double or triple what the the rates were in the initial period, meaning one's monthly mortgage payment would then double or triple.  But the house flipper wasn't concerned, for he/she would buy a home, sometimes with terrible credit themselves and with a minimal down payment of 2-3%, then would quickly resell the home long before the super-low teaser rate expired, make 10% profit on the sale, and use the money to flip another home.

Essentially, what these vultures did was dramatically pump up the prices of homes to unrealistic values that did not equal the true equity of the home, and was sustained because it enticed further speculation and home flipping by others.  Let's go back to my $200k example:

A seller wants $200k for his/her home..  instead of a real home buyer purchasing, it is bought by a house flipper.  The new owner wants his 10% profit so the home is listed 2 months later, and sold to a real home buyer now at $220k.   Now let's say the real home buyer was going to put $40k down and finance the rest at a fixed rate of 4.99% for 30 years:

Home Price      Down Pymt      Int. Rate      Total loan/ payment
$200,000            $40,000         4.99%         $308,858/ $857.94/mo
$220,000            $40,000         4.99%         $347,464/ $965.18/mo

That house flipper made a $20k profit but in addition, artificially bumped up the cost for the real home buyer by $39k (and $108/mo additional) over the life of the mortgage  vs. had the real buyer and seller agreed to terms without the house flipper getting involved-

Let's take this one step further..  When speculation fever gripped the nation, especially in the mid 2000's, house flippers were actually selling to other house flippers, who were also looking at homes as investments as a way to make quick easy money.   So let's continue with the example-  House flipper#1 buys the home from seller at $200k then sells home to another flipper/speculator at $220k.  House flipper #2 wants his/her 10% profit too, so the home is put on the market at $242k and 2 months after listing, a real home buyer purchases it (the Same buyer that would have purchased at original $200k if not for house flippers jacking up the price.).  The real home buyer puts down the same $40k down payment.. same 30yr loan.. same interest rate of 4.99% -

Home Price      Down Pymt      Int. Rate      Total loan/ payment/mo.
$200,000          $40,000         4.99%         $308,858/ $857.94/mo
$220,000          $40,000         4.99%         $347,464/ $965.18/mo
$242,000          $40,000         4.99%         $389,984/ $1,083,15/mo

Now things become clearer.  When two vulture house flippers who Needed to make a 10% profit, got between seller and true buyer in a sincere home ownership transaction,  the price of the home went up $42,000 but the actual total debt accumulated by the true home buyer went up $81,000 including an additional $230 in monthly payments.

Now if the value of the house stayed at that $242k, perhaps the real home buyer wouldn't mind overpaying so much, believing he/she would make it up years later when its re-sold.  But what happened when the housing bubble collapsed in 2007, was in many areas, home prices dropped by minimally 20% (they're still falling in value today) so that $242k home is really worth at most, $193,600 if he/she wanted to resell in today's market.  So in essence, the real home buyer will pay not only $81k more in Total mortgage vs. if he/she bought the home at $200k  but when adding the differential between what the real home buyer payed from house flipper #2 ($242k)  and the current home value ($193,600),  that makes an additional loss of $48,400.

The total combined loss for the real home owner ends up a whopping $139,000!!!

All because of house flippers.

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