Softening Market Teaches Flippers a Lesson

Investing in real estate looked so sexy.

Like the ’90s tech boom that turned college kids and housewives into day traders, the housing bubble turned insurance brokers, doctors and auto mechanics into regular real estate flippers, buying and then quickly sell homes for easy profits.

Now those profits are shrinking fast.

Nearly one in five flippers who sold from April to June actually lost money on the deal, the highest level in two and a half years, according to data from HomeSmartReports.com, which today will release a report on flipping activity in 147 metro areas.

The vanishing act of speculators is accelerating the decline in home sales. That’s making life hard for home sellers, but giving buyers a bonanza of choices. It’s also a stark reminder of the cyclical nature of real estate, especially here in the Florida housing market.

Though it’s too early to say how far the market will fall, short-term investors are learning how hard it is to make money — any money — once For Sale signs begin hanging in yards for months. Area sellers cut prices, and builders hand out swimming pools to entice buyers.

Take Jeffrey Epstein, an Florida insurance broker. When Epstein put deposits down on a condo and a town house under construction in Miami in 2004, he never actually planned to live in them — or even buy them outright.

“My strategy was just to put down a deposit and try to flip the contracts when they built the properties, which I was able to do on a couple others. But then I ran into a couple of problems,” the 49-year-old said.

Namely a local real estate market with a 17-month supply of condo inventory for sale and prices 11 percent below last year’s median.

In June and July, Epstein had to come up with the money to close on the condo and the town house. Now, to get them off his hands, he’s offering to pay the buyers’ closing costs along with the homeowner’s association fees for a year.

Thousands of investors across the country are saying the same thing. Investors bought about one out of every four homes sold last year, according to the National Association of Realtors. They focused on the hottest markets, such as California, Florida, Arizona and Nevada — the very markets that are now feeling the sharpest reversals of fortune.

A sharp drop in 2006 sales suggests that speculators have fled the market, believes Edward Leamer, director of the UCLA Anderson Forecast, a national economic prognosticator. Yet the fact that prices remain stubbornly high in most markets shows that many investors are still holding onto their properties with dreams of making a profit.

“It’s different from the stock markets,” Leamer says. “When things get bad, there’s a mad dash for the door, and prices can drop rapidly. In the home market, the investors, rather than rushing for the door, are holding onto homes imagining the market will turn around.”

Some investors are wary of falling housing prices and are already bailing out. The number of homes for sale in the U.S.has hit a record. That bulging inventory both makes it hard for homeowners to sell and creates eye-catching bargains for buyers.

In places like Palm Beach, homes that were selling for $535,000 last year are staying on the market a lot longer, then going for a lot less — as low as $460,000 today.

Falling prices, of course, have also hurt the traditional buyers who bought their homes with plans to live there and build equity the old-fashioned way, investing long-term, paying down their Florida mortgage loan and gradually benefiting from rising property values.

Other flipping highlights from the second quarter:

• Ocala, Fla., and Hagerstown, Md., tied for the most flipped properties, comprising about 6.7 percent of home sales.
• In Truckee, Calif., north of Lake Tahoe, 67 percent of those flipping homes lost money on their sales, the largest percentage of any metro area. Last winter’s snowfall was nearly 40 feet, which may have caused some investors to think twice about the market.
• Flippers in Gainesville, Fla., lost the most money, a median of $63,948. Florida had three of the top four biggest median losers in the country. Gainesville, situated in the north-central part of the state, holds less appeal for investors than do coastal cities.

Since the beginning of 2000, far more flippers have made money than lost money. But even in a frenzied market, amid bidding wars and escalation clauses in contracts, it’s easy for some people to lose money — a lot of money — by flipping real estate.

Part of the art of investing in real estate is being able to ride the cycles. One way of making a big return on your money is to put down as little cash as possible. But then, should you have to hang on to your property through a downturn, you might have to watch your monthly Florida home mortgage drain away your profit.

“Buy the best location and have holding power, and you’ll never lose, even if there’s economic downturn,” says Seth Okun, 50, a podiatrist in Tampa, Fla., who has investment properties in Florida, New York and Nevada.

One of the most reliable ways to make money has been to add value to a property. Put some “sweat-equity” into the property by remodeling or repairing it. That, and make sure you can tough out a bad couple of months or even years. Otherwise, that adjustable Florida mortgage payment you have won’t seem so ideal.