Flipping used to be a dirty word in residential real estate, but not anymore. A recent policy change by the U.S. Department of Housing and Urban Development is encouraging flipping to foster more sales of foreclosure homes that were badly damaged by the previous owners or others.
Area realtors are praising the move, saying it should help the still-struggling existing home market.
When the real estate market was booming and home values escalated, "flippers" could purchase homes, then turn around and sell them at an enormous profit without actually doing anything to increase the home's value. To discourage the practice, the department amended its regulations to prohibit flipping on properties to be financed with Federal Housing Administration-insured mortgages.
According to the policy, a mortgage would not be eligible for FHA insurance if the purchase contract was executed within 90 days of the prior acquisition by the seller. The 90-day prohibition has been waived for one year starting Feb. 1.
"Since a large part of the mortgage activity taking place today is FHA, there were concerns that efforts to stabilize neighborhoods hard hit by foreclosure and abandonment were further challenged by this prohibition," said Brian Sullivan, department spokesman. "This is about people coming in trying to stabilize neighborhoods by purchasing homes and actually rehabilitating them. And then selling them to families that are low, moderate and middle income."
In January, foreclosure activity increased nearly 4 percent from the previous month in the Valley, and one in every 102 housing units received a foreclosure filing during the month - the second-highest foreclosure rate among U.S. metropolitan areas with a population of at least 200,000, according to the latest report from Realtytrac, an online tracker of foreclosure properties.
The Valley was the only metro area among the top 10 to post a month-over-month increase in foreclosure activity.
"There's a lot of foreclosure homes out there that are in really bad shape," said Jay Thompson, an East Valley real estate agent. "Allowing an investor to come in, buy the property, fix it up and then turn right around and sell it is a good thing because there's a lot of people who want to buy a house, but they don't have the knowledge or the money to fix it up."
JUST ONE STEP
The anti-flipping waiver isn't the solution to the foreclosure crisis, but it's a step in the right direction, said Jay Butler, associate professor of real estate in the W.P. Carey School of Business at Arizona State University.
The waiver includes numerous safeguards to prevent inflated pricing, such as if the price of the home is 20 percent over the previous sale, the seller has to justify that increase, he said.
Still, market variables might prevent the waiver from having much of an effect locally, Butler said.
"The problem is, the potential buyer is not a big number," he said. "The first-time, entry-level buyers ... we're sort of running out of them. There's not a lot around. And you've got to look at the neighborhood. You may have a nice home that you fixed up, but if the neighborhood is still largely foreclosures, it's (the sale) not going to happen."
FHA financing, which took a back seat to subprime and nontraditional financing during the boom, is more in demand now, Butler said.
"The waiver is really going to benefit certain neighborhoods," he said. "What they want is to get an owner-occupant into this home ... and begin to improve the neighborhood, and values stabilize and begin to move up."
The waiver is aimed at helping to sell properties that might otherwise remain vacant for up to 90 days while making sure that buyers aren't tricked into overpaying, Sullivan said.
"If you buy a house for $120,000 and it's actually worth $100,000, you're underwater to the tune of $20,000," he said. "You've seen how declining home values all over Arizona have put property owners in that position. But it's the market conditions that have done that, not unscrupulous property flippers who collude with appraisers to artificially inflate the value of the home."
Shawn Stagg, a real estate agent with US Preferred Realty in Mesa, said he's seeing a lot of "good flippers" buying bank-owned homes and installing new carpet, paint and appliances.
"As a buyer, I'm having to give 3.5 percent down to FHA, which doesn't leave me a lot of money to repair the cupboard that's broken, or to put in the refrigerator or dryer, those things that cost," he said.
Chandler-based real estate agent Zack Alawi said he's seen an uptick in interest from investors in Las Vegas and California wanting to flip homes in the East Valley. Nearly all offers made on his listed properties are cash from investors looking to flip.
"They're not only flipping bank-owned homes and Fannie Mae-owned homes, but you can also now flip short-sales that are backed by Fannie Mae loans, which you couldn't do before either," he said. "That moves up the whole short-sale flipping game, where an investor can come in and buy a short-sale, make the original offer around 60 percent to 70 percent of the market value ... and then they turn around and resell it to the final end-user at 85 percent to 90 percent of market value. And they pocket that 15 percent or 20 percent margin."
The FHA guarantees loans when homes are purchased, and then it sells the loans to Fannie Mae.
David Donaldson, a real estate agent with Keller Williams Realty East Valley in Gilbert, said flippers have every right to expect a profit if they've added value to the home.
"If you buy a house for $50,000, it may be worth $100,000 in a couple of weeks or a couple of months because of the improved value," he said. "And the important thing is if it's above 20 percent ... they have to show verification of why there's that much improved value from when it's acquired by the investor."