Friday, May 19, 2006

Flipper Inventory & Flippers in Trouble


Flippers are interesting because presumably, they are purely economic in their motivation. They generally aren’t people ready to retire hoping to get the most for their empty nest, or people pulling up stakes to start a new life in Iowa or Boston. They are people who make a living buying and selling homes, and they need to turn a profit, or they’re out of business. In other words, flippers are to real estate what “smart money” is to the stock market. Because of this, we should be able to learn a lot about what the market is doing by observing flipper behavior.

So, how do you figure out if a home is being sold by a flipper, instead of by a regular person? One way is to look at previous sales. For the purposes of my calculations, I’m using a resale cutoff of two years. In other words, if the house was sold once before within the last two years, the current seller can be defined as an investor or flipper. You can also find a flipper in trouble if she’s selling a house for equal or less than what she paid for it.

For the purposes of this discussion, I’ve taken a slightly more nuanced view. I’m assuming these two things about our flipper:

· She’s a real estate insider, so she doesn’t pay the typical 5%+ in commissions a regular seller does.

· She’s got a lot of cash, so she has almost no carrying costs other than taxes, insurance, and upkeep.

In other words, what she paid for a property is roughly what she needs in order to break even. I’ve added a 2% “trouble bias” to take into account the intangibles like time and listing costs.

Using these criteria, I’ve compiled the following charts for the Sacramento Region. Two caveats: Since these data don’t take into account homes that were purchased new and are now being “resold” for the first time, the Flipper Market Share is almost certainly much higher than the numbers I have. (I’m working on a way to incorporate new home resales into the data, and I’ll report back in the future if I get any results.) Secondly, I have no idea how these data compare historically to flipper market share. Is 20% a high number? I have no idea. If anybody has a way to put this information into context, please email me.

Next post: Flipper Pricing vs. Market Pricing.

Max







17 comments :

tom stone said...

with the addition of this blog sacramento now has the best coverage of any bubble market i have seen.i do not know how valid your assumptions are about the flippers of resale houses,you assume a degree of competence that is much higher than average.as to new home flippers there are a lot,a loan broker of my acquaintance has been giving very popular seminars on "mining your equity" for quite a while...lovely idea,take out all but 5% of theequity in your home,buy 4 or 5 new homes,and invest some of the $ in an annuity,which his partner sells.all the home loans are i/o arms,to maximize cash flow,increase profits.he has been doing 30 to 50 loans a month for more than a year and only puts his "investors" into new homes...it's safe as houses,cause real estate just goes up in california.

Max said...

i do not know how valid your assumptions are about the flippers of resale houses,you assume a degree of competence that is much higher than average.

Me neither. I’m actually trying to answer that question right now by “mining the equity” in my data. J My goal is to try and find some leading indicators for the market here, so we know where we’re headed. Right now, inventory is going up by leaps and bounds (we had a 2% jump in one day yesterday!), but prices won’t budge. There are actually people still raising their prices week to week if their place doesn’t sell!

Max

Anonymous said...

Ask around but I think you are way off in that "flippers" have a lot of cash. Most flippers use a lot of leverage and are way negative each month (but is has not been a big deal for the loan broker or RE agent flippers who have lots of cash comming in). This is going to get ugly with sales slowing at the same time the cash to pay for the negative carry slows...

Max said...

Ask around but I think you are way off in that "flippers" have a lot of cash.

I think you're right, but that was my way of being conservative when looking at the data. A better way might be to look at performance vis-à-vis another investment, or to look at “burn rate” the way ocrenter does…

Max

Anonymous said...

I think speculator is more in line of a term rather than flipper...Speculators are doing just that. Flippers may or may not be speculators but the ones I know...myself included, don't worry about the market's ups or downs. When your buying 20-50cents on the dollar, who really cares.
-Caddis

Max said...

I think speculator is more in line of a term rather than flipper... When your buying 20-50cents on the dollar, who really cares.

So if you lose money, you're a speculator, but if you make money, you're a flipper. :) Call it whatever you want, you're buying a house for the purpose of resale investment, not to live in. Apples to apples.

And if you make 100% profit on your flips, great! You have an inside track or a special method that makes you smarter than most flippers. The median last purchase date for the flips on the market today is Feb 2005, and the median % above purchase price is 18.5. In fact, only 5% of all flippers are asking 100% or more over their purchase price. Good luck to you!

Anonymous said...

I think this conversation is worthless. Just another "Blogger who's pissed" I really don't get what you are trying to accomplish.

-Caddis

Neil said...

First, thanks for the information. I follow this blog (amoung others).

However, I would nitpick on one thing. Down here in Los Angeles, we have a *huge* number of two year flippers? Why? To get that equity tax free. :)

It amazes me the number of homes that come on the market exactly two years after closing and at exactly 150% of the purchase price. Anyone else notice this trend?

To Caddis:
This blog has good numbers. By October, we'll know. Just look at the inventory... its scary all over California. But Sacramento and San Deigo are the two most out of whack with fundamentals. And need we discuss Vegas, Boston, DC, Pheonix, or Florida???

Neil

Anonymous said...

Oh I don't think we need to wait to see the numbers. Historically, 17% affordability has been the point at which demand leaves the state. With the intrest rates lowering the indez has been pushed past that number.
As it stands, I'm follow foreclosures and seening the people who are going to sale...and not getting out. Are the folks that bought last year. Many speculators? I'm working with a few homeowners now who may need to unload if they can't solve their problem. I'm getting more calls and am prepared for the impending crash...Get your cash ready...

The interesting thing is that the last two times the market has busted we were at a higher interest rate. Foreclosure activity went up 981%. Now we have LOWER interest rates....they'll only go UP. So we are approaching a market California has never see before. This will be a blood bath. Get your cash ready, because it'll boom again and it'll be bigger than this one.

~Caddis

Max said...

Just another "Blogger who's pissed" I really don't get what you are trying to accomplish.

I'm not pissed, believe me. I'm just trying to understand the market and where it's headed.

So, is ~Caddis the same as -Caddis?

Anonymous said...

yup. Maybe you should look backward instead of looking forward.
~Caddis

Max said...

Maybe you should look backward instead of looking forward.

I'm not sure what you mean by that. Read the rest of the blog. The only way I can derive these data is to look at past sales.

Sorry if I doubt your profit claims, it's just that your statement ("20-50 cents on the dollar") rings false when applied to the market in general. You're truly an awesome flipper if you can turn this kind of profit today.

Anonymous said...

Well I look for things that others don't. I'm not a "flipper" I'm an investor. I seek out property with subsantial equity, look for problems I can solve and then go for it. How do you sell a house if your in prison? How does an heir liqudate an estate if there's no documentation that they have an interest? How about expensive lawsuits? What about those people who buy a house together and then never speak a word again? What about code violations? There are so many problems people have when selling a house. I've simply learned how to untie the knot. Enough on that.

My point about looking back is that you need to look WAY back, like 1970 and go forward. You'll see a pattern emerge on the ups and downs of the market.
~caddis

Anonymous said...

Ya like this http://physicsweb.org/articles/news/10/5/17/1

Anonymous said...

It's gotten to be one of the most tiresome cliche's I've ever heard; anyone who points out the facts and dangers of the RE industry is a "bitter renter" or Caddis' latest twist "an angry blogger"... I'm going to coin a new cliche; the "Flustered Flipper"! People like Caddis who in spite of their boasting, when one peers beneath the HELOC/ARMIO lifestyle veil, the ugly less than profitable truth is revealed. I am in the industry; I've been a residential superintendent building these silly energy gobbling McMansions on an ever increasing scale for 15 years- I have profited too- but these greedy parasites (flippers) have destroyed the industry. They bring nothing to the table but the ability to borrow money. They don't build anything they don't create anything and they sure as shit do not add any real value to the economy. They are pyramid scheme scam artists nothing more.
Here's a stat for Max --mebbe it's something you could persue in a factual non-anecdotal way--

One of the 2 main players in production and custom home foundations for the Elk Grove/EDH/Lincoln/Folsom just laid off another 100 men- after laying off 150 guys in the winter. In 2005 they poured 400 foundations a month- they poured less than 40 this month.

Here's another more real time stat:The El Dorado County building department just LAID off an inspector- and there's one out on what appears to be permenant disability. So now a historically chronically understaffed department is down 2 men and is not looking for replacements. Could the dramatically (shockingly) low level of new building permits for this year have some statistical value????

Anonymous said...

Morgan Stanley's census says there are only 2,800,000. millionaires in North America (US, Canada & Mexico). Their definition is anyone who has equity/cash ASIDE FROM THEIR HOME totalling $1 million. So, millions (hundreds of thousands?) of homes are priced at around a million and 40% are investments. Further, 70% of all homes in CA last year were IO/ARM financed. And finally, assuming CA has lets say, more than the statistically suggested 0.75% millionaires ... say perhaps 2% ... or about 600,000 millionaires. And lets assume that your average millionaire got there by being either professionally gifted or a savvy business owner.

So, where are the greater fools coming from in the flipping game? What's can possibly support this house of cards further? Are there actually people out there who seriously have trouble understanding business cycles and will plough even more of Other Peoples Money into the game?

And Caddis, people in prison probably own trailer homes if they own a home at all. And they can probably use their monthly phone call to hire a competent realtor at 6% rather than gift their property to you for a 50 - 80% discount. Heirs are documented in Wills or they're by legal definition not heirs. And they certainly cannot sell stuff they don't have title to. Building violations usually run under $10K. Even really, really bad ones. And you can still sell a house with a building order against it if you discount the cost of remedial works against the sale price.

Are you running a No Money Down / Make a Million seminar this weekend? Seriously mate, if you're claiming you're picking stuff up at 20-50% of value I'd have to call you a complete and shameless b....

Well, no need to state the obvious.

Anonymous said...

F@cked Borrower or successful flip:

2039 Impressionist Wy
El Dorado Hills, CA 95762

Built in 2007, Sold in 2007, up for sale in 2007!

The owner is a realtor...I know they put in a pool and fancy backyard landscaping, How can I find out how far underwater this property is? Where can I found out more about the encumberances on this property??

listed at 865k I think it sold for 740k but not sure.

Will this flip work? Lets watch and see! EDH is immune to the the pop they say...