Real estate investors come in many shapes and sizes. One type of investor is popular these days: the flipper. Flippers are investors who buy distressed real estate at a discount and sell it at market values, after having performed repairs to the property. The flipper hopes to cover his initial purchase cost, repair costs, closing costs, and have money left over for profit.
In many cases, this is a good sign of a recovering housing market. Also the flippers are performing a service to the community. How does this work?
The great majority of homes are bought with financial assistance, ie. a mortgage. To protect the lender (and the buyer) the house must meet minimum condition standards. These standards vary from across loan types, but most require homes to have working heat, a solid functioning roof and windows, established utilities, flooring, fixtures, etc. Once a home falls below this standard and the owner is unable or unwilling to raise the condition to meet the standard the value of the home will often plummet.
The word plummet is appropriate since the value will no longer be based on the condition. Essentially, the value will have to factor in the cost of the repairs, plus the cost of the risk for a flipper to risk cash to fix the property. That risk value will translate into the profit for the flipper if all goes well.
Flippers are helpful to the market because they step in to fix a problem others are unable or unwilling to fix. In a way, they are like vultures. A vulture has a bad connotation, but in truth the vulture is nature's garbage man. The vulture cleans up what others do not want to see or deal with.
The flippers hope to profit. They are not the only ones to benefit though. The new home owner gets the house they want and is able to obtain a loan. The transaction participants continue to earn a living, such as title companies, termite inspectors, repair contractors, Realtors, etc. The block the house is located on is improved with one fewer blighted property. The home owners in the neighborhood have improved property values. The community tax base remains stable, etc.
Once the market recovers, there are fewer and fewer distressed homes then flipping is not needed in such great numbers. So if you notice the home that has been vacant for 18 months and has had waste high grass now has a dumpster in the driveway, see as a possible sign of recovery in your local housing market. Also note all of the positive things that will come from the process.
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