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Don’t Call It A Comeback But House Flipping Is Hitting An Pre-Crash High

Fueled by the perfect storm of TV shows, rising home prices and low interest rates, house flipping is hitting a pre-crash high. Should we be worried?

By Jeff Vasishta December 29, 2016
Credit: Drew Coffman

Music is playing and house flippers are walking around chairs, making lots of money. None of them are quite sure when the sounds will stop. Sound familiar? According to the Wall St. Journal, house flipping is back, like it never went away. It’s been taken out of the gutter, dressed up and given its own headlining show. The Journal states, “The number of investors who flipped a house in the first nine months of 2016 reached the highest level since 2007. About a third of the deals in the third quarter were financed with debt, a percentage not seen in eight years.”

Related: Mark Zuckerberg’s Plans To Flip His Palo Alto Residence Are Met With Board Rejections

Unlike 2008, however, much of the flipping frenzy appears to be happening in Southern California. Fueled by TV shows such as HGTV’s “Flip Or Flop”, investors are making an average of $61,000 per flip. The article, though, doesn’t state how much money is being spent for properties and how much their renovation costs are. In a market such like Southern California where properties can cost hundreds of thousands of dollars, a $61,000 profit may not be such a good margin. In fact, should the music stop and money was borrowed to do the deal, the borrower could be in serious debt.

After the financial crash in 2008 the abundance of companies willing to fund flips disappeared and borrowers turned to private funding sources, namely family and friends, to find capital. It was a safer scenario all round. A borrower’s credit wasn’t on the line, the lender generally got paid once the flip closed, not after a certain time period (usually 6-12 months in most lender financed deals) and the borrower often had no skin in the game — i.e. their own funds — so their stress levels all around were lower.

Related: Five Unconventional Ways To Flip A House When You Are Broke

Now, though, like a scene from “Ground Hog Day”, Wall St. wants in on the game and is propping up finance companies like the San Francisco-based Lending Home Corp,  Asset Avenue Inc., and Anchor Loans from Calabasas California which has raised over $220 million mostly major banks. J.P. Morgan recently lent 5 Arch $60 million and Wells Fargo and Goldman Sachs have also, according the WSJ, made loans.

Now, though, like a scene from “Ground Hog Day”, Wall St. wants in on the game and is propping up finance companies like the San Francisco-based Lending Home Corp,  Asset Avenue Inc., and Anchor Loans from Calabasas California which has raised over $220 million mostly major banks. J.P. Morgan recently lent 5 Arch $60 million and Wells Fargo and Goldman Sachs have also, according the WSJ, made loans.

While property prices rise and available housing remains low, the music is continuing to play but if interest rates continue to rise as they have done, then end home buyers will not be able to qualify for mortgages all bets are off.

Like 2008, however, where markets such as Florida and Vegas were at the nexus of the US house flipping crash, investors looking to get into the game now may be wise to look at markets where property values have continued to climb at a steady rate, rather than dramatically, where purchase prices and unemployment is low. Of course, many investors have different opinions as to where this will be. Many, along with several big banks, evidently still feel that place is in Southern California. Getting that decision right could be the difference between history repeating itself.

Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

ABOUT THE AUTHOR Jeff Vasishta

Jeff is a writer, husband and father but not necessarily in that order. As a music journalist he counts Prince, Beyonce and Quincy Jones amongst those he’s interviewed. He's also owned and flipped homes in Brooklyn, NJ, CT and PA.

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