House Flipping Is Out of Control In East New York
Even East New York is getting in on the game.
Flip a house in Brooklyn? Fuggheddaboutit! That’s the advice most realtors will give you. The purchase price, renovation and holding costs are not for the faint of wallet—and with the market cooling, returns are no longer guaranteed…unless you live in East New York.
According to Leo Goldberg, senior policy associate with The Center for NYC Neighborhood, East New York had the most flips in the city in 2015 with 94. The average purchase price was $215,000 and the properties were resold within 12 months for more than triple that number.
There have been some crazy deals made. On Blake Avenue in East New York, a property was purchased for $145,183 in February 2014 and sold a year later for $534,000.
The general rule of thumb for house flippers to bear in mind is called the Maximum Allowable Offer (MAO) formula—which is 70 percent of the After Repair Value (ARV) minus the cost of repairs. (Yeah, you can go back and read that again. I’ll wait.) This formula allows for a 20 percent profit after all expenses (around 10 percent). And that’s nothing to sneeze at. But, in most parts of New York where demand is high the numbers don’t work.
The key for flipping is to get under-market properties—like foreclosures, or home owners in trouble with their mortgages. East New York is the place to find the low hanging fruit nowadays. Rezoning has fanned the flames of financial passion lately too, with 190 blocks now allowed to have taller residential buildings, stacking 6500 new apartments.
It’s a similar pattern that’s being repeated in many lower income neighborhoods around NYC – the South Bronx, Newark, NJ and Bushwick. Property manager and rental broker Tariq Hakeem with AIM Realty Services LLC works in all area of Brooklyn. He sees the flipping frenzy in East New York following a well-worn formula.
“Gentrification starts with Section 8 (a government assisted housing program),” Hakeem says. “Section 8 would pay over $2000 for a 3 bedroom. A working person has a ceiling of around $1800/month. An investor can take those type of Section 8 rents to the bank and show that the rental income can support a mortgage on much higher numbers than anyone thought possible.”
Clearly, the buyers paying $750,000 for a townhouse in East New York, that a few years ago they could have picked up for $200,000 are not locals.
“They are a lot of investors who maybe can’t afford Crown Heights but the low interest rates have made the numbers work in East York. House flipping only works in areas of high foreclosure and neglected properties,” Hakeem says, “And for twenty years East New York was undesirable. In the bigger picture, it’s serviced by The C train and the LIRR. It’s close to Kennedy Airport and Belt Parkway, so all those play a factor in why it’s taking off.”
“Now we’re seeing the gentrification wave come from Bushwick and Bed-Stuy and other communities coupled with the rezoning has really created a tremendous amount of pressure on homeowners,” Michelle Neugebauer, executive director of Cypress Hills Local Development Corporation, told NY1.
Community groups plan to push for legislation against house flipping. “So it’s not legal anymore to buy a home so low and flip it for 100, 200 percent profit in the same year,” Neugebauer said.
But being this being New York, creative developers may find a way to flip that idea as well.
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