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Buyer Beware: Flipped Homes Could Be A Real Nightmare If You’re Not Careful

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Terry Story, Flipped Homes

With Terry Story, 28-year veteran Real Estate Agent with Coldwell Banker in Boca Raton, FL

Inventory Continues To Be Tight

Steve kicks off Real Estate Round-Up by speaking with Terry Story about a slower pace of sales despite a steady rise in home prices.  Terry attributes this to really low inventory of homes for sale.  For instance, in her city of Boca Raton, Florida, she looked for single-family homes for sale for less than $300,000… and found just one!  Similar searches in neighboring cities did not fare much better, underscoring the real shortage of housing inventory, especially in the lower price range that most first-time home buyers can afford.  Terry says inventory is down 17% compared to historical levels, and that’s a really steep drop.

High Land Prices Hurt New Housing Construction

Steve mentions the sharp rise in rental construction in downtown Boca Raton, with a lot of new skyscraper buildings going up, almost entirely as rentals.  So, with the deep shortage of homes for sale, he wonders why builders aren’t taking advantage of this opportunity and building homes for sale.  Terry blames this on the lack of land and high land prices that are causing builders to build up and offer units for rent.

Home Prices Expected To Steadily Rise Across The U.S.

The problem isn’t limited to places like Boca Raton. Terry Story adds that the median home price in the U.S. now stands at $255,000 and was up 10% in the first quarter of 2017.  Looking ahead, home prices are projected to go up by 4% in 2018, then drop a little to 3% annual growth over the 2019-2021 period.  As a result, she believes home prices will continue to rise as inventory stays low and demand outpaces supply for the foreseeable future.

Towns With The Lowest Home Prices

While the most expensive areas are urban hotspots such as San Francisco/Silicon Valley, some of the cheapest towns for residential housing include Youngstown, Ohio, with a median price of about $87,000; Cumberland, Maryland, at $98,000; Decatur, Illinois, at $107,000; Binghamton, New York, at about $109,000; and Elmira, New York, at about $112,000.

Lower Down Payments

Continuing on, Terry talks about the drop in down-payment requirements that have made it easier for people to take on mortgages.  Where, earlier, a 20% down payment was almost required, the past few years has seen about 1.5 million buyers purchase their homes with mortgage down-payments of less than 10%.  And even that appears high relative to the 3% down-payment that Fannie Mae and Freddie Mac now allow.

Steve attributes the 3% down-payment to better data analysis that lets insurance companies screen multiple parameters, in addition to credit scores, to evaluate a buyer’s true purchasing power and mortgage payment worthiness.  Terry also attributes lower down-payment requirements to a 50-point rise in credit scores across the U.S. relative to the 2004-2007 period.

Due Diligence On Flipped Homes

Finally, Steve wants to know if buyers should scrutinize a flipped home the same way they’d analyze a rental car that’s for sale.  His logic is that investors who know they’re going to flip the home in a few years don’t bother to take care of the home beyond outward cosmetic appearances, so buyers should dig even deeper on such sales.

Terry says a good place to start is by looking at whether the seller is an individual or an LLC (Limited Liability Corporation).  That’s because investors often set up an LLC to purchase a foreclosed home. They then renovate the home, sell it, and liquidate the LLC.  So, months later, if a buyer finds a defect in the property or the title, the LLC has no assets and is no longer in existence, so they have no one to go back to.  However, if the LLC has been in existence for a long time, there’s probably less to worry about it.

In summary, home prices are expected to continue to rise over the next few years, albeit at a slower pace; housing inventory continues to be very low as builders focus on rentals; lower down-payment requirements should make mortgages easier to get, especially with stronger credit scores; so demand will outstrip supply for now. And, finally, if you’re interested in buying a flipped home, make sure you’re extra thorough in your due diligence.


Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: It’s time for Real Estate Round-Up. This is the time every single week, we get together with noted real estate agent, Terry Story. Terry is a 28-year veteran with Coldwell Banker located in sunny, well, partly sunny, Boca Raton, Florida. Welcome back to the show, Terry. How are you?

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: Sure. So, home prices keep climbing but sales are not keeping pace because why? There’s no inventory.

Terry Story: There’s no inventory, that nasty little world. And it’s so true, Steve. We keep saying, low levels of inventory. Low levels of inventory. I’m going to tell you something crazy. I just looked in my particular city of Boca Raton, just wanted to see what you could find under $300,000 in a single-family home? One.

Steve Pomeranz: One.

Terry Story: That’s it. One. I’m not kidding. I’m not even exaggerating. And then, I went to some neighboring cities, staying east, and there were like, two others. So, when I say shortage of inventory, I really mean it. And it really is most prevalent in a lower price range. So, the problem we’re having is there’s no inventory for first-time home buyers to purchase. We’re down like 17%. A really high number.

Steve Pomeranz: They’re still building huge amounts of rentals in our local area. I mean, downtown Boca Raton, they’re putting up these kinds of skyscrapery type buildings. Almost all of them are rentals, and I guess that’s the reason why. But I don’t understand why builders aren’t taking advantage of this opportunity and putting up shanties or whatever they can put out there. What’s going on?

Terry Story: Well, it goes to there’s no land, and you know, the cost of land is expensive, so a builder has to look, “Well, if it’s going to cost me X amount of dollars to purchase this property, where is that number, what price point do I need to sell the unit, units, homes, to make a reasonable profit?”

Steve Pomeranz: Gotcha.

Terry Story: So, that’s what we’re seeing.

Steve Pomeranz: What is the median existing-home price for a single-family these days?

Terry Story: Yeah, right now it’s about $255,000 across the country.

Steve Pomeranz: Okay. How much higher is that, let’s say from earlier in the year?

Terry Story: Well, we’re looking at, say, the first quarter. It’s up 10% and it represents a 6% rise from the second quarter of last year. So, it’s a steady climb. I was looking at some other statistics and if you look at appreciation, the forecasts are 4% next year and then it’ll start to taper down a little bit, 3%, 3%, 3%, maybe 2%. So, we have many years ahead of us of appreciation; outside of some extraordinary economic influences, we’re going to continue to see growth. Demand is certainly outpacing supply and there doesn’t seem to be light at the end of the tunnel.

Steve Pomeranz: So, the most expensive areas in the country are the San Francisco/Silicon Valley type of areas. I don’t think that’s any surprise. What are some of the cheapest towns in the country and what are those houses going for?

Terry Story: Sure, if you look at Youngstown, Ohio, that’s about $87,000; Cumberland, Maryland, $98,000; Decatur, Illinois, $107,000; and Elmira, New York about $112,000. Those are the places you want to move to.

Steve Pomeranz: So, Terry, but there’s plenty of money available for people to borrow to buy these houses, and people are actually putting down less money than they ever have.

Terry Story: That’s true, 20% was the norm, and now what we’re seeing, the past years, actually, about 1.5 million borrowers purchasing with less than 10%. So basically, what’s happened, Steve, is Fannie Mae and Freddie Mac have brought back the 3% mortgages, and a lot of people are just taking advantage of that, which is not a bad thing.

Steve Pomeranz: No, you know, I think, I think these mortgage companies, I think the Fannie Maes of the world have better data now to be able to figure out who’s a worthy buyer or not. I don’t think there are any more of these liar loans where people, they put a mirror up to someone’s mouth to see if they were misting the mirror, then that would qualify them. I think all that’s over with, but it makes you a little nervous.

Terry Story: Right, and keep in mind, these are first liens. These are mostly single mortgages. They’re not second mortgages. And you still have to have a strong credit score; actually, they’re up about 50 points more than they were during the 2004-2007 years. So, they’re stronger and healthier.

Steve Pomeranz: There was some interesting information that you gave me about when you’re buying a house that’s been flipped, a flipped house, there are some questions you should ask. I think this is incredibly important because it’s kind of like, when you have a rental car, you know, you don’t really take care of it as good as you take care of your owned car, and I think it may be the same for a flipped house. So, what are some of the questions you should ask?

Terry Story: Well, the absolute first question is, who is the seller? Is it an individual or is it an LLC? You say, why is that so important? Well, some people use what they will call a one-off LLC to purchase a foreclosed home. They’ll renovate it and then sell the property. But the problem is, after they sell it, the LLC is then liquidated, so then months later, when the buyer finds out there was a defect in the property or with the title, then the LLC has no assets and is no longer in existence, so you have no one to go back to.

Steve Pomeranz: Yeah, so think about that. First of all, it means limited liability corporation, so they have limited liability, and if they create an LLC, you know, for the purposes of handling the money of this flipped house, and then they go out of business, or they just close it, you’ve got no recourse. That’s big.

Terry Story: Right, and one way to see if you’re buying a house and the LLC is just formed, I’d be probably a little leery of it, but if it’s an LLC that’s been in existence for a long time, then there’s probably less to worry about it.

Steve Pomeranz: Well, we are out of time, unfortunately. My guest, as always, is Terry Story. Terry is a 28-year veteran with Coldwell Banker located in Boca Raton, Florida. And she can be found at TerryStory.com. Thanks, Terry.

Terry Story: Thanks for having me, Steve.