Home Flippers, Vultures of the Housing World
Most of us have seen the dirty winged creature lurking from a tall light post or circling high above its prey. Vultures have always carried with it the ominous stigma of death and disease, a vile creature living in the shadows. Even Charles Darwin called them ‘disgusting’. In spite of the reputation the vulture has earned, it is one of nature's misunderstood, unsung heroes. While the panda bears and baby giraffes get applause and attention, vultures are doing the dirty work.
Similar to the animal kingdom, dirty work is often taken for granted in the world of real estate. Contrary to the soft handed actors on HGTV, flipping a home is not easy or clean. Renovating a mold covered, rodent infested, wet, stinking home is tough work and not for the faint of heart. Like the vulture, Home Flippers are opportunistic creatures scavenging on neglected, discarded, and dead properties. Home flippers and vultures are used to picking a home clean to the bones while onlookers sneer and point up their nose at the work in progress. Millions of homes are left abandoned and neglected each year, destined for a pile of disease filled rubble and without those willing to do the dirty work this would be their final destiny. But regardless of their reputation vultures and Home Flippers go about their business, cleaning up what others have thrown away.
Are flippers driving up home prices?
There is no denying the basic premise of flipping a home; taking a low valued home and fixing it up so that it costs more for a prospective home buyer. With that being said, critics who want to blame the past several year’s rapid home prices on flippers are ill-informed. In the short term, and at the micro level it is easy to see that any contractor during most of the Covid timeframe was making a killing from flipping properties. This success was the result of (not the cause) all time high home prices.
At the end of the day real estate is a product of supply and demand and all other factors fall under this umbrella. Rising home prices lately have been a product of the lowest interest rates of all time, (Increase in demand), a mobilized county moving away from cities during covid (Increased demand), inflation, and home building lagging seriously behind with Covid shutdowns and supply chain issues (Lowered Supply).
Flippers have been around long before HGTV and will remain long after our next market correction. Vultures are always there, cleaning up messes, and rejuvenating the land.
Target Properties
Typically, the properties home flippers work on are absolute wrecks. Typically, we are walking into homes with human sized holes in the walls, boarded up windows, bathtubs lying in the kitchen having fallen through the ceiling, animal feces, clogged pipes, piles and piles of trash, and the smells! Left untouched these properties are destined for abandoned drug hangouts and general piles of rubble. At the time of this being written there are approximately 1 million abandoned homes in the US and many more families looking for homes. These families cannot move into a home with a bathtub laying in the kitchen. Banks will not loan on a property with a busted roof, let alone a hole in the wall, and unless you have the CASH to purchase the property, pay CASH for all the repairs, and also have 4-6 months to wait (somewhere else) while this is being done, then these houses are not for you. So the property sits.
Maybe it was foreclosed on and a bank owns it, having no interest in being a landlord they shove the file deep in the filing cabinet and there it remains. Or maybe there was a death in the family and the remaining heirs have no idea where to get started, so it sits. Maybe it was a problem property for a landlord and after one final eviction, he threw his hands up, and exclaimed “I’m sick of this $%&$”. And put it out of his mind. There are many reasons homes are left abandoned or neglected.
A vacant house slowly deteriorating into the ground doesn’t help anybody. Well, almost anybody.. Because like the vulture, we aren’t looking for beauty, we are looking for a dead, rotting carcass.
The NET Effect of an Abandoned Home
When a property is left unattended the grass grows higher and higher as the trees and weeds latch on to the siding. A kid throws a rock through the window and the rain puddles in the living room. A chipmunk finds a new home in an old dresser and lays down for a nap in a sock drawer. Mold takes grab of every nook and cranny in a once vibrant kitchen. Very quickly, the house becomes uninhabitable. Local teenagers make it their ‘spot’ to cause mischief and lay low from peering eyes. Out-of-towners start dumping trash in the backyard and after realizing nobody is watching, and finally they just drop it off right in the front yard after it becomes clear that nobody cares. Property values drop and nobody wants to buy any homes for sale within eyesight of the heap of trash that was once a home.
As the neighborhood wrinkles their collective brow at the pile of trash, the vulture begins to circle. An old truck approaches the home and parks in front. A man wearing pants a couple sizes too big, held up by a large belt with a tape measure stuck on the side steps out. His food stains are hidden by the paint streaks all across his shirt, battle wounds from a recent job. He’s chewing on a burger because he’s been on a job all morning but had a few minutes to pass by a property his cousins said he should check out. He walks up towards the house and notices it’s about a 1,500 sq/ft house, probably 3 bedroom and 2 bath, like all the others in the area. He peers in the windows with his flashlight, looking and listening intently as he takes in his surroundings. Walking around the property he starts adding up all the pieces. New roof $8,000, siding & exterior paint $4,500, couple of windows $750, flooring $6,500, on and on recording it all on a small notepad.
Acquiring the Property
Towards the end of the day he sits down on the computer and looks up the property ownership information on the county website. It’s public information, anyone can see the mailing address of any piece of property in the country. He jots down the address and writes a handwritten letter to the owner explaining that he would like to purchase the property for $32,000. Time goes by but sure enough, late the following week he receives a call from the homeowner. “I paid $90,000 for that house ten years ago! The nerve you have to make such a low-ball offer.” The home flipper talks him through all the issues he saw with the house and reminds him it has become the local dump where trash is scattered all over the yard.
Over the next 3 weeks the Home Flipper and the homeowner talk back and forth, negotiating. Between the crumbling ceilings and moldy floors the homeowner starts to get the picture and realizes it isn’t the same house he once owned. Only a vulture would touch a property like this, it was no place for a family. After 104 text messages, 8 phone calls, and 1 failed Facetime attempt an agreement was reached - “$35,000 and the house is yours.”
Acquiring the property is where the value is created in the deal. The property has to be purchased for the right price. At a minimum this number cannot be greater than 70% of the ARV (After Repair Value) - repairs. So if this house could be worth $120,000 then the home flipper cannot pay more than $120,000*.7 ($84,000) - $40,000=$44,000. Although this is a very critical moment in the process it is not necessarily the most difficult.
The Rehab
Rehabbing is not easy work. The crew starts removing moldy trim boards, revealing black mold all over. In the bedrooms there is rodent feces on every inch of the floor, mixed along with acorn shells, and even some large sticks and leaves. Water damage is everywhere. Up in the attic new insulation has to be put down so someone has to crawl up in the dark, hot, non-ventilated space being careful to walk on the support beams or risk falling through the ceiling. The soft fiberglass leaves its mark on every exposed piece of skin, causing itching and irritation well into the next day. The toilets are backed up and there’s a smell coming from the drain pipes that would gag a maggot. A 30 yard dumpster is filled up within one day of being in the house.
Just like the deer lying lifeless next to the highway, this house is being picked clean from the vultures. Without the vultures the pile of rubble would lie there diseased, infecting all around it. But the vulture offers rejuvenation, giving the ecosystem further life. The old knob and tube wiring from the 50’s is replaced with brand new insulated wiring, severely reducing the chances of electrical fire. Lead, which was found in paint and pipes from that era are removed and chemical free replacements are put in its place. The drains are scraped free and water flows through them like before. The walls are covered with a new color and scent. Dated tiles and wallpaper are removed and updated fixtures are installed throughout the house.
Weeks turn into months and the house begins to take on a new look. Neighbors start to walk by the house again instead of turning around in disgust and a local boy is paid to mow the front lawn. There is a buzz on the streets and neighbors cheer on the work.
Selling Out
When all is said and done the vultures contact a Realtor and the house is listed for sale. Taking into account the price that was paid for the property, all the time and materials that have gone into it, the carrying costs, the permits, the ideas that did not go to plan, the stress, the time, and the current market conditions - the house is put on the market at $120,000. The goal is to get this thing sold as quickly as possible, and until then the Home Flipper has a lot of money in the house he would like to recoup.
Within a short period of time there are 5, 6, now 10 offers on the property. What a miracle! Offers come in way over asking price and are backed by cash. Finally settling on an applicant an offer is accepted at $137,000 and the Home Flipper is rewarded for all of his work. This was all too common from 2020-2022 as Home Flippers reaped the rewards of a moving frenzy, low supply, and very high demand for housing.
Don’t hate the Player, Hate the Game
The market is the market. There is no backroom smoke filled room with a select few people pulling levers to determine what a home should be worth or should sell for. A house is priced using a CMA (Comparative Market Analysis) which considers homes sold in the previous months. The market will determine the price because at the end of the day a home is only worth what someone will pay for it, determined by supply and demand.
The role of the Home Flipper in the real estate world is as natural as the vulture.
Not only is there a new property ready for a family to call their home, but along this process many different people were positively affected. Several people were paid to fix the house, the electricians, plumbers, HVAC workers, flooring installers, suppliers, the utility companies received income, a Realtor was paid, lenders received compensation for the loan, a boy mowed the lawn, and everyone ate lunch somewhere! Many hands were fed during this project and many will benefit from this salvaged property.
Defending a Vulture
Yes, Home Flippers make a profit, just like Priests and Public Defenders. Like the vultures who remove diseased and rancid carcasses from the side of the road, home flippers are removing the dilapidated broken down properties from our neighborhoods and turning them into beautiful new homes for people to live. If you don’t think the flipper should make a profit for his work then why should the grocer make money for selling apples, or the artist for their art. There is a tremendous risk in flipping a property. New problems are always found, time is money, and market conditions can always change. In addition to providing a thankless job for the housing ecosystem the home flipper faces many financial, mental, and physical burdens along the way.
Vultures might not look pretty and you might not even like knowing what they do, but they are necessary to keep our ecosystem healthy. So the next time you think to yourself ‘Those Home Flippers are just VULTURES!’
Yes, we are, and you’re welcome.