patrick.net

We already have that tax. It's called CAPITAL GAINS.

HousingWatcher says

We already have that tax. It’s called CAPITAL GAINS.

Too easy to bake into the sale price. I was thinking of something that would make it harder to flip properties.

terriDeaner says

HousingWatcher says

We already have that tax. It’s called CAPITAL GAINS.

Too easy to bake into the sale price. I was thinking of something that would make it harder to flip properties.

Why? What is wrong with someone who buys a run-down property, invests time and energy repairing and updating it so that it appeals to the move-in ready loving public?

I don't get the hatred for flippers...

tatupu70 says

terriDeaner says

HousingWatcher says

We already have that tax. It’s called CAPITAL GAINS.

Too easy to bake into the sale price. I was thinking of something that would make it harder to flip properties.

Why? What is wrong with someone who buys a run-down property, invests time and energy repairing and updating it so that it appeals to the move-in ready loving public?
I don’t get the hatred for flippers…

I understand the hatred. Flippers have an advantage on the REO market. They pay with cash, beat higher offers, and put it right back on the market at a higher price with little or no improvements, and score a profit. This compounded over several transactions builds up their cash pile while ultimately costing homebuyers more. It's economic inefficiency.

Again, that's just applied to this current situation, not to fix-up flips.

klarek says

People who aren’t aware of what they’re doing when they are 30 years old, have a college degree, and spend a half million dollars in a purchase which they were adequately warned would blow up in their faces are not defensible. They’re idiots.

They're also the majority.

klarek, since you don't like people who sell things for a profit, I assume that you don't own any stocks, bonds, or mutual funds and if you do, you will sell them for exactly what you paid, right? Because selling them for a profit would be an economic inefficiency. I also assume you don't own any gold or silver and if you do, you will sell them for exactly what you paid because profiting would just cost future buyers more and result in an economic inefficiency.

swebb says

I guess for me a big consideration is the person selling at the top didn’t have any control over the bubble — they just reacted to it. It’s hard for me to blame them. What if they have to move for a job in 2006 — do they list their house at what they think the market will bear, or do they list 25% below market because that’s what they think the true value is.

Exactly right. That's why I made a distinction between those people and the opportunists and flippers. It's clever and good for feathering your own nest, but it's not scrupulous.

And I do think that "housing as an investment strategy" is a big part of the problem. If people got a small, modest return on investment, the problems with "stupid buyers" would melt away---this whole depression would have been avoided really.

Some of the assumptions here have been based on a healthy, non-distorted market. Under normal circumstances, a buyer and seller agree to a price and a transaction is done. But in this case, buyers would have had to have known the status of the securities, the Government policies related to housing, the acquiescence of Fannie and Freddie, the over-leveraging by AIG et al, the failure of the ratings agencies, all while ignoring the historically safe purchase of American housing.

And anyone who knew all of that during the bubble or prior, would appear to me to have an asymmetrical advantage.

If a seller had such an advantage, I'd say they do not deserve their winnings. I'd say there is a difference between someone moving due to fortunate or unfortunate circumstances (both could be winners in this case) and a glorified pump and dump.

and again, I'd say that I personally don't see a difference between someone who sees appreciation of 200% in two years taking their cash via HE or selling it outright. In both cases, people walked away with unearned and undeserved income.

I invest in the market, but yeah...something about those "earnings" feel a bit like "winnings". Buying into the market at 7k didn't require me to be a genius any more than selling during the bubble did for those who profited.

@CL, this thread has gone on too long and lost direction. It's basically going around in circles now, with the same points being argued over and over. The people who disagree with your concept of clawback have made their arguement: no, it is not deserved, as everyone willingly participated in the same game. (In most cases) no illegal activity was partaken by the sellers therefore they have no obligations to their buyers.

But I haven't seen any convincing arguements as to why a person who bought a house and then sold it for more than he paid isn't entltled to his profits. So now I turn the question back to you.

What morale obligation is there to return profits? How are those profits unearned?

FunTime says

They’re also the majority.

Again, no they are not. I gave some accurate numbers which validate that there are four times the number of renters than there are people who are underwater.

You're entitled to your opinion and imagination, but they are baseless.

HousingWatcher says

klarek, since you don’t like people who sell things for a profit

I never said this. I just said there's a pretty good argument for taxing the shit out of somebody that takes advantage of their ability to buy a house for a much lower price than other bidders because of his cash position, dumps the property right back on the market at a much higher price, and builds his cash pile thus perpetuating this cycle. There's no economic efficiency being added here, just a sort of arbitrage.

I'm all for taking risks and making profits, but I see way too many houses in my area that are purchased at an extremely low price relative to their comps, then show up on the market again a mere few weeks after closing at substantially higher prices.

klarek says

somebody that takes advantage of their ability to buy a house for a much lower price than other bidders because of his cash position, dumps the property right back on the market at a much higher price, and builds his cash pile thus perpetuating this cycle. There’s no economic efficiency being added here, just a sort of arbitrage.

I guess you could argue that the value being added is the reduction of risk, and timing. As I understand it most REO properties are sold "as is" and with minimal inspection / remedies available. The risk of a major problem is relatively low in the aggregate, but if an individual case goes bad it could spell disaster for a retail buyer, whereas the investor can shoulder the burden of a bad foundation every now and then. Also, as I understand it, the time frame for short sales and other distressed purchases is not as structured as a typical retail purchase...The investor, not needing it as a place to live, has more flexibility here than a retail buyer. The cost and uncertainty associated with just the 2-week "spit shine" is enough of a burden that many buyers will avoid it...

Plenty of cash buyers get stuck holding the bag, as well. I have seen several purchase / re-listings that appear to have not gone well for the investor (Denver, Co).

Would flipping work if the housing market was at a stable supply-demand equilibrium and not propped up by low-interest loans, GSE's, the MID, etc., etc.?

terriDeaner says

Would flipping work if the housing market was at a stable supply-demand equilibrium and not propped up by low-interest loans, GSE’s, the MID, etc., etc.?

I think klareks argument is the opposite--that cash buyers have the advantage now. That seems to imply that the lack of financing, or at least the lack of belief in financing, is causing cash buyers to get properties at below market value.

tatupu70 says

I think klareks argument is the opposite–that cash buyers have the advantage now.

(edit) I suspect financing is always difficult to get for truly run down places, as they make poor collateral, so the all-cash buyer should always have an advantage there. Consider also that currently almost all of the flipper properties would be bank-owned or short sales so it is not surprising that the seller (essentially the bank) would rather do less paperwork and take 'cash on the barrel'. In a 'flat', stable market, there would be few of these properties available for purchase, so the 'flipper' would be limited in their ability to profit from the system. However, in a gamed system, like the one we currently have, the flippers can potentially manipulate the market prices, at least temporarily, by reducing low-priced housing supply, putting little actual value into the house, and selling houses at a profit to take advantage of currently inflated market prices. This activity is bad because it stabilizes or further inflates already overpriced housing, AND reduces availability of affordable low-end housing. Not every foreclosure or short sale is a shithole waiting to be rehabbed or demolished.

To make this work buy-and-flip system work well, however, you NEED potential homeowner access to cheap credit. Some sucker needs to be stuck with the reno-flip bill. Otherwise the flipper gets stuck chasing the market back down and makes no money.

One caveat... a flipper could sell to a buy-and-hold investor for cash, although I suspect few deals are done this way as the latter would probably just buy a foreclosure for cash and fix it up as a rental.

As an aside, I would LOVE to see how many cash transactions are ACTUALLY money pulled from a personal line of credit...

tatupu70 says

terriDeaner says

Would flipping work if the housing market was at a stable supply-demand equilibrium and not propped up by low-interest loans, GSE’s, the MID, etc., etc.?

I think klareks argument is the opposite–that cash buyers have the advantage now. That seems to imply that the lack of financing, or at least the lack of belief in financing, is causing cash buyers to get properties at below market value.

I refrained from using the term market value since it's in essence what is being paid for the house, but I've heard of countless examples where banks shunned higher offers from, say, first time buyers with little down in favor of a ridiculously low price from an all-cash buyer. On one hand, I understand that the bank is just being pragmatic and realistic. The fully-leveraged first-timers are waaaay more likely to fall through on the deal, for a number of reasons. On the other hand, I think that these flippers can take advantage of this, and sell that same house right back to the people who were going to offer more for it, and score a quick profit out of nothing. Essentially, this is a system which is introducing an unneeded middle-man. A person that's able to pony up the front money, and take it right back (plus some) from the original buyers. What sort of efficiency is there in a system like that? More transactions, more realtor commissions, more tax and title fees?

It's just a general argument and observation, and per Roberto's above remarks, it's not really an issue if the person holds onto it. I'm just seeing a lot of houses going through flippers and back onto the market with nearly no time elapsed between closing and the new listing.

klarek says

Essentially, this is a system which is introducing an unneeded middle-man. A person that’s able to pony up the front money, and take it right back (plus some) from the original buyers. What sort of efficiency is there in a system like that? More transactions, more realtor commissions, more tax and title fees?

EXACTLY.

terriDeaner says

Consider also that currently almost all of the flipper properties would be bank-owned or short sales so it is not surprising that the seller (essentially the bank) would rather do less paperwork and take ‘cash on the barrel’

I don't understand your point here. To the seller, there is no more paperwork for a cash buyer or financed buyer. There is, however, risk that the deal will fall through--appraisal doesn't make, loan is denied, etc. That's why they take the cash.

To me the answer is obvious--there is a non-zero risk that the deal will fall through. In a declining market, a deal that falls through has a definite cost. So, the bank is transferring that risk to the "flipper" (I think that is a misuse of the term--investor is probably better). The investor is taking the risk and is therefore entitled to the potential reward (or loss).

terriDeaner says

klarek says

Essentially, this is a system which is introducing an unneeded middle-man. A person that’s able to pony up the front money, and take it right back (plus some) from the original buyers. What sort of efficiency is there in a system like that? More transactions, more realtor commissions, more tax and title fees?

EXACTLY.

+1. When credit system in deep trouble cash can be used to generate more cash.

tatupu70 says

I don’t understand your point here. To the seller, there is no more paperwork for a cash buyer or financed buyer. There is, however, risk that the deal will fall through–appraisal doesn’t make, loan is denied, etc. That’s why they take the cash.

I'm using the term paperwork a bit loosely here. Consider that an all cash buyer merely needs to show up with a check and/or some easily acquired proof-of-funds, and the seller just needs to cash the check (once it is written) order to close escrow. Contrast this process with the financed buyer's process. Even if the FB shows up with a pre-approval, the mortgage still needs to *actually* be written, which is not instantaneous and is far more involved than cutting a check. Sure, in some cases the financed deal may be straightforward, and nearly as easy as a all-cash transaction.

tatupu70 says

To me the answer is obvious–there is a non-zero risk that the deal will fall through. In a declining market, a deal that falls through has a definite cost.

This is part of what I meant by 'paperwork'. As you indicate, most banks will likely choose the path of least resistance (all-cash), with the highest probability of clearing quickly. Part of this is because there is ALWAYS a chance that a financing-dependent purchase may fall through due to the financing. And I would suggest that this chance of dumping is probably MUCH higher than the chances of an all-cash deal falling through.

terriDeaner says

And I would suggest that this chance of dumping is probably MUCH higher than the chances of an all-cash deal falling through.

Agreed. That's why I don't think it's a valueless transaction. The investor is assuming the risk for the bank.

tatupu70 says

So, the bank is transferring that risk to the “flipper” (I think that is a misuse of the term–investor is probably better). The investor is taking the risk and is therefore entitled to the potential reward (or loss).

Flippers are more like middlemen than investors. Sure, they are taking on risk, but in the end that risk is not the same in our current gamed market as it would be in a stable, supply-demand equilibrium 'freeish'-market. The government guarantees that with every low-interest loan it backs, and every other trick currently in place to keep inflated prices propped up.

If you don't believe me (and I suspect you won't), consider how much flipping activity has declined since the days of foolishly easy credit (sub-prime, alt-a, pick-a-pay, etc). Flipper risk during this period, up until the end, was ACTUALLY pretty low since increasingly crooked financial policy virtually guaranteed price inflation for an extended period of time. They were operating more like real estate brokers/agents who had to slap a coat of paint and redecorate a property between sales. The ones that didn't make money during the boom, or got caught with their pants down at the end of the fuckfest (and I do mean fuckfest) were probably shortsighted, stupid, or greedy or some combination of the three.

Sure, credit is tighter now and flipper activity is lower, but plenty of idiots can still get low-downpayment, high principle FHA loans, for example. Think about how demand for highly-priced flipped homes would deteriorate if these idiots couldn't get financing. And think about how this translates into ACTUAL investment risk on the part of the flipper.

tatupu70 says

Agreed. That’s why I don’t think it’s a valueless transaction. The investor is assuming the risk for the bank.

I have some more thoughts on this but I'll have to come back to it later...

bubblesitter says

terriDeaner says

klarek says

Essentially, this is a system which is introducing an unneeded middle-man. A person that’s able to pony up the front money, and take it right back (plus some) from the original buyers. What sort of efficiency is there in a system like that? More transactions, more realtor commissions, more tax and title fees?

EXACTLY.

+1. When credit system in deep trouble cash can be used to generate more cash.

That's my issue with it. Great, take advantage of the system, but at the cost to whom? Other buyers. The fact is that these investor flippers can buy with lower bids says how very wrong the system is.

tatupu70 says

The investor is assuming the risk for the bank.

If they bought it at $80k under "market value", excluding defects, what are the chances they're inheriting any real risks?

klarek says

That’s my issue with it. Great, take advantage of the system, but at the cost to whom? Other buyers. The fact is that these investor flippers can buy with lower bids says how very wrong the system is.
tatupu70 says
The investor is assuming the risk for the bank.
If they bought it at $80k under “market value”, excluding defects, what are the chances they’re inheriting any real risks?

Essentially you are saying that the banks are stupid and don't properly understand the risk of these loans not closing. Judging by their past performance, it's hard to argue with you.

It's not the systems fault though--it's just the seller's fault. The seller is leaving money on the table. Robert is right... Finally, if you are crying because you can't get a below market deal--shut up and save the money yourself! There is nothing stopping you from putting in an all cash offer...

tatupu70 says

It’s not the systems fault though–it’s just the seller’s fault. The seller is leaving money on the table. Robert is right… Finally, if you are crying because you can’t get a below market deal–shut up and save the money yourself! There is nothing stopping you from putting in an all cash offer…

Don't disagree at all. If one is to whine that it isn't "fair", they're not wrong, but the answer is of course to come to the table with more money. Just pointing out that the way this kind of system repeats itself, it sort of compounds this problem to where the only people who are compounding their available capital are the flippers.

I'm just looking at it as an economic inefficiency and why flippers don't deserve any sympathy.

klarek says

I’m just looking at it as an economic inefficiency and why flippers don’t deserve any sympathy

I agree too--I would definitely not have any sympathy for flippers...