Flipping and Flopping

I read a post (http://www.bloomberg.com/apps/news?pid=20601109&sid=a7XoKagoeGig&pos=10) that disappointed me.  Although the author did attempt to cover the issue from multiple angles, his slant still comes across to me as anti-flipping.  I'm less concerned about his position on flipping.  Rather, the key issue for me is that it's clear that he didn't know the difference between flipping and flopping, and none of the editors picked up on that too.  I expected more from Bloomberg.  They pride and brand themselves as "a premier site for news and financial information";  yet, they didn't take the time to thoroughly dig into the subject before publishing this post.

 Whether or not he reads my rebuttal, I decided to share what I wrote him.  I refuse to continue to let some folks in the media (and others) blame us for all the the problems in the real-estate market.  Ants and vultures get more respect for performing the ecological equivalent of the work that we do.  That's not right!

 Please feel free to let me know what you think--even if you disagree.

Here's what I wrote:

I'm also an investor, and I read your post ("Banks Face Short-Sale Fraud as Home ‘Flopping’ Rises" [http://www.bloomberg.com/apps/news?pid=20601109&sid=a7XoKagoeGig&pos=10]).  I noticed that you--like several other reporters writing about flipping and "flopping"--appear to have missed several crucial points.

First, Sergio Natera and Anna McElaney were real-estate agents.  Seller's agents, when facilitating a deal (aka practicing real-estate), have a fiduciary responsibility to sell homes for the highest price possible.  The key here issues are 1) the seller's agent's foreknowledge of another buyer who was willing to pay a higher price, and 2) the collusion between both agents on each deal.  Had both agents disclosed both issues to the seller before closing, then the government wouldn't have a case.

Second, buyers (including investors) are principals to the deal--not facilitators.  They have no such fiduciary responsibility to the seller.  Listing agents aim to help owners sell their properties for top dollar;  investors have to buy properties at prices that will yield a positive pre-tax cash-flow (PTCF) and/or that can be flipped for a profit.  Some investors will disclose their intent to flip the property for a profit, and others won't.  The banks, Freddie Mac, and Fannie Mae are starting to demand that buyers disclose more details about their purchase;  they're forcing investors to disclose their intent to flip a short-sale upfront hoping to find out whether a buyer is willing to pay more.  Frankly, it's really none of their business, and I'm praying for a court challenge on this.  The irony is that those same banks do exactly the opposite when trying to dispose other assets:  they refuse to disclose the same information that they're trying to extract from the investors in the prior case.

Third, short-sale flipping is perfectly viable in many cases.  Some sellers are envious and furious about the investors making money when the sellers aren't—especially when 1 or more lenders come after those sellers a few years later with deficiency judgments.  Many bankers whine about losing too much money implying that we're “stealing” it from them.  I have 2 words for them:  quit crying!  They're mad that we're playing the same game by their rules;  they wouldn't think twice about using their leverage to milk every penny out of us on a deal.  Besides, most of their losses are paper losses which they'll recoup via the foreclosure auction, a mortgage insurance claim, a REO sale, a deficiency judgment, etc.  Plus, they can write off their losses.  The only time they'll realize their losses is when they have insufficient cash reserves;  that's when the FDIC steps in to take them over.  The bureaucrats keep pandering to the sellers and bankers, and they keep reaming us investors to appeal to the sellers and bankers.  Yet, they haven't considered the fallout that would happen if  we were to form a grassroots movement to start fighting back by boycotting all short-sales and REOs.

Fourth, many short-sale properties require some immediate rehab to get them market ready.  Investors add value to those properties, and deserve to be compensated for their effort.  Yet, some short-sale properties require no rehab, and I realize that it's harder for many real-estate outsiders to see how the investors added value in those cases.  The investors here add value via marketing and deal structuring.  Keep in mind that real-estate agents, attorneys, business execs (especially M&A teams), car salespersons, bankers, and others also make money via marketing and deal structuring.  The key difference between the value in both cases is that the product/service is tangible (physical repairs) in the prior and intangible (negotiations) in the latter.  Besides, investors aren't the only ones who purchase products/services from their suppliers at wholesale prices, add value, and resale the end products at retail prices (for a profit).

Fifth, buyers aren't holding loaded guns to sellers' heads.  Sellers can choose to sell for whatever price/terms that will work best for them--provided they can afford to wait.  Distressed sellers usually can't afford to wait to sell for top dollar;  the best price/terms that they're going to get will reflect this.  Some people might accuse buyers (especially investors) of preying upon the misfortune of others;  however, many of those same people had no problems during the past sellers' market of gouging buyers (especially distressed ones).  That's hypocritical.

Sixth, investors are an easy target for scapegoats, because we're honest about intent to make money from each deal.  The banks and the government are embarrassed for having been caught with their pants down, and sellers are rabid about the falling prices.  Please note that repeat buyers (the majority of whom are investors) close nearly 50% of all sales nationwide;  we close roughly 30% to 40% of all sales nationwide.  Let's say that roughly 50% (typically less) of those investors--or 15% to 20% of all buyers--flip properties, and the others hold properties.  Until recently (when the Obama administration instituted the HAMP and HAFA program changes earlier this year), the majority of the the flips were actually on REOs--not short-sales.  Yet, let's say that 50% of the flips were short-sales;  so, we're really dealing with 7% to 10% of all the sales.  Mathematically, the accusations levied against us for causing prices to drop nationwide don't hold up.  Besides, we obviously aren't the only ones buying properties for lower prices;  a majority of the buyers--who aren't investors--are also buying properties for lower prices.

Seventh, although many investors prefer to invest in (pre-)foreclosures (ie short-sales, REOs, foreclosure auctions, etc), some of us (myself included) don't.  There are lots a different ways to invest in real-estate, and some of those ways don't involve any property transfer (eg tax liens, notes, exchanges [in some cases], syndicates [in some cases], wholesaling, etc).  We all specialize in 1 or more styles of investing.  Investors who specialize in doing deals with creative financing actually pay closer to the current market value for properties, and we'll periodically pay more than retail buyers could/would pay (because some lenders won't lend as much for the properties).  Why doesn't that ever get reported?  Plus, most of us prefer to focus on the properties that no one else--including the seller--wants.  The point is it seems that every hack or talking head has a bug up his/her butt about the few rotten apples on Wall Street, and they're taking their rage out on all investors indiscriminately.  That's not fair!  It's time for us to stand up and to be heard.  Please realize that every investor isn't a Donald Trump, Sam Zell, or Warren Buffet--nor does s/he want to be.  Rather, many investors own 2 or 3 properties;  are regular folks (teachers, plumbers, social workers, police, military vets, etc);  and earn a modest income from their properties.

Eighth, you took Mark Walters words (about influencing a broker on a BPO) out of context.  Was that a misstep, or did you do that deliberately?  It's unfortunate that he didn't respond to your inquiry;  I also would have liked to read his feedback.  Had you listened to all of his videos on this, and had you understood the full context of what he was talking about, then you would have seen--as Dean Edelson pointed out--that one does this by providing comps, pointing out certain deficiencies/features of a property, etc.  It's illegal to bribe a broker to give a higher/lower BPO, and it's also illegal to bribe an appraiser to give a higher/lower appraisal.  Two people whom you really should talk to on this are:  Jeff Watson and Bob Diamond (both are real-estate attorneys and investors who specialize in short-sales).  Actually, Freddie Mac based its current policy off Jeff's work.  (If you do contact Jeff, then ask him to expound on the differences between policies, statutes, and tortes.)

Finally, I initially intended for this to be a short rebuttal.  Yet, the more and more times that I reread your post, the more compelled I felt to help shed more light on several of the issues that you raised.  I hope that you'll now see that this Flipping vs Flopping debate is much more nuanced than you realized.