Renters are the new victim of foreclosure crises
We saw a lot of shows on TV during the housing boom, about flipping houses. Flipping is buying, remodeling and immediately selling houses for a profit. There were signs posted throughout my community saying “we buy houses fast.” There were real estate meetups with like-minded people looking to cash in on the rapid housing boom; and then, like an atomic bomb, the housing boom turned into the housing bust. Now, it’s not uncommon to see single home tenants who pay their rent monthly being evicted from their homes by a mortgage lender.
I warned many people I knew who were excited by the fast-moving housing market; that what goes up eventually comes down, and sometimes very quickly. Some listened and some didn’t. I have a friend who got a nightmare predatory loan who had a high credit score. I have a friend who, after talking to me, decided not to buy a condo at the top of the market. Other friends told him not to listen, real estate never goes down and it’s only a matter of time before his real estate is worth more than the original purchase. She was happy that she listened to me, now those same condos are priced less than she would have paid.
Many of the so-called pinball machines on TV took shabby houses and made them look beautiful in just a few short weeks. At the end they would tell us that this is my flip and that I will earn “X” dollars when it sells. What we were not told was that it was based on “IF” the sale was finalized and several other conditions were met. If the sale was finalized, how much did the investor pay in total costs, including short-term capital gains taxes, real estate fees, and the sellers’ cost of mortgage to sell the home? These taxes, fees and costs could substantially decrease the net amount for the fin.
Here is a fictional example based on information provided by
The Average TV Pinball:
The Pinball paid: $300,000 for a vandalized house.
The Pinball fixed up the house for: $80,000
Gross return on housing
The Pinball sold the house for (if the sale is final): $425,000
Cost of selling the house
Real Estate Agent Fee: 6% = $25,000
Seller Mortgage Cost: 2% = $8,500
Short-term capital gains on investment properties: 20% – $8,500
Net profit after all cost deductions
After all deductions, the profit is: $9,200
(approximately and if the sale of the house is final)
To effectively repair a dilapidated house takes at least 3-4 months. That means you can only do 3-4 houses a year; if you do not have major problems, and you are very lucky in finding a suitable home to reform.
So if you remodel four average homes per year, you could earn around $36,000 if the homes sell within the year. Most people could make as much or more money at a full-time job with a benefits package. If you’re self-employed, you’ll have to pay self-employment taxes on this money, buy your own expensive benefits package, and end up with much less than if you were an employee.
The example above is the highly-skilled, lucky pinball scenario. Those who are not lucky enough to sell the house that turns them around, as is often the case now, will have to rent it. Many
of these flippers took predatory loans thinking they would remodel and sell (flip) the house quickly. This “flip this house and quick remodel” is no longer happening and those who were involved in this phenomenon are stuck with an inventory of homes they can’t sell. Some are still trying to flip houses because they haven’t gotten the big picture that houses aren’t selling at previous boom prices, so they can’t sell the houses for a profit, and in some areas houses aren’t selling. absolutely.
Since they can’t sell the houses, they rent them out. My guess is when the usurious loan adjustment is due; the poor tenant is stuck holding the bag. The tenant pays the rent to the
homeowner every month, the homeowner is unable to make the adjusted loan payment, so the homeowner defaults and, to the surprise of the tenant, receives eviction papers from the lender who served the homeowner. The scenario is sad in every way, and everyone loses, but especially the tenant, since they are the innocent victims in the middle of the fiasco.
I also suspect that some of the rented houses were used solely for investment purposes, the owner took out an “easy” loan against the house during the boom and defaulted on the payment.