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Flipping: Change The Appraiser's Method Of Appraising

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Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Let me tell you what 'flipping' did in Colorado.

Investors poured into older neighborhoods that were run down and had high numbers of rental properties, particularly near the downtown area that was pretty much an unsafe place to live or be outside at night.

New growth was spreading all over the front range, and 'urban sprawl' was causing long commutes for those who worked in the downtown area.

Flippers started buying up homes around the downtown area that had been the property of slum lords for years, gutted and restored them to their original beauty. The yuppies loved it. They wanted to live closer to their work and were willing to pay a premium for a nice home that they didn't have to get their hands dirty fixing up. The flippers gentrified neighborhoods that most had written off as areas that should be considered war zones and bulldozed because of their high crime rates and negligent ownership.

I have difficulty thinking of these so-called 'flippers' as being criminals. They did things that improved many areas, stepping up to the plate and filling a market demand that others either wouldn't or couldn't. Yes, they made some excellent profits doing it, but how can that be considered wrong other than by the lenders who weren't able to suck them dry with long-term loans?

It wasn't as if they didn't have to do something to make those profits. They just made a quick return on their sweat.
 

Stone

Elite Member
Joined
Feb 1, 2002
Professional Status
Certified General Appraiser
State
Wisconsin
Dee Dee - As far as I understand it, what you describe isn't really "flipping." That is the problem with the term, there doesn't seem to be a good definition that everyone agrees upon.
 
Joined
Jan 13, 2002
Professional Status
Retired Appraiser
State
Florida
Dee Dee,

I salute those that fixed up some of the old houses, did a good job on them and made their profits. Wish I had the money to do it too and hoping I can shortly. The areas where gentrification was/is taking place are mostly turning out pretty nice.

Where it's done well.

I have a real problem with so called investors that go into the $40 - 50 K areas, buy the houses for $20K+/-, do nothing more than a cover-up rehab, get their pet appraiser to value it at $80K when it still realistically should be no more than $50K, then sell it to some poor idiot that doesn't know any better. After all, HUD and the appraiser are supposed to protect them, aren't they? HUD/FHA and the appraiser wouldn't let them buy it if it wasn't worth it. WE know how bad it actually is; the general public, especially in this price range, don't. There is so much paperwork to be signed, many just want a house and believe that since they have to sign a ton of papers to get it, everybody else does this too, it must be OK. How many actually read what they are signing or would understand it if they did? We are a nation of sheep and this price range doesn't usually have enough education (for a variety of reasons) to have any clue about what they are doing. The sharks are always there to 'help' them.

I've been doing a few FHA Streamline Refis lately. Some of those houses were never FHA compliant and are falling apart again after only 1 - 3 years. The owners can't afford to fix the messes that should have been fixed before they were sold and owe more than it was ever worth.

Again, FHA and other lenders have come up with the wrong 'fix' for attempting to stop the illegal flipping. Previous sale dates really have nothing to do with it. If the lenders didn't have the choice of what 'pet appraiswhore' to use for these, it wouldn't happen. If the lender was held responsible for these loans, it wouldn't happen and they would pay much more attention to what their LOs were doing.

BTW, just talked to an investor friend last night as he was driving home from the local investors club meeting. They had some people in from the AmeriDream program. When a newbie investor asked about the rehabbed property appraising for what was needed to make this work, these people told them that they never had to worry about that!!!! This investor friend of mine is finally thinking that he might as well join the illegal flippers and do these kinds of deals since they all appear to be getting away with it anyway. So far, I've been able to keep him on the path of the truth is best... I doubt I can much longer because it's just too easy to make a few to many thousands more with the 'right' appraiser and lender.

:twisted: :twisted: :twisted: :twisted: :twisted: :twisted:
 

Randy Beigh

Senior Member
Joined
Jan 16, 2002
Dee Dee/Pamela

Dee Dee, there is nothing wrong with flipping. Good grief, it's the American way. By low, sell high.

Pamela, what you described has happened in probably, every large American city. These clowns go into the poorer areas, by foreclosures or whatever, paint them, then resell to people who shouldn't/couldn't get a loan for a dog house. Eventually, they become repos again.

The worst part of this scheme is that there has to be an appraiser that is participating. The illegal flips would almost never happen without that appraiser participation.
 

Scott Warner

Freshman Member
Joined
Oct 20, 2002
Professional Status
Licensed Appraiser
State
Pennsylvania
There is a difference between gentrification and flipping.
 

Dee Dee

Elite Member
Joined
Jan 16, 2002
Professional Status
Certified Residential Appraiser
State
Colorado
Michael,
You're right, the definition of what a flip is depends on who you ask. What I described should NOT be considered illegal. Having appraised more than a few of these fixed up properties, I had solid comp sales to justify the sometimes eye-popping higher values after the homes were fixed up.

Pam,
I can play the devils advocate on your observation. :twisted: :wink:

More often than not, those who are buying on the lower end of the housing market are bad credit risks, with or without an extra $20,000 added onto the price after a cosmetic rehab. Problem is that lenders don't like to make a loan at all on a house with a bad roof, trashed interior and peeling paint. Yes, often the very low end rehabs are cosmetic only, but it brings the home back up to a quality level that will allow it to be acceptable to more lenders. The average homebuyer who would even want to purchase a $20,000 home, if given the opportunity, probably wouldn't have any extra cash or credit to do cosmetic repairs. They're too busy trying to figure out how to pay the electric bill or keeping their vehicle running...fixing up the old place will be last on their list of priorities. The odds of a poor property going from bad to worse is not a risk that lenders will take.

If there are legitimate comparable sales of other houses which have been repaired in a manner similar to the subject, then the market and lenders have spoken and the appraiser has done no harm. The estimated value of a cosmetically rehabbed property in that neighborhood that lenders will back is around $80,000. If the lenders are qualifying borrowers who can't keep up on payments in that range....well, it's their mistake, not the appraisers.
Now, covering up major structural problems or anything of that nature is a different story.

Scott,
I KNOW there is a difference between gentrificiation and flipping <slap, slap>.
The point I was trying to make was that it was the investors who took the risks by buying torn up properties and fixing them up that started the gentrification process in areas where the slum lords and low-income homeowners couldn't or wouldn't. That those same people would be accused of doing something wrong (flipping), is ridiculous. The demand was there, and they profited. Good for them....I wish I would have been less of a skeptic about 8 years ago and had done the same. I'd be retired by now.
 

John Hassler

Senior Member
Joined
Jul 23, 2002
Professional Status
Certified Residential Appraiser
State
California
Pamela Crowley (Florida) said:
get their pet appraiser to value it at $80K when it still realistically should be no more than $50K, then sell it to some poor idiot that doesn't know any better.


Pamela

Your point seems to be that of obtaining an inflated appraisal via a "pet" appraiser. The fact that the home was purchased a week, month, decade ago is irrelevant in your scenerio.

I have no problem with flipped properties although there are few out this way. Usually its the $750k cottage that gets torn down to the studs and spit back out for $1.5m less than a year later. I'm doing one like that right now where the speculator paid $800k for a foreclosure and put $600k into it - now he (and the LO) thinks it $1.8m and I'm at $1.6m. As long as you are doing your job properly, just let the chips (values) fall where they may. I include the sales history of subject and comps for a minimum of three years; I'm lucky, my data sources are good for about the last twenty years of sales and I just report whatever I find.

John Hassler
 

Frederick R. Ruffell

Senior Member
Joined
Jan 21, 2002
Professional Status
Certified General Appraiser
State
California
Somewhere along the way the term "flip" became a dirty word because of some criminals commiting fraud. Let's not forget the golden rule, he who has the gold makes the rules! If investors you do not like it let them use their own gold. :usa
 
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