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Can You Still Make Money Flipping Houses?

Published by Lawrence Roberts | December 26th 2008 | Views:

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Speculation is a battle. The forces of greed and fear drive the financial markets, and the speculator attempts to profit from these moves. Speculation is not investment, although most do not understand the distinction. Speculation is the battle of the individual against the herd. For those who understand it and have learned to move against the emotional forces of fear and greed, there is opportunity to profit. For those who follow the herd, there are brief moments when profits are available, but few have the discipline to take them. Most speculators are slain by the market.

Flipping has become much more difficult since 2006, not just because prices are dropping, but because the constriction of credit and the tightening of financing terms makes it much more costly and difficult to do. The Option ARM with 100% financing was the ideal tool for the flipper. It allowed him to enter the market with none of his own money, it greatly reduced the carrying cost of the property, and it gave him downside protection in the event prices fell. With these conditions in place, it is no wonder speculative flipping became the pastime of every would-be Donald Trump in California.

Another behavior enabled by loose credit during the bubble was cash-out serial refinancing. With the ability to get access to cash from the property without selling it, there was no need to sell the property, and many speculators held their properties and withdrew their cash as needed. Houses were treated like savings accounts earning a very high return. Of course, they were not withdrawing free money, they were adding huge amounts of debt, but since the debt service costs were low, and since nobody thought they would ever have to pay this money back out of their income, cash-out refinancing became the rule rather than the exception.

It is still possible to make money flipping houses even in a declining market. Many cash buyers go to foreclosure auctions and buy properties for less than it value in the financing dominated market. If this property is quickly flipped before its value declines further, the flipper can make a small profit. It is the only viable way to make money in a declining real estate market.
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