Okay, I want you to picture a specific sign.
You've probably seen it a hundred times. You're
stopped at a red light, maybe at a busy intersection.
You're just looking out the window and you see
it. It's stapled to a telephone pole. It's usually
like bright yellow, maybe white. And it has this
almost handwritten looking font, or sometimes
it's literally just a sharpie. And it says four
words, we buy ugly houses. Or cash for homes.
Any condition. Exactly. Those ones, too. And
I think for the longest time, I just I glossed
over them. You know, they were just part of the
background noise of driving around town. Yeah,
they just blend in. It's like street level advertising
spam. Yeah. Right up there with lost dog flyers.
Yes, totally. But recently I started really noticing
them like they were everywhere. And then I go
home. I turn on the TV. I'm flipping through
channels late at night. And it's there, too.
But on TV, it's not ugly at all. Oh, no. On TV,
it's glamorous. It's so glamorous. It's, you
know, sledgehammers crashing through drywall
in slow motion. It's high fives in a brand new
kitchen. It's these big flashy profit margins
flashing up on the screen. It's really the two
faces of the exact same coin, isn't it? The telephone
pole is the acquisition, the gritty start and
the TV show. Yeah. That's the disposition, the
glossy end result. Right. But what they're both
selling at the end of the day is the concept
of flipping. And that is what we are really getting
into today. We're going to unpack this whole
phenomenon. But I want to be clear. We are not
doing the HGTV version of this conversation.
I don't really care about the backsplash tile
or the staging furniture. I want to know about
the machinery behind it. Because when you see
those signs or you watch those shows, you are
really just looking at the absolute tip of a
massive economic iceberg. That's a good way to
put it. We've got this whole stack of articles,
data reports, economic analyses. and they paint
this picture of flipping not just as a hobby
or a side hustle, but as a massive financial
engine. And I would add an ethical minefield.
That too, a big one. And we're definitely going
to get into the ethics of it, but we're also
going to look at the hard numbers, the actual
economics of buying, renovating, and reselling
these assets. And we have to ask the big question
here. Is this whole industry a vital service
that is saving our housing stock? Or is it more
of a predatory machine that's just chewing up
neighborhoods and spitting out unaffordable assets?
It's a huge question. And I think maybe before
we get too deep in the weeds, we should probably
clarify what we even mean by flipping in this
specific context. Because, you know, if you talk
to a day trader on Wall Street, flipping means
something completely different. That's a great
point. Yeah. In the broadest sense, flipping
is just. It's buying any asset to sell it quickly
for a profit. You can flip a vintage sneaker.
Right. You can flip a stock, a comic book. A
Taylor Swift ticket. Exactly. It's an arbitrage
play. You believe an asset is undervalued or
maybe you believe you can add value to it really
quickly and then you sell it on. But for this
deep dive we're focusing in, we are looking pretty
much exclusively at real estate. Right. The whole
process of acquiring a residential property.
rehabbing it, or as we'll find out, at least
claiming to rehab it and then reselling it for
more. That's the one. And, you know, I think
the common perception is that this is kind of
a niche thing. Maybe it's your uncle who's a
contractor and he does like one house a summer
or a couple of small time investors here and
there. Yeah. Cottage industry. Exactly. But the
data you pulled, man, it really shattered that
illusion for me. The scale of this is. Well,
it's industrial. It is absolutely industrial.
There's no other word for it. If we look at some
of the peak numbers provided in the research,
specifically going back to 2017, house flipping
in the U .S. hit an 11 -year high. We're talking
about 207 ,088 condos and single -family houses
flipped in a single year. Okay, let's just pause
on that number for a second. 207 ,000, that is...
That's a lot of drywall. That is a lot of paint.
It's a staggering amount of inventory being turned
over. And to give you some context for that number,
that 207 ,000 represented nearly 6 % of all single
family property sales that year. Wait a minute,
6%. You know, 6 % sounds like a small number
if you just say six. But when you think about
the millions and millions of real estate transactions
that happen every year, that's wild. It means
if I drive down a random street with, say, 20
for sale signs? Statistically, at least one of
them, probably more, is a flip. Wow. Yeah. And
that's really why this matters so much. Because
when you have an activity that accounts for that
much of the total market, it stops being a side
hustle. You know, it starts being a market mover.
It's not just following the trends. It's making
the trends. It is. It impacts prices for everyone.
It impacts the availability of housing stock.
It fundamentally impacts the character of community.
And that's the tension, right? That's the central
conflict we're going to keep coming back to in
this entire deep dive. On one hand, you have
this argument that these people are well. They're
heroes. They are taking the houses that nobody
wants, the ugly houses from the telephone pole
sign, and they're turning them back into livable,
beautiful homes. They are, in a sense, recycling
the American housing stock. That's the rejuvenation
argument. And to be fair, it has merit. We'll
definitely get into that side of it. But then
you have the complete other side, the side that
says this is predatory, that it's just a way
to artificially inflate prices, to create dangerous
real estate bubbles, and ultimately to displace
the people who have lived in these neighborhoods
for decades. The exploitation argument. And honestly,
the data we have here, it supports both sides.
It really depends on how a flip is executed and
why. It's not a binary, you know, good or bad.
It's a whole spectrum. So let's start with the
engine that drives all of this. Let's start with
the money, the economics of the flip, because
on the surface, the business model seems incredibly
simple. Deceptively simple. Yeah. Buy low, fix
it up, sell high. It's the classic buy low, sell
high logic just applied to bricks and mortar.
It sounds simple and it is in principle. But
the real nuance, the secret sauce is in where.
Where do you buy low and where can you sell high?
Because real estate, as they say, is local. But
capital. Capital is global. It's mobile. This
was one of the most interesting threads in the
reading for me. This idea that flipping, it follows
a migration pattern. It's almost like watching
a weather map or a virus spreading. It moves
to wherever the conditions are most favorable
for growth. Exactly. And to really understand
the current state of flipping, where it's happening
now, you have to look at the history. of where
that capital has traveled over the last couple
of decades. The sources all point to what they
call the California effect in the 2000s as the
perfect case study. Ah, the bubble years. The
bubble years, yeah. Think back to, say, 2005,
2006 in California. You had this intense economic
pressure cooker. You had high -paying jobs, high
wages, but just astronomically high real estate
prices. It was becoming functionally impossible
for a normal person to buy a home in the Bay
Area or Los Angeles. So what do people do when
they can't afford to live where they work? They
move. They move. They migrate. And crucially,
they take their equity with them. So you saw
this massive exodus of Californians moving to
cheaper states. The data points to Arizona, Nevada,
Texas, Oregon, Washington as the main destinations.
I remember this so clearly. I remember reading
all those stories about people selling like a
total teardown shack in San Jose for a million
dollars and then going and buying a literal mansion
in Phoenix. Right. But think about the second
order effects of that. Think about the economics
of that single transaction multiplied by thousands.
You have this wave of new buyers arriving in,
say, Phoenix with pockets absolutely full of
California cash. What happens to the housing
market in Phoenix? Demand goes through the roof.
Supply is static. So prices have to spike. Prices
spike dramatically. And who notices when prices
start to spike? The flippers. Investors. Flippers.
They see the heat map turning red in a new city
and they swarm to it. So that migration of people
directly caused this wave of gentrification in
these new locations. The Las Vegas Valley, the
suburbs of Phoenix, they became the new hotspots,
the new ground zero. It's like a contagion then.
The high price fever in California infected the
neighboring states. Contingent is actually a
very, very apt term for it. And it's important
because it illustrates that flipping isn't just
a local issue. You can't just look at your local
city council and blame them for rising prices.
It's often driven by these huge macroeconomic
forces happening thousands of miles away. OK,
here's where the plot twists a bit, because if
you asked me today or, you know, in the last
couple of years where the hot flipping markets
are, I'd probably still guess the Sunbelt. You
know, I guess Austin or Miami, maybe Phoenix
is still hot. That would be the intuitive guess
for sure. But the data we have from 2020 and
onward shows this, this massive shift. The capital,
it seems, got bored of the Sunbelt or maybe it
just got priced out of the Sunbelt and it moved
to the Midwest, the Rust Belt. The Great Lakes
region specifically. This was the most fascinating
pivot in all the data. We're talking about greater
Cleveland, Akron, Pittsburgh, and even South
Bend, Indiana. Akron, Ohio, the new real estate
frontier. It sounds so counterintuitive. It does
sound counterintuitive until you pull up the
spreadsheet. And then it makes perfect, cold,
hard sense. It is purely a margin play. Okay,
walk me through the math. Why Akron? What's the
play? Let's look at the 2019 numbers that were
provided in our source stack. In these Midwest
markets, the median flip home was purchased for
roughly $60 ,000. $60 ,000. I mean, let's just
sit with that for a second. In San Francisco,
you can't buy a parking spot for $60 ,000. In
parts of Cleveland, that gets you a whole house.
It gets you a whole house. Now, it might need
a lot of work. It's not going to be pretty. It
might be in a neighborhood that has seen much,
much better days. But the entry price, your initial
capital outlay, is incredibly low. Okay, so that's
the buy low part. What about the sell high? Right.
So now look at the exit price. They were selling
those same renovated homes for a median price
of $124 ,000. Okay, let me do the quick back
of the knack in math here. You buy for $60 ,000.
You sell for $124 ,000. That is a $64 ,000 growth
spread. That's more than 100 % markup on your
initial purchase price. Exactly. Now, obviously,
you've got your renovation costs in there. You
have holding costs, taxes, realtor fees. But
let's say you spend a generous $30 ,000 on the
rehab. You are still clearing a massive profit
relative to your initial investment. The ROI
is huge. And compared to a market like L .A.
Oh, it's a completely different world. In L .A.,
you might have to spend $800 ,000 just to buy
a teardown. And maybe you spend another $200
,000 fixing it and sell it for $1 .1 million.
The raw dollar amount of profit is higher, maybe,
but the risk you took on is astronomical. Your
capital is tied up, and the percentage return
is often much, much thinner. Plus, the competition
must be insane in those markets. Fierce. Everyone
is looking for a deal. But in the Midwest in
2019, 2020, the market inefficiencies were still
there. There was still gold in those hills, so
to speak. So you literally have investment advisors,
people in suits, in high -rise offices in Century
City telling their California -based investors,
don't buy a rental in your backyard. Send your
money to Northeastern Ohio. That's exactly what
was happening. It's the financialization of the
Rust Belt. These cities that were hit so hard
by deindustrialization that had this huge surplus
of cheap, aging housing stock suddenly became
these unlikely gold mines for remote capital.
It's just wild to think about. You have a guy
in Santa Monica sitting by his pool owning a
portfolio of three or four homes in Akron that
he's probably never even stepped foot in. And
this isn't just a U .S. phenomenon either. The
sources touched on this briefly, but it's important
to... note that this buy, rehab, resell model
is growing rapidly in Europe, too. You have large
real estate firms and private equity buying up
properties in places like Berlin and Lisbon doing
the exact same thing. So it's a global shift
in how we view housing. It's moving away from
just shelter and more towards just an asset class
to be optimized, like a stock or a bond. That's
the perfect way to describe it. Which brings
us right back to the impact on the ground. Because
look. If I'm living in Akron and my neighborhood
has a bunch of boarded up, derelict houses, and
suddenly all this capital flows in from California
and fixes them up, isn't that a good thing? Let's
play devil's advocate for a minute here. Let's
talk about the good. This is the strongest, most
compelling argument for the flipping industry.
The idea of gentrification as restoration. Right.
Because nobody wants to live next to a zombie
house, a place with broken windows and weeds
up to your waist. Of course not. And there's
a very specific sociological theory that comes
up in the literature here that explains why.
It's called the broken windows theory. Right.
I've heard this used in policing contexts, you
know, crack down on the small stuff like turnstile
jumpers to prevent bigger crimes from happening.
But how does it apply to real estate? The underlying
logic is identical. The theory, which dates back
to social scientists Wilson and Kelling in the
80s, suggests that visible signs of disorder
and neglect act as a powerful signal to the community.
What kind of signal? A broken window that goes
unfixed. Or in this context, a house with peeling
paint, knee -high grass, and a collapsing front
porch that signals to everyone, both law -abiding
citizens and criminal elements, that... No one
cares about this place. It signals a lack of
surveillance, a lack of ownership, a power vacuum.
Exactly. It sends a message that says the social
contract is broken here. The rules don't apply.
And that environment is a magnet for vandalism,
for squatting, for drug use. It creates this
vicious spiral of decline. So the flipper in
this narrative comes in as the interrupter of
that spiral, the circuit breaker. In theory,
yes. That's the idea. They come in, they fix
the broken window, they paint the siding, they
hire a landscaper to cut the grass, they install
a motion sensor light on the porch. Suddenly
the signal changes completely. The signal now
says someone is watching. Someone has invested
here. This property has value. Precisely. And
that can create a virtuous cycle. Well, the criminal
element might move on. Because the environment
is no longer permissive. The neighbors across
the street see the improvement and they feel
a renewed sense of pride. Or maybe it's just
peer pressure and they finally decide to paint
their own fences. The whole block gets a lift.
And then there's the money side of it for the
city itself. I have to imagine the local government
is basically rolling out the red carpet for these
investors. For the most part, yes. Absolutely.
Because cities, especially struggling ones, run
on property taxes. A house that's assessed at
$60 ,000 pays very little in tax revenue. That
same house, after a flip, now assessed at $124
,000, pays more than double. That's more money
for schools, for roads, for the fire department.
Exactly. And don't forget the sales tax bump
during the renovation itself. I mean, if you're
doing a full gut rehab on a house, you're buying
thousands of dollars of lumber, drywall, copper
pipes, new appliances. You're hiring local electricians
and plumbers and roofers. It's a mini stimulus
package for the local economy. It absolutely
is. There is no denying that. When a flip is
done right, and that's the key qualifier, when
it's done right, meaning they actually. fix the
structural issues and restore the home to the
market in a responsible way, it can be a massive
net positive for a dying neighborhood. It brings
housing stock back online that might otherwise
be condemned and demolished. When it's done right.
That feels like the key phrase in this whole
conversation, doesn't it? It is. Because that
brings us directly to the dark side. The bad.
The bad. Because we can talk about the neighbor
effect. You know, my house value goes up because
your newly renovated house value went up. That
sounds great. But there is a cost to that. If
values on my street keep going up and up and
up, eventually they go up too much for some people.
This is where we collide head on with the issue
of displacement. It's the unavoidable flip side
of gentrification. Right. So let's say I've lived
in my house for 30 years. I bought it for nothing
back in the 80s. Maybe I'm on a fixed income
now. I'm retired. I'm not planning on selling
my house ever. But suddenly three flippers come
onto my block and the property values just skyrocket.
Your property tax assessment skyrockets right
along with them. Your tax bill could double or
triple in just a few years. And if you're on
a fixed income and you can't afford that new
massive tax bill. Yeah. You are forced to sell.
You're taxed out of your own home. You are forced
to leave the community you may have helped build
and lived in your entire life. And if you're
a renter, it's even faster and more brutal. Oh,
yeah. The landlord sees the property values going
up all around, sees what the flicked houses are
renting for and says, why on earth am I charging
$800 a month when the new market comps say I
can get $1 ,500? And your lease is up and you
get a notice. Your rent is doubling. Pay up or
get out. Exactly. So while the neighborhood objectively
looks nicer. You know, better paint jobs, new
windows, manicured lawns. The community that
actually lived there, the social fabric, is completely
erased. The flipping activity accelerates gentrification
to a speed that existing residents simply cannot
adapt to. And then there's the quality issue,
the quality of the work itself. We absolutely
have to talk about the lipstick flip. Oh, the
lipstick flip. It's such a wonderfully evocative
term. It really is. It paints the perfect picture,
doesn't it? A lipstick flip. is in essence putting
lipstick on a pig. It's a renovation that is
purely cosmetic, designed to dazzle the buyer's
eye while ignoring, or in some cases actively
hiding, the serious, expensive structural rot
underneath. This is what I was alluding to earlier
with the millennial gray laminate floors and
the generic fixtures. You walk into one of these
places and everything smells like fresh paint.
It looks like an Instagram post. But what is
going on behind the drywall? That's the million
-dollar question. And the problem is, the flipper's
primary motivation is speed. Every single day
they hold that property, they're losing money
on interest payments, insurance, taxes, utilities.
They want to get in and get out as fast as possible.
And fixing a cracked foundation is slow and expensive.
And, most importantly, invisible. No buyer walks
into an open house and says, ooh, honey, look
at that sexy new foundation repair. Right. No,
they say, look at that beautiful subway tile
backsplash. Or, wow, an open concept. Exactly.
So the flipper spends all their money on the
tile, the paint, the new stainless steel appliances,
the fixtures, the lipstick, and they just ignore
the cast iron plumbing from 1950 that's about
to burst. Or the old knob and tube wiring that's
a genuine fire hazard. The sources we looked
at mentioned critics saying that flippers often
use these very specific, expensive looking, minimalist
designs precisely to distract from the lack of
structural integrity. It's basically architectural
sleight of hand. It is. They create a wow factor
with surface level stuff to keep you from looking
too closely at the things that actually matter.
for the health and safety of the home. And in
Europe, the sources point to an even more specific
and maybe more insidious type of structural degradation.
It's not just about bad repairs. It's about fundamentally
changing the layout of homes for the worse. This
is the chopping up of apartments. Yes. In many
older European cities, you have these beautiful,
large, historic apartments. They're perfect for
a family. But a flipper or an investor looks
at that space, and they don't see a family home.
They see inefficiency. They see unmonetized square
footage. So what do they do? They buy the large
family apartment, and they throw up a bunch of
new walls and chop it into three tiny micro apartments.
Because three tiny rents add up to more than
one big rent. It's just a math problem for them.
Correct. But the long -term cost to the city
is that you systematically destroy the family
-sized housing stock. You turn a neighborhood
that was once full of families into a neighborhood
of transients, students and short term renters.
You change the demographic fabric of a place
permanently just to squeeze out a few more percentage
points of annual yield. It's incredibly cynical.
But, you know, I also want to be fair to the
flippers for a second, or at least the honest
ones who are trying to do good work, because
the sources made it very, very clear. This is
not easy money. We see the big profit numbers
on TV, but we don't always see the spectacular
losses. No, absolutely not. It's a high risk,
high stress game. The failure rate is significant.
The sources we read listed a top 10 risk factors
list, and it's basically a catalog of nightmares
for any property owner. What was the one that
stood out to you on that list? For me, it was
the concept of the demo discovery. That sounds
like the title of a horror movie. For the investor,
it feels like one. It's that moment when you
start demolition. You take that sledgehammer
to the kitchen wall because you want to create
that open concept we talked about, and you find
something you absolutely did not budget for.
Like what? Termites. Termites. Black mold hiding
behind the drywall. A load -bearing wall that
your plan said you could remove, but it turns
out it's the only thing holding up the second
floor. Or maybe you find out the previous owner
did a bunch of unpermitted electrical work, and
it's a complete rat's nest of fire hazards. And
just like that, your $30 ,000 renovation budget
is now $60 ,000 or more. And your three -month
timeline just doubled. And while you're scrambling
to deal with that, you're also dealing with the
other huge risk factor, the human element, specifically
finding dependable contractors. Oh, man. Anyone
who has ever just tried to do a simple kitchen
remodel knows this pain intimately. Now imagine
doing it remotely. Imagine you're that investor
we talked about sitting in California trying
to manage a contractor in Akron, Ohio. The contractor
knows you aren't there to check on the progress.
Maybe he doesn't show up for a week. Maybe he's
juggling three other jobs. Maybe a bunch of expensive
copper piping just walks off the job site. So
you're just bleeding money every single day.
You're bleeding money. Running out of funds is
a huge, huge risk. If you run out of cash halfway
through a flip, you are dead in the water. You
can't sell a half gutted house for a profit.
You're stuck. You might lose everything. So it's
high risk, high reward. That's the game. But
that's the legal version of the game. That's
the, you know, I tried my best, but the market
turned against me version. Now we need to move
to the next segment. The part that I have to
say really made my blood boil when I was reading
the notes. We need to talk about the ugly. This
is where we leave the world of legitimate. if
risky, investment strategies. And we enter the
world of actual crime. Because there are people
out there who aren't just bad at flipping or
cutting corners to save a buck. They are actively
and systematically preying on people. Predatory
behavior. And it often starts with the acquisition.
We talked about those yellow signs, we buy ugly
houses. But the tactics used to actually get
the owners of those houses to sell can be incredibly
manipulative. Let's talk about this concept of
posing. What is that? Posing is a tactic where
a corporate entity, a big real estate firm or
a professional investment group disguises itself
as a sympathetic everyday individual. So like
you get a letter in the mail and it looks handwritten.
Maybe it's on, you know, cute stationery. And
it says something like, hi, I'm Jen. My husband
and I are looking for our first home to raise
our baby in. We just love your street. Please
call us if you're thinking of selling. Right.
And you, the homeowner, you think, oh, how sweet.
Jen needs a house for her baby. Yeah. But Jen
is a persona. Jen isn't real. Jen is a call center
in another state. Jen is a shell company owned
by a private equity firm. That is so dark. It's
a psychological tactic. It's designed to lower
your defenses. If you know you're negotiating
with a sharp -suited professional shark, you
keep your guard up. You hire a lawyer. You get
your own appraisal. If you think you're helping
a nice young couple start their family, You might
accept a lower price out of kindness. You might
be more flexible on the terms. And who are they
targeting with these letters? They're not just
sending them out randomly, are they? No, the
targeting is very precise. The sources are very
specific about this. They target the vulnerable.
They pull public records to find the elderly
who have owned their homes for a long time who
might be looking to downsize and have no idea
what the current market value is. OK. They target
people who are in foreclosure or deep in debt.
They target owners of properties with what the
industry calls stigmas. Stigmas. What does that
mean? It could be anything that makes a property
hard to sell on the open market. A serious bug
infestation, a hoarding situation, a house where
a violent crime occurred, or even just a house
with notoriously bad neighbors. They find owners
who are embarrassed or desperate or just completely
overwhelmed, and they offer them what seems like
an easy way out. We'll pay cash, we can close
in seven days, no inspections, no hassle. And
for someone who is drowning in debt or shame,
that sounds like a lifeline. But it's not. It's
an anchor. Because the offer they make is almost
always pennies on the dollar. They are stripping
the equity from the people who need it the most
under the guise of helping them. But even that,
it's still technically legal, right? I mean,
it's unethical, it's slimy, but buying low isn't
a crime in itself? Correct. It exists in a moral
gray area. But illegal property flipping is a
crime. And the sources we reviewed and law enforcement
distinguish this very, very clearly from just
being a shrewd negotiator. OK, so this is the
real criminal stuff. What makes a flip illegal?
In a word, fraud. The mechanism here is completely
different. In a legal flip, you buy a property,
you add value through improvements or you wait
for the market to rise and then you sell. In
an illegal flip, the improvement is a lie. and
the value is a complete fabrication. Okay, so
walk us through the scheme. How do you pull something
like this off? All right, step one, the criminal
entity buys a property, usually a very distressed
one, a real wreck. Let's say they buy it for
$100 ,000. Okay. Step two, they make zero, and
I mean zero, meaningful improvements. They might
sweep the floor. They might put up a new house
number to make it look like something happened,
but they do nothing of actual value. Got it.
Step three is the crime itself. They immediately
put it back on the market, sometimes within days
or even hours, and resell it for, say, $200 ,000.
But wait, who would buy a $100 ,000 house for
$200 ,000? Wouldn't the buyer, you know, see
that it's a total dump? They would, unless the
buyer is in on the scheme. Or, more commonly,
the real victim isn't the buyer, it's the bank.
The scheme requires collusion. You can't do it
alone. You need a corrupt appraiser. Ah, the
appraiser is the gatekeeper. The appraiser is
the linchpin. The bank relies on the professional
appraiser to tell them, yes, this house is indeed
worth $200 ,000 and is adequate collateral for
the loan. So the corrupt appraiser falsifies
the report. They might use comparable sales from
a totally different, much nicer neighborhood.
They might lie about the square footage or the
condition of the property. So the bank's underwriting
department gets the paperwork. It all looks legitimate,
they say, looks good. And they approve the loan
and wire the $200 ,000. Exactly. The flipper
gets the $200 ,000, pays off the corrupt appraiser,
and walks away with a huge fraudulent profit.
The buyer, who is often a straw buyer, who has
paid a small fee to let the criminals use their
good credit score, never intends to make a single
mortgage payment. The mortgage immediately goes
into default. The bank has to foreclose. And
when the bank finally takes possession of the
house and goes to sell it to recoup their money,
they realize, wait a minute, this is a pile of
rubble that's only worth $100 ,000. The bank
is forced to take the massive loss. It's literally
bank robbery with paperwork instead of a gun.
That's a perfect way to put it. And when you
multiply this by thousands and thousands of transactions
across the country, you get systemic risk. You
get bubbles. And this brings us to the big one,
the 2008 connection. Because I think people remember
the big short. They remember the term subprime.
But I don't think everyone fully realizes how
central this kind of flipping was to the entire
crash. It was the gasoline on the fire. An accelerant.
How so? What was the mechanism? Well, think about
the incentives at the time. In the years leading
up to 2008, lending standards were, well, they
were basically non -existent. You had the infamous
no income, no job, no assets loans, the NINJ
loans. You could get a mortgage with practically
zero money down. So you didn't need to be a millionaire
real estate tycoon to be a speculator anymore.
You just needed a pulse and a decent credit score.
Exactly. So you had taxi drivers, strippers,
school teachers, people with absolutely no background
in real estate, buying three, four, five houses
at a time, not to live in, not even to rent out,
just to flip. They were betting on the market.
They assumed prices would just go up forever.
It was pure, unadulterated speculation. They
were buying with the sole intent of reselling
in a month or two for profit. And this created
this massive artificial demand for housing, demand
radically outstripped supply. And what happens
then? Prices skyrocketed. Which in turn drew
in even more flippers who saw the easy money
being made. It was a feedback loop, an inflationary
spiral. But it was a house to cards because the
underlying value just wasn't theirs, all built
on cheap debt. And the moment the prices stopped
rising, the moment the music stopped. Everyone
tried to sell at once. And there were no buyers
left, just sellers. And prices collapsed. But
the debt, the mortgages, remained. And because
the banks had lent 100 % of the inflated value,
or in some cases even more, they were left holding
trillions of dollars in toxic assets. The flipping
frenzy was a major, major component. of what
became the global financial crisis. It's actually
terrifying to think that a bunch of people slapping
gray paint on houses in Florida and Nevada helped
take down an institution like Lehman Brothers.
It just shows how interconnected and fragile
the whole system can be. So surely we learned
our lesson from that, right? This brings us to
segment five, regulation. What did the government
do to stop this from ever happening again? Well,
they tried. The FHA, the Federal Housing Administration,
has always been wary of this stuff. They insure
mortgages against default. So they are the ones
on the hook financially when these fraud schemes
go south. So they have skin in the game. A lot
of skin in the game. So back in 2003, they already
had rules about this. But in 2006, right as the
bubble was really peaking, they introduced a
very specific rule designed to stop predatory
flipping in its tracks. It was called the 90
-day rule. Okay, the 90 -day rule. How did that
work? It was very simple and very effective.
If you bought a house, you were prohibited from
reselling it to a buyer using an FHA -insured
mortgage for at least 90 days. Why 90 days? What's
magical about three months? It stops the churn.
The illegal fraud schemes we just talked about,
the buy at noon, sell at 1 p .m. scams, those
rely on incredible speed. By forcing the investor
to actually hold the property for 90 days, you
force them to incur real costs. Holding costs.
Exactly. Mortgage payments, insurance, taxes,
maintenance, market risk. It makes the quick
and dirty scam unprofitable and much riskier.
So it's basically a speed bump for the market.
It's a fantastic speed bump. And it worked until...
Ironically, it became a problem. Wait, how did
a rule that stopped fraud become a problem? Because
of the crash it was meant to prevent. By 2010,
the housing market was a corpse. Foreclosures
were everywhere. Banks were drowning in this
bad inventory they couldn't get rid of. The government
needed someone. anyone to come in and start buying
up these foreclosed homes to stabilize the market.
They needed the flippers. They needed the flippers.
But the flippers, the legitimate ones, were saying,
hey, we can't buy these thousands of foreclosures
because the 90 -day rule ties up our capital
for too long. We need to be able to move fast
to make the business model work. Wow. So the
government was stuck between a rock and a hard
place. Do you keep the rule that stops fraud
or do you get rid of it to save the entire market
from collapsing further? And they chose the market.
In 2010, the FHA issued a waiver that greatly
relaxed and for a period of time essentially
eliminated the 90 -day requirement. They took
down the speed bump to get traffic moving again,
even if some of that traffic was dangerous. That's
the perfect analogy. It was a calculated risk.
They hoped that other newer oversight mechanisms
like stricter appraisal standards and smarter
bank algorithms would catch the fraud this time.
And to be fair, we do have things now like U
.S. PAPE, which are the professional appraisal
standards. And Fannie Mae has these collateral
underwriter programs that automatically flag
suspicious rapid flips. But the fundamental tension
remains. Regulation slows down market. Deregulation
invites fraud. It's a pendulum that just keeps
swinging back and forth. Now, I want to pivot
from government regulation to something that
I think is in some ways just as powerful and
shaping this industry. And that's the culture,
the media. Oh, this is huge. You can't understand
modern flipping without talking about TV. Right,
because as we said, after the 2008 crash, flipping
was a dirty word. If you called someone a flipper,
it was an insult. You were basically calling
them a shark, a scammer, a person who helped
cause the recession. It was a derogatory term.
It was associated with financial ruin and greed.
But then... Yeah. Something shifted. The reputation
got laundered. And I think we can trace it back
to a specific network and a specific genre of
television. Reality TV, HGTV, A &E. Bravo. And
the sources mentioned a really specific moment
in July 2012. CNBC, which is a serious business
news network, greenlit multiple new pilots, all
focused on house flipping. That was the signal.
That was the moment the industry came out of
the penalty box. When a network like CNBC says
this is legitimate business content, they are
re -legitimizing the entire practice for the
public. They are saying this is a valid business
again. And then the flood gets just opened. Flip
or flop. Flip this house. Property ladder masters
a flip. Then the crazier ones like Zombie House
Flipping, Flipping Vegas, Flipping Boston. It's
an endless list. But think about what these shows
actually do psychologically. They gamify housing.
They absolutely do. Every single episode has
the exact same formulaic structure. The brave,
telegenic hero buys the ugliest house on the
block. They encounter a scary, unexpected prop.
Oh no, the budget. Which usually happens right
before a commercial break. Of course. They heroically
solve it. They stage the house with beautiful
furniture. And then the payoff. The big reveal.
And the graphic on the screen. Purchase price,
$6. Renovation cost, 36 city. Total profit, $50
,000. And then everyone high fives and the credits
roll. It trains us as viewers to view the house
solely as a profit center. It trains us to root
for the highest possible sale price. Exactly.
You're sitting there on your couch and you are
actively cheering for the house to sell for the
highest number imaginable. You were cheering
for housing inflation in your city. You never
stopped to ask, wait, who can actually afford
that house now? Or what does this do to the property
taxes of the neighbors? You're just happy that
the nice couple on TV made their money. And it
completely, totally glosses over the lipstick
issue we talked about. We are trained by these
shows to applaud the gray floors and the subway
tile and the barn doors. That specific visual
language, the HGTV aesthetic, becomes the new
standard for what value looks like. And we don't
ask if they properly replaced the 80 -year -old
wiring. We just ask if they successfully opened
up the floor plan. It creates a whole generation
of buyers who value aesthetics over mechanics.
And maybe even more dangerously, it creates a
generation of amateur flippers who watch these
shows and think, hey, I can do that. It looks
so easy. And then they go out, they get a hard
money loan, they buy a house in Akron, and they
get absolutely crushed by that demo discovery.
Right. The media narrative just fuels the cycle.
It keeps the fresh, naive capital flowing into
the system, which helps keep the prices up, which
keeps the pros in business. It's a self -perpetuating
machine. So after all of this, where does this
leave us? We've looked at the economics, the
incredible 100 percent margins in the Midwest.
We've looked at the good, the real value of fixing
broken windows and saving homes. We've looked
at the bad and the ugly, the fraud, the displacement
and the systemic risk to our economy. I think
we're left with a spectrum. That really is the
most important takeaway for anyone listening.
Flipping isn't inherently evil and it isn't inherently
good. It is a tool. It is a mechanism for capital
allocation in the housing market. In the hands
of a responsible local contractor in Cleveland
who really cares about the neighborhood, who
buys a rot infested shell of a house and genuinely
turns it back into a safe, beautiful family home.
That's a win for everyone. That is rejuvenation.
That is saving a dying asset and adding value
to a community. But in the hands of a remote
speculator who has never set foot in the state
or a criminal fraudster or a lipstick artist
just looking for a quick buck. It is a predatory
practice. It extracts wealth from the community.
It degrades the long term quality of the housing
stock and it fuels instability for everyone.
It creates wealth for investors. There's no doubt.
It creates tax revenue for struggling cities.
But it so often comes at the direct expense of
long term residents and overall affordability.
And that tension isn't going away. I mean, as
long as housing in our society is viewed as an
investment vehicle, as one of the primary ways
to build wealth, rather than just as a place
to sleep flipping, is going to be a central and
controversial part of the American economy. So
here's the question I really want to leave you
with today. We all love a good before and after
picture. It's satisfying. It triggers something
in our brains that loves order from chaos. But
when does a smart investment cross that invisible
line and become predatory behavior? And I would
add this final thought to that. The next time
you see that for sale sign on a newly renovated
home, the one with the perfect fresh sod and
the trendy modern fawn, ask yourself about the
invisible costs. Who lived in that house before?
Why did they have to leave? And who is really
truly paying for that profit margin you see on
TV? Is it the new buyer? Is it the bank? Or is
it the neighborhood itself? Something to think
about the next time you drive past one of those
little yellow we buy ugly houses signs. Thanks
for diving deep with us. We'll see you next time.