WEBVTT 00:00:00.000 --> 00:00:02.240 Okay, I want you to picture a specific sign. 00:00:02.439 --> 00:00:04.280 You've probably seen it a hundred times. You're 00:00:04.280 --> 00:00:06.940 stopped at a red light, maybe at a busy intersection. 00:00:07.099 --> 00:00:08.839 You're just looking out the window and you see 00:00:08.839 --> 00:00:12.480 it. It's stapled to a telephone pole. It's usually 00:00:12.480 --> 00:00:15.960 like bright yellow, maybe white. And it has this 00:00:15.960 --> 00:00:19.219 almost handwritten looking font, or sometimes 00:00:19.219 --> 00:00:21.480 it's literally just a sharpie. And it says four 00:00:21.480 --> 00:00:25.920 words, we buy ugly houses. Or cash for homes. 00:00:26.589 --> 00:00:29.570 Any condition. Exactly. Those ones, too. And 00:00:29.570 --> 00:00:32.369 I think for the longest time, I just I glossed 00:00:32.369 --> 00:00:34.210 over them. You know, they were just part of the 00:00:34.210 --> 00:00:36.090 background noise of driving around town. Yeah, 00:00:36.109 --> 00:00:38.030 they just blend in. It's like street level advertising 00:00:38.030 --> 00:00:40.729 spam. Yeah. Right up there with lost dog flyers. 00:00:40.729 --> 00:00:44.369 Yes, totally. But recently I started really noticing 00:00:44.369 --> 00:00:46.990 them like they were everywhere. And then I go 00:00:46.990 --> 00:00:48.890 home. I turn on the TV. I'm flipping through 00:00:48.890 --> 00:00:51.289 channels late at night. And it's there, too. 00:00:51.570 --> 00:00:55.320 But on TV, it's not ugly at all. Oh, no. On TV, 00:00:55.380 --> 00:00:57.899 it's glamorous. It's so glamorous. It's, you 00:00:57.899 --> 00:01:00.079 know, sledgehammers crashing through drywall 00:01:00.079 --> 00:01:02.899 in slow motion. It's high fives in a brand new 00:01:02.899 --> 00:01:05.299 kitchen. It's these big flashy profit margins 00:01:05.299 --> 00:01:07.739 flashing up on the screen. It's really the two 00:01:07.739 --> 00:01:10.659 faces of the exact same coin, isn't it? The telephone 00:01:10.659 --> 00:01:13.819 pole is the acquisition, the gritty start and 00:01:13.819 --> 00:01:16.319 the TV show. Yeah. That's the disposition, the 00:01:16.319 --> 00:01:18.900 glossy end result. Right. But what they're both 00:01:18.900 --> 00:01:21.879 selling at the end of the day is the concept 00:01:21.879 --> 00:01:24.650 of flipping. And that is what we are really getting 00:01:24.650 --> 00:01:26.549 into today. We're going to unpack this whole 00:01:26.549 --> 00:01:28.849 phenomenon. But I want to be clear. We are not 00:01:28.849 --> 00:01:31.349 doing the HGTV version of this conversation. 00:01:31.549 --> 00:01:34.069 I don't really care about the backsplash tile 00:01:34.069 --> 00:01:37.189 or the staging furniture. I want to know about 00:01:37.189 --> 00:01:39.469 the machinery behind it. Because when you see 00:01:39.469 --> 00:01:41.689 those signs or you watch those shows, you are 00:01:41.689 --> 00:01:44.170 really just looking at the absolute tip of a 00:01:44.170 --> 00:01:47.150 massive economic iceberg. That's a good way to 00:01:47.150 --> 00:01:49.849 put it. We've got this whole stack of articles, 00:01:50.030 --> 00:01:53.260 data reports, economic analyses. and they paint 00:01:53.260 --> 00:01:55.719 this picture of flipping not just as a hobby 00:01:55.719 --> 00:01:58.140 or a side hustle, but as a massive financial 00:01:58.140 --> 00:02:01.420 engine. And I would add an ethical minefield. 00:02:01.540 --> 00:02:04.560 That too, a big one. And we're definitely going 00:02:04.560 --> 00:02:06.079 to get into the ethics of it, but we're also 00:02:06.079 --> 00:02:08.639 going to look at the hard numbers, the actual 00:02:08.639 --> 00:02:12.180 economics of buying, renovating, and reselling 00:02:12.180 --> 00:02:15.000 these assets. And we have to ask the big question 00:02:15.000 --> 00:02:17.860 here. Is this whole industry a vital service 00:02:17.860 --> 00:02:21.960 that is saving our housing stock? Or is it more 00:02:21.960 --> 00:02:24.639 of a predatory machine that's just chewing up 00:02:24.639 --> 00:02:27.280 neighborhoods and spitting out unaffordable assets? 00:02:27.740 --> 00:02:30.300 It's a huge question. And I think maybe before 00:02:30.300 --> 00:02:31.960 we get too deep in the weeds, we should probably 00:02:31.960 --> 00:02:35.599 clarify what we even mean by flipping in this 00:02:35.599 --> 00:02:37.819 specific context. Because, you know, if you talk 00:02:37.819 --> 00:02:39.840 to a day trader on Wall Street, flipping means 00:02:39.840 --> 00:02:41.520 something completely different. That's a great 00:02:41.520 --> 00:02:43.639 point. Yeah. In the broadest sense, flipping 00:02:43.639 --> 00:02:47.300 is just. It's buying any asset to sell it quickly 00:02:47.300 --> 00:02:49.960 for a profit. You can flip a vintage sneaker. 00:02:50.000 --> 00:02:52.620 Right. You can flip a stock, a comic book. A 00:02:52.620 --> 00:02:55.199 Taylor Swift ticket. Exactly. It's an arbitrage 00:02:55.199 --> 00:02:57.479 play. You believe an asset is undervalued or 00:02:57.479 --> 00:02:59.479 maybe you believe you can add value to it really 00:02:59.479 --> 00:03:01.879 quickly and then you sell it on. But for this 00:03:01.879 --> 00:03:04.199 deep dive we're focusing in, we are looking pretty 00:03:04.199 --> 00:03:07.280 much exclusively at real estate. Right. The whole 00:03:07.280 --> 00:03:09.259 process of acquiring a residential property. 00:03:10.169 --> 00:03:12.150 rehabbing it, or as we'll find out, at least 00:03:12.150 --> 00:03:14.710 claiming to rehab it and then reselling it for 00:03:14.710 --> 00:03:17.150 more. That's the one. And, you know, I think 00:03:17.150 --> 00:03:19.050 the common perception is that this is kind of 00:03:19.050 --> 00:03:20.729 a niche thing. Maybe it's your uncle who's a 00:03:20.729 --> 00:03:23.490 contractor and he does like one house a summer 00:03:23.490 --> 00:03:26.370 or a couple of small time investors here and 00:03:26.370 --> 00:03:29.210 there. Yeah. Cottage industry. Exactly. But the 00:03:29.210 --> 00:03:31.990 data you pulled, man, it really shattered that 00:03:31.990 --> 00:03:34.680 illusion for me. The scale of this is. Well, 00:03:34.719 --> 00:03:36.979 it's industrial. It is absolutely industrial. 00:03:37.180 --> 00:03:39.120 There's no other word for it. If we look at some 00:03:39.120 --> 00:03:41.020 of the peak numbers provided in the research, 00:03:41.219 --> 00:03:44.120 specifically going back to 2017, house flipping 00:03:44.120 --> 00:03:47.319 in the U .S. hit an 11 -year high. We're talking 00:03:47.319 --> 00:03:51.379 about 207 ,088 condos and single -family houses 00:03:51.379 --> 00:03:53.860 flipped in a single year. Okay, let's just pause 00:03:53.860 --> 00:03:56.240 on that number for a second. 207 ,000, that is... 00:03:56.560 --> 00:03:58.680 That's a lot of drywall. That is a lot of paint. 00:03:58.900 --> 00:04:01.520 It's a staggering amount of inventory being turned 00:04:01.520 --> 00:04:04.139 over. And to give you some context for that number, 00:04:04.259 --> 00:04:09.199 that 207 ,000 represented nearly 6 % of all single 00:04:09.199 --> 00:04:11.400 family property sales that year. Wait a minute, 00:04:11.500 --> 00:04:14.199 6%. You know, 6 % sounds like a small number 00:04:14.199 --> 00:04:16.459 if you just say six. But when you think about 00:04:16.459 --> 00:04:19.740 the millions and millions of real estate transactions 00:04:19.740 --> 00:04:23.579 that happen every year, that's wild. It means 00:04:23.579 --> 00:04:26.680 if I drive down a random street with, say, 20 00:04:26.680 --> 00:04:29.660 for sale signs? Statistically, at least one of 00:04:29.660 --> 00:04:33.300 them, probably more, is a flip. Wow. Yeah. And 00:04:33.300 --> 00:04:35.600 that's really why this matters so much. Because 00:04:35.600 --> 00:04:38.040 when you have an activity that accounts for that 00:04:38.040 --> 00:04:41.180 much of the total market, it stops being a side 00:04:41.180 --> 00:04:43.339 hustle. You know, it starts being a market mover. 00:04:43.519 --> 00:04:45.379 It's not just following the trends. It's making 00:04:45.379 --> 00:04:48.040 the trends. It is. It impacts prices for everyone. 00:04:48.259 --> 00:04:50.439 It impacts the availability of housing stock. 00:04:50.459 --> 00:04:52.560 It fundamentally impacts the character of community. 00:04:52.699 --> 00:04:54.680 And that's the tension, right? That's the central 00:04:54.680 --> 00:04:56.319 conflict we're going to keep coming back to in 00:04:56.319 --> 00:04:58.800 this entire deep dive. On one hand, you have 00:04:58.800 --> 00:05:02.680 this argument that these people are well. They're 00:05:02.680 --> 00:05:05.879 heroes. They are taking the houses that nobody 00:05:05.879 --> 00:05:08.740 wants, the ugly houses from the telephone pole 00:05:08.740 --> 00:05:11.339 sign, and they're turning them back into livable, 00:05:11.339 --> 00:05:14.339 beautiful homes. They are, in a sense, recycling 00:05:14.339 --> 00:05:17.199 the American housing stock. That's the rejuvenation 00:05:17.199 --> 00:05:20.110 argument. And to be fair, it has merit. We'll 00:05:20.110 --> 00:05:21.790 definitely get into that side of it. But then 00:05:21.790 --> 00:05:23.850 you have the complete other side, the side that 00:05:23.850 --> 00:05:26.269 says this is predatory, that it's just a way 00:05:26.269 --> 00:05:29.149 to artificially inflate prices, to create dangerous 00:05:29.149 --> 00:05:31.589 real estate bubbles, and ultimately to displace 00:05:31.589 --> 00:05:32.930 the people who have lived in these neighborhoods 00:05:32.930 --> 00:05:36.290 for decades. The exploitation argument. And honestly, 00:05:36.389 --> 00:05:39.110 the data we have here, it supports both sides. 00:05:39.149 --> 00:05:42.850 It really depends on how a flip is executed and 00:05:42.850 --> 00:05:45.350 why. It's not a binary, you know, good or bad. 00:05:45.649 --> 00:05:48.069 It's a whole spectrum. So let's start with the 00:05:48.069 --> 00:05:50.149 engine that drives all of this. Let's start with 00:05:50.149 --> 00:05:52.649 the money, the economics of the flip, because 00:05:52.649 --> 00:05:55.149 on the surface, the business model seems incredibly 00:05:55.149 --> 00:05:58.310 simple. Deceptively simple. Yeah. Buy low, fix 00:05:58.310 --> 00:06:01.089 it up, sell high. It's the classic buy low, sell 00:06:01.089 --> 00:06:03.189 high logic just applied to bricks and mortar. 00:06:03.370 --> 00:06:06.649 It sounds simple and it is in principle. But 00:06:06.649 --> 00:06:10.069 the real nuance, the secret sauce is in where. 00:06:10.250 --> 00:06:13.550 Where do you buy low and where can you sell high? 00:06:13.829 --> 00:06:17.370 Because real estate, as they say, is local. But 00:06:17.370 --> 00:06:20.509 capital. Capital is global. It's mobile. This 00:06:20.509 --> 00:06:22.310 was one of the most interesting threads in the 00:06:22.310 --> 00:06:26.750 reading for me. This idea that flipping, it follows 00:06:26.750 --> 00:06:28.410 a migration pattern. It's almost like watching 00:06:28.410 --> 00:06:31.209 a weather map or a virus spreading. It moves 00:06:31.209 --> 00:06:33.149 to wherever the conditions are most favorable 00:06:33.149 --> 00:06:36.149 for growth. Exactly. And to really understand 00:06:36.149 --> 00:06:38.069 the current state of flipping, where it's happening 00:06:38.069 --> 00:06:40.790 now, you have to look at the history. of where 00:06:40.790 --> 00:06:42.790 that capital has traveled over the last couple 00:06:42.790 --> 00:06:45.769 of decades. The sources all point to what they 00:06:45.769 --> 00:06:48.829 call the California effect in the 2000s as the 00:06:48.829 --> 00:06:51.410 perfect case study. Ah, the bubble years. The 00:06:51.410 --> 00:06:54.949 bubble years, yeah. Think back to, say, 2005, 00:06:55.189 --> 00:06:58.769 2006 in California. You had this intense economic 00:06:58.769 --> 00:07:01.189 pressure cooker. You had high -paying jobs, high 00:07:01.189 --> 00:07:03.730 wages, but just astronomically high real estate 00:07:03.730 --> 00:07:05.829 prices. It was becoming functionally impossible 00:07:05.829 --> 00:07:08.189 for a normal person to buy a home in the Bay 00:07:08.189 --> 00:07:10.350 Area or Los Angeles. So what do people do when 00:07:10.350 --> 00:07:12.329 they can't afford to live where they work? They 00:07:12.329 --> 00:07:14.889 move. They move. They migrate. And crucially, 00:07:14.930 --> 00:07:17.009 they take their equity with them. So you saw 00:07:17.009 --> 00:07:19.310 this massive exodus of Californians moving to 00:07:19.310 --> 00:07:22.149 cheaper states. The data points to Arizona, Nevada, 00:07:22.430 --> 00:07:24.949 Texas, Oregon, Washington as the main destinations. 00:07:25.209 --> 00:07:27.449 I remember this so clearly. I remember reading 00:07:27.449 --> 00:07:30.449 all those stories about people selling like a 00:07:30.449 --> 00:07:33.209 total teardown shack in San Jose for a million 00:07:33.209 --> 00:07:35.810 dollars and then going and buying a literal mansion 00:07:35.810 --> 00:07:38.350 in Phoenix. Right. But think about the second 00:07:38.350 --> 00:07:40.519 order effects of that. Think about the economics 00:07:40.519 --> 00:07:43.420 of that single transaction multiplied by thousands. 00:07:43.740 --> 00:07:47.220 You have this wave of new buyers arriving in, 00:07:47.279 --> 00:07:50.160 say, Phoenix with pockets absolutely full of 00:07:50.160 --> 00:07:53.120 California cash. What happens to the housing 00:07:53.120 --> 00:07:55.220 market in Phoenix? Demand goes through the roof. 00:07:55.279 --> 00:07:58.680 Supply is static. So prices have to spike. Prices 00:07:58.680 --> 00:08:01.839 spike dramatically. And who notices when prices 00:08:01.839 --> 00:08:04.300 start to spike? The flippers. Investors. Flippers. 00:08:04.399 --> 00:08:06.620 They see the heat map turning red in a new city 00:08:06.620 --> 00:08:09.350 and they swarm to it. So that migration of people 00:08:09.350 --> 00:08:12.189 directly caused this wave of gentrification in 00:08:12.189 --> 00:08:14.550 these new locations. The Las Vegas Valley, the 00:08:14.550 --> 00:08:16.930 suburbs of Phoenix, they became the new hotspots, 00:08:16.930 --> 00:08:19.370 the new ground zero. It's like a contagion then. 00:08:19.470 --> 00:08:22.029 The high price fever in California infected the 00:08:22.029 --> 00:08:24.600 neighboring states. Contingent is actually a 00:08:24.600 --> 00:08:27.480 very, very apt term for it. And it's important 00:08:27.480 --> 00:08:29.379 because it illustrates that flipping isn't just 00:08:29.379 --> 00:08:31.939 a local issue. You can't just look at your local 00:08:31.939 --> 00:08:34.740 city council and blame them for rising prices. 00:08:35.039 --> 00:08:38.340 It's often driven by these huge macroeconomic 00:08:38.340 --> 00:08:41.539 forces happening thousands of miles away. OK, 00:08:41.679 --> 00:08:44.019 here's where the plot twists a bit, because if 00:08:44.019 --> 00:08:46.100 you asked me today or, you know, in the last 00:08:46.100 --> 00:08:47.679 couple of years where the hot flipping markets 00:08:47.679 --> 00:08:50.600 are, I'd probably still guess the Sunbelt. You 00:08:50.600 --> 00:08:54.220 know, I guess Austin or Miami, maybe Phoenix 00:08:54.220 --> 00:08:56.039 is still hot. That would be the intuitive guess 00:08:56.039 --> 00:08:58.279 for sure. But the data we have from 2020 and 00:08:58.279 --> 00:09:01.559 onward shows this, this massive shift. The capital, 00:09:01.600 --> 00:09:03.820 it seems, got bored of the Sunbelt or maybe it 00:09:03.820 --> 00:09:05.799 just got priced out of the Sunbelt and it moved 00:09:05.799 --> 00:09:09.419 to the Midwest, the Rust Belt. The Great Lakes 00:09:09.419 --> 00:09:12.240 region specifically. This was the most fascinating 00:09:12.240 --> 00:09:14.600 pivot in all the data. We're talking about greater 00:09:14.600 --> 00:09:17.919 Cleveland, Akron, Pittsburgh, and even South 00:09:17.919 --> 00:09:20.840 Bend, Indiana. Akron, Ohio, the new real estate 00:09:20.840 --> 00:09:23.899 frontier. It sounds so counterintuitive. It does 00:09:23.899 --> 00:09:26.039 sound counterintuitive until you pull up the 00:09:26.039 --> 00:09:28.519 spreadsheet. And then it makes perfect, cold, 00:09:28.639 --> 00:09:32.179 hard sense. It is purely a margin play. Okay, 00:09:32.220 --> 00:09:34.379 walk me through the math. Why Akron? What's the 00:09:34.379 --> 00:09:37.120 play? Let's look at the 2019 numbers that were 00:09:37.120 --> 00:09:39.519 provided in our source stack. In these Midwest 00:09:39.519 --> 00:09:42.379 markets, the median flip home was purchased for 00:09:42.379 --> 00:09:47.039 roughly $60 ,000. $60 ,000. I mean, let's just 00:09:47.039 --> 00:09:49.039 sit with that for a second. In San Francisco, 00:09:49.179 --> 00:09:52.059 you can't buy a parking spot for $60 ,000. In 00:09:52.059 --> 00:09:53.759 parts of Cleveland, that gets you a whole house. 00:09:53.980 --> 00:09:55.879 It gets you a whole house. Now, it might need 00:09:55.879 --> 00:09:57.740 a lot of work. It's not going to be pretty. It 00:09:57.740 --> 00:09:59.840 might be in a neighborhood that has seen much, 00:09:59.899 --> 00:10:03.100 much better days. But the entry price, your initial 00:10:03.100 --> 00:10:06.379 capital outlay, is incredibly low. Okay, so that's 00:10:06.379 --> 00:10:08.340 the buy low part. What about the sell high? Right. 00:10:08.460 --> 00:10:10.659 So now look at the exit price. They were selling 00:10:10.659 --> 00:10:12.840 those same renovated homes for a median price 00:10:12.840 --> 00:10:15.919 of $124 ,000. Okay, let me do the quick back 00:10:15.919 --> 00:10:18.360 of the knack in math here. You buy for $60 ,000. 00:10:18.360 --> 00:10:22.559 You sell for $124 ,000. That is a $64 ,000 growth 00:10:22.559 --> 00:10:25.399 spread. That's more than 100 % markup on your 00:10:25.399 --> 00:10:28.269 initial purchase price. Exactly. Now, obviously, 00:10:28.330 --> 00:10:30.389 you've got your renovation costs in there. You 00:10:30.389 --> 00:10:32.970 have holding costs, taxes, realtor fees. But 00:10:32.970 --> 00:10:35.330 let's say you spend a generous $30 ,000 on the 00:10:35.330 --> 00:10:38.470 rehab. You are still clearing a massive profit 00:10:38.470 --> 00:10:41.610 relative to your initial investment. The ROI 00:10:41.610 --> 00:10:44.049 is huge. And compared to a market like L .A. 00:10:44.110 --> 00:10:46.289 Oh, it's a completely different world. In L .A., 00:10:46.289 --> 00:10:49.549 you might have to spend $800 ,000 just to buy 00:10:49.549 --> 00:10:52.389 a teardown. And maybe you spend another $200 00:10:52.389 --> 00:10:55.309 ,000 fixing it and sell it for $1 .1 million. 00:10:56.200 --> 00:10:58.960 The raw dollar amount of profit is higher, maybe, 00:10:59.139 --> 00:11:01.980 but the risk you took on is astronomical. Your 00:11:01.980 --> 00:11:04.080 capital is tied up, and the percentage return 00:11:04.080 --> 00:11:06.220 is often much, much thinner. Plus, the competition 00:11:06.220 --> 00:11:09.220 must be insane in those markets. Fierce. Everyone 00:11:09.220 --> 00:11:11.679 is looking for a deal. But in the Midwest in 00:11:11.679 --> 00:11:14.899 2019, 2020, the market inefficiencies were still 00:11:14.899 --> 00:11:16.600 there. There was still gold in those hills, so 00:11:16.600 --> 00:11:19.059 to speak. So you literally have investment advisors, 00:11:19.399 --> 00:11:22.120 people in suits, in high -rise offices in Century 00:11:22.120 --> 00:11:24.379 City telling their California -based investors, 00:11:24.519 --> 00:11:26.940 don't buy a rental in your backyard. Send your 00:11:26.940 --> 00:11:29.779 money to Northeastern Ohio. That's exactly what 00:11:29.779 --> 00:11:31.799 was happening. It's the financialization of the 00:11:31.799 --> 00:11:34.519 Rust Belt. These cities that were hit so hard 00:11:34.519 --> 00:11:36.720 by deindustrialization that had this huge surplus 00:11:36.720 --> 00:11:40.480 of cheap, aging housing stock suddenly became 00:11:40.480 --> 00:11:43.259 these unlikely gold mines for remote capital. 00:11:43.379 --> 00:11:45.200 It's just wild to think about. You have a guy 00:11:45.200 --> 00:11:47.879 in Santa Monica sitting by his pool owning a 00:11:47.879 --> 00:11:51.240 portfolio of three or four homes in Akron that 00:11:51.240 --> 00:11:53.460 he's probably never even stepped foot in. And 00:11:53.460 --> 00:11:55.379 this isn't just a U .S. phenomenon either. The 00:11:55.379 --> 00:11:57.759 sources touched on this briefly, but it's important 00:11:57.759 --> 00:12:00.750 to... note that this buy, rehab, resell model 00:12:00.750 --> 00:12:04.149 is growing rapidly in Europe, too. You have large 00:12:04.149 --> 00:12:06.850 real estate firms and private equity buying up 00:12:06.850 --> 00:12:09.289 properties in places like Berlin and Lisbon doing 00:12:09.289 --> 00:12:11.429 the exact same thing. So it's a global shift 00:12:11.429 --> 00:12:13.850 in how we view housing. It's moving away from 00:12:13.850 --> 00:12:16.870 just shelter and more towards just an asset class 00:12:16.870 --> 00:12:19.970 to be optimized, like a stock or a bond. That's 00:12:19.970 --> 00:12:21.690 the perfect way to describe it. Which brings 00:12:21.690 --> 00:12:24.470 us right back to the impact on the ground. Because 00:12:24.470 --> 00:12:27.179 look. If I'm living in Akron and my neighborhood 00:12:27.179 --> 00:12:30.480 has a bunch of boarded up, derelict houses, and 00:12:30.480 --> 00:12:32.779 suddenly all this capital flows in from California 00:12:32.779 --> 00:12:36.200 and fixes them up, isn't that a good thing? Let's 00:12:36.200 --> 00:12:37.879 play devil's advocate for a minute here. Let's 00:12:37.879 --> 00:12:41.740 talk about the good. This is the strongest, most 00:12:41.740 --> 00:12:44.259 compelling argument for the flipping industry. 00:12:44.559 --> 00:12:48.009 The idea of gentrification as restoration. Right. 00:12:48.090 --> 00:12:50.009 Because nobody wants to live next to a zombie 00:12:50.009 --> 00:12:52.230 house, a place with broken windows and weeds 00:12:52.230 --> 00:12:54.049 up to your waist. Of course not. And there's 00:12:54.049 --> 00:12:56.389 a very specific sociological theory that comes 00:12:56.389 --> 00:12:58.149 up in the literature here that explains why. 00:12:58.370 --> 00:13:00.490 It's called the broken windows theory. Right. 00:13:00.610 --> 00:13:03.629 I've heard this used in policing contexts, you 00:13:03.629 --> 00:13:06.169 know, crack down on the small stuff like turnstile 00:13:06.169 --> 00:13:08.309 jumpers to prevent bigger crimes from happening. 00:13:08.409 --> 00:13:11.830 But how does it apply to real estate? The underlying 00:13:11.830 --> 00:13:14.690 logic is identical. The theory, which dates back 00:13:14.690 --> 00:13:17.029 to social scientists Wilson and Kelling in the 00:13:17.029 --> 00:13:19.710 80s, suggests that visible signs of disorder 00:13:19.710 --> 00:13:22.450 and neglect act as a powerful signal to the community. 00:13:22.730 --> 00:13:25.330 What kind of signal? A broken window that goes 00:13:25.330 --> 00:13:28.830 unfixed. Or in this context, a house with peeling 00:13:28.830 --> 00:13:32.230 paint, knee -high grass, and a collapsing front 00:13:32.230 --> 00:13:36.190 porch that signals to everyone, both law -abiding 00:13:36.190 --> 00:13:39.429 citizens and criminal elements, that... No one 00:13:39.429 --> 00:13:41.470 cares about this place. It signals a lack of 00:13:41.470 --> 00:13:44.070 surveillance, a lack of ownership, a power vacuum. 00:13:44.350 --> 00:13:47.049 Exactly. It sends a message that says the social 00:13:47.049 --> 00:13:49.350 contract is broken here. The rules don't apply. 00:13:49.570 --> 00:13:52.289 And that environment is a magnet for vandalism, 00:13:52.309 --> 00:13:55.409 for squatting, for drug use. It creates this 00:13:55.409 --> 00:13:58.799 vicious spiral of decline. So the flipper in 00:13:58.799 --> 00:14:01.019 this narrative comes in as the interrupter of 00:14:01.019 --> 00:14:03.259 that spiral, the circuit breaker. In theory, 00:14:03.299 --> 00:14:05.620 yes. That's the idea. They come in, they fix 00:14:05.620 --> 00:14:07.879 the broken window, they paint the siding, they 00:14:07.879 --> 00:14:10.039 hire a landscaper to cut the grass, they install 00:14:10.039 --> 00:14:12.279 a motion sensor light on the porch. Suddenly 00:14:12.279 --> 00:14:14.240 the signal changes completely. The signal now 00:14:14.240 --> 00:14:16.820 says someone is watching. Someone has invested 00:14:16.820 --> 00:14:19.460 here. This property has value. Precisely. And 00:14:19.460 --> 00:14:21.879 that can create a virtuous cycle. Well, the criminal 00:14:21.879 --> 00:14:24.450 element might move on. Because the environment 00:14:24.450 --> 00:14:26.789 is no longer permissive. The neighbors across 00:14:26.789 --> 00:14:28.690 the street see the improvement and they feel 00:14:28.690 --> 00:14:31.210 a renewed sense of pride. Or maybe it's just 00:14:31.210 --> 00:14:33.350 peer pressure and they finally decide to paint 00:14:33.350 --> 00:14:35.629 their own fences. The whole block gets a lift. 00:14:35.909 --> 00:14:38.769 And then there's the money side of it for the 00:14:38.769 --> 00:14:41.049 city itself. I have to imagine the local government 00:14:41.049 --> 00:14:43.250 is basically rolling out the red carpet for these 00:14:43.250 --> 00:14:46.490 investors. For the most part, yes. Absolutely. 00:14:46.490 --> 00:14:49.389 Because cities, especially struggling ones, run 00:14:49.389 --> 00:14:51.970 on property taxes. A house that's assessed at 00:14:51.970 --> 00:14:56.110 $60 ,000 pays very little in tax revenue. That 00:14:56.110 --> 00:14:59.830 same house, after a flip, now assessed at $124 00:14:59.830 --> 00:15:02.809 ,000, pays more than double. That's more money 00:15:02.809 --> 00:15:05.490 for schools, for roads, for the fire department. 00:15:05.830 --> 00:15:08.269 Exactly. And don't forget the sales tax bump 00:15:08.269 --> 00:15:10.379 during the renovation itself. I mean, if you're 00:15:10.379 --> 00:15:12.919 doing a full gut rehab on a house, you're buying 00:15:12.919 --> 00:15:15.559 thousands of dollars of lumber, drywall, copper 00:15:15.559 --> 00:15:19.200 pipes, new appliances. You're hiring local electricians 00:15:19.200 --> 00:15:21.559 and plumbers and roofers. It's a mini stimulus 00:15:21.559 --> 00:15:24.220 package for the local economy. It absolutely 00:15:24.220 --> 00:15:27.240 is. There is no denying that. When a flip is 00:15:27.240 --> 00:15:29.659 done right, and that's the key qualifier, when 00:15:29.659 --> 00:15:32.789 it's done right, meaning they actually. fix the 00:15:32.789 --> 00:15:34.850 structural issues and restore the home to the 00:15:34.850 --> 00:15:37.690 market in a responsible way, it can be a massive 00:15:37.690 --> 00:15:40.649 net positive for a dying neighborhood. It brings 00:15:40.649 --> 00:15:43.190 housing stock back online that might otherwise 00:15:43.190 --> 00:15:45.950 be condemned and demolished. When it's done right. 00:15:46.659 --> 00:15:48.419 That feels like the key phrase in this whole 00:15:48.419 --> 00:15:50.340 conversation, doesn't it? It is. Because that 00:15:50.340 --> 00:15:52.759 brings us directly to the dark side. The bad. 00:15:52.960 --> 00:15:55.120 The bad. Because we can talk about the neighbor 00:15:55.120 --> 00:15:57.440 effect. You know, my house value goes up because 00:15:57.440 --> 00:15:59.419 your newly renovated house value went up. That 00:15:59.419 --> 00:16:02.320 sounds great. But there is a cost to that. If 00:16:02.320 --> 00:16:05.019 values on my street keep going up and up and 00:16:05.019 --> 00:16:07.940 up, eventually they go up too much for some people. 00:16:08.139 --> 00:16:10.659 This is where we collide head on with the issue 00:16:10.659 --> 00:16:13.659 of displacement. It's the unavoidable flip side 00:16:13.659 --> 00:16:17.159 of gentrification. Right. So let's say I've lived 00:16:17.159 --> 00:16:19.039 in my house for 30 years. I bought it for nothing 00:16:19.039 --> 00:16:21.360 back in the 80s. Maybe I'm on a fixed income 00:16:21.360 --> 00:16:23.419 now. I'm retired. I'm not planning on selling 00:16:23.419 --> 00:16:27.360 my house ever. But suddenly three flippers come 00:16:27.360 --> 00:16:31.559 onto my block and the property values just skyrocket. 00:16:31.659 --> 00:16:34.480 Your property tax assessment skyrockets right 00:16:34.480 --> 00:16:36.820 along with them. Your tax bill could double or 00:16:36.820 --> 00:16:38.940 triple in just a few years. And if you're on 00:16:38.940 --> 00:16:41.860 a fixed income and you can't afford that new 00:16:41.860 --> 00:16:45.720 massive tax bill. Yeah. You are forced to sell. 00:16:45.820 --> 00:16:47.720 You're taxed out of your own home. You are forced 00:16:47.720 --> 00:16:50.059 to leave the community you may have helped build 00:16:50.059 --> 00:16:52.600 and lived in your entire life. And if you're 00:16:52.600 --> 00:16:55.019 a renter, it's even faster and more brutal. Oh, 00:16:55.039 --> 00:16:57.159 yeah. The landlord sees the property values going 00:16:57.159 --> 00:16:59.620 up all around, sees what the flicked houses are 00:16:59.620 --> 00:17:01.799 renting for and says, why on earth am I charging 00:17:01.799 --> 00:17:04.339 $800 a month when the new market comps say I 00:17:04.339 --> 00:17:07.059 can get $1 ,500? And your lease is up and you 00:17:07.059 --> 00:17:09.400 get a notice. Your rent is doubling. Pay up or 00:17:09.400 --> 00:17:12.440 get out. Exactly. So while the neighborhood objectively 00:17:12.440 --> 00:17:15.299 looks nicer. You know, better paint jobs, new 00:17:15.299 --> 00:17:17.859 windows, manicured lawns. The community that 00:17:17.859 --> 00:17:20.420 actually lived there, the social fabric, is completely 00:17:20.420 --> 00:17:24.460 erased. The flipping activity accelerates gentrification 00:17:24.460 --> 00:17:27.519 to a speed that existing residents simply cannot 00:17:27.519 --> 00:17:30.220 adapt to. And then there's the quality issue, 00:17:30.380 --> 00:17:32.440 the quality of the work itself. We absolutely 00:17:32.440 --> 00:17:34.460 have to talk about the lipstick flip. Oh, the 00:17:34.460 --> 00:17:36.539 lipstick flip. It's such a wonderfully evocative 00:17:36.539 --> 00:17:39.519 term. It really is. It paints the perfect picture, 00:17:39.660 --> 00:17:42.869 doesn't it? A lipstick flip. is in essence putting 00:17:42.869 --> 00:17:45.490 lipstick on a pig. It's a renovation that is 00:17:45.490 --> 00:17:48.849 purely cosmetic, designed to dazzle the buyer's 00:17:48.849 --> 00:17:51.970 eye while ignoring, or in some cases actively 00:17:51.970 --> 00:17:55.250 hiding, the serious, expensive structural rot 00:17:55.250 --> 00:17:57.029 underneath. This is what I was alluding to earlier 00:17:57.029 --> 00:17:59.809 with the millennial gray laminate floors and 00:17:59.809 --> 00:18:01.829 the generic fixtures. You walk into one of these 00:18:01.829 --> 00:18:03.730 places and everything smells like fresh paint. 00:18:03.789 --> 00:18:05.910 It looks like an Instagram post. But what is 00:18:05.910 --> 00:18:08.220 going on behind the drywall? That's the million 00:18:08.220 --> 00:18:11.259 -dollar question. And the problem is, the flipper's 00:18:11.259 --> 00:18:14.319 primary motivation is speed. Every single day 00:18:14.319 --> 00:18:16.440 they hold that property, they're losing money 00:18:16.440 --> 00:18:19.380 on interest payments, insurance, taxes, utilities. 00:18:19.539 --> 00:18:21.980 They want to get in and get out as fast as possible. 00:18:22.160 --> 00:18:25.799 And fixing a cracked foundation is slow and expensive. 00:18:26.220 --> 00:18:30.599 And, most importantly, invisible. No buyer walks 00:18:30.599 --> 00:18:33.000 into an open house and says, ooh, honey, look 00:18:33.000 --> 00:18:35.859 at that sexy new foundation repair. Right. No, 00:18:35.920 --> 00:18:38.180 they say, look at that beautiful subway tile 00:18:38.180 --> 00:18:41.359 backsplash. Or, wow, an open concept. Exactly. 00:18:41.380 --> 00:18:43.039 So the flipper spends all their money on the 00:18:43.039 --> 00:18:45.220 tile, the paint, the new stainless steel appliances, 00:18:45.380 --> 00:18:47.819 the fixtures, the lipstick, and they just ignore 00:18:47.819 --> 00:18:50.319 the cast iron plumbing from 1950 that's about 00:18:50.319 --> 00:18:52.880 to burst. Or the old knob and tube wiring that's 00:18:52.880 --> 00:18:55.150 a genuine fire hazard. The sources we looked 00:18:55.150 --> 00:18:56.930 at mentioned critics saying that flippers often 00:18:56.930 --> 00:19:00.049 use these very specific, expensive looking, minimalist 00:19:00.049 --> 00:19:03.130 designs precisely to distract from the lack of 00:19:03.130 --> 00:19:05.269 structural integrity. It's basically architectural 00:19:05.269 --> 00:19:08.210 sleight of hand. It is. They create a wow factor 00:19:08.210 --> 00:19:10.990 with surface level stuff to keep you from looking 00:19:10.990 --> 00:19:12.809 too closely at the things that actually matter. 00:19:13.259 --> 00:19:15.400 for the health and safety of the home. And in 00:19:15.400 --> 00:19:18.119 Europe, the sources point to an even more specific 00:19:18.119 --> 00:19:21.160 and maybe more insidious type of structural degradation. 00:19:21.539 --> 00:19:24.500 It's not just about bad repairs. It's about fundamentally 00:19:24.500 --> 00:19:27.660 changing the layout of homes for the worse. This 00:19:27.660 --> 00:19:30.720 is the chopping up of apartments. Yes. In many 00:19:30.720 --> 00:19:33.440 older European cities, you have these beautiful, 00:19:33.519 --> 00:19:35.980 large, historic apartments. They're perfect for 00:19:35.980 --> 00:19:38.940 a family. But a flipper or an investor looks 00:19:38.940 --> 00:19:41.440 at that space, and they don't see a family home. 00:19:41.619 --> 00:19:44.599 They see inefficiency. They see unmonetized square 00:19:44.599 --> 00:19:46.859 footage. So what do they do? They buy the large 00:19:46.859 --> 00:19:48.880 family apartment, and they throw up a bunch of 00:19:48.880 --> 00:19:51.240 new walls and chop it into three tiny micro apartments. 00:19:51.519 --> 00:19:53.839 Because three tiny rents add up to more than 00:19:53.839 --> 00:19:56.180 one big rent. It's just a math problem for them. 00:19:56.400 --> 00:19:59.460 Correct. But the long -term cost to the city 00:19:59.460 --> 00:20:02.420 is that you systematically destroy the family 00:20:02.420 --> 00:20:05.319 -sized housing stock. You turn a neighborhood 00:20:05.319 --> 00:20:08.099 that was once full of families into a neighborhood 00:20:08.099 --> 00:20:11.019 of transients, students and short term renters. 00:20:11.259 --> 00:20:13.579 You change the demographic fabric of a place 00:20:13.579 --> 00:20:16.099 permanently just to squeeze out a few more percentage 00:20:16.099 --> 00:20:18.940 points of annual yield. It's incredibly cynical. 00:20:18.960 --> 00:20:20.920 But, you know, I also want to be fair to the 00:20:20.920 --> 00:20:22.500 flippers for a second, or at least the honest 00:20:22.500 --> 00:20:24.839 ones who are trying to do good work, because 00:20:24.839 --> 00:20:27.750 the sources made it very, very clear. This is 00:20:27.750 --> 00:20:30.390 not easy money. We see the big profit numbers 00:20:30.390 --> 00:20:32.509 on TV, but we don't always see the spectacular 00:20:32.509 --> 00:20:35.490 losses. No, absolutely not. It's a high risk, 00:20:35.569 --> 00:20:38.009 high stress game. The failure rate is significant. 00:20:38.450 --> 00:20:41.549 The sources we read listed a top 10 risk factors 00:20:41.549 --> 00:20:43.829 list, and it's basically a catalog of nightmares 00:20:43.829 --> 00:20:45.809 for any property owner. What was the one that 00:20:45.809 --> 00:20:47.809 stood out to you on that list? For me, it was 00:20:47.809 --> 00:20:50.150 the concept of the demo discovery. That sounds 00:20:50.150 --> 00:20:52.369 like the title of a horror movie. For the investor, 00:20:52.529 --> 00:20:55.170 it feels like one. It's that moment when you 00:20:55.170 --> 00:20:57.910 start demolition. You take that sledgehammer 00:20:57.910 --> 00:20:59.329 to the kitchen wall because you want to create 00:20:59.329 --> 00:21:01.809 that open concept we talked about, and you find 00:21:01.809 --> 00:21:03.950 something you absolutely did not budget for. 00:21:04.329 --> 00:21:08.029 Like what? Termites. Termites. Black mold hiding 00:21:08.029 --> 00:21:11.509 behind the drywall. A load -bearing wall that 00:21:11.509 --> 00:21:13.930 your plan said you could remove, but it turns 00:21:13.930 --> 00:21:15.730 out it's the only thing holding up the second 00:21:15.730 --> 00:21:18.450 floor. Or maybe you find out the previous owner 00:21:18.450 --> 00:21:20.630 did a bunch of unpermitted electrical work, and 00:21:20.630 --> 00:21:23.250 it's a complete rat's nest of fire hazards. And 00:21:23.250 --> 00:21:25.990 just like that, your $30 ,000 renovation budget 00:21:25.990 --> 00:21:29.269 is now $60 ,000 or more. And your three -month 00:21:29.269 --> 00:21:32.069 timeline just doubled. And while you're scrambling 00:21:32.069 --> 00:21:33.670 to deal with that, you're also dealing with the 00:21:33.670 --> 00:21:37.569 other huge risk factor, the human element, specifically 00:21:37.569 --> 00:21:41.230 finding dependable contractors. Oh, man. Anyone 00:21:41.230 --> 00:21:43.450 who has ever just tried to do a simple kitchen 00:21:43.450 --> 00:21:46.250 remodel knows this pain intimately. Now imagine 00:21:46.250 --> 00:21:49.509 doing it remotely. Imagine you're that investor 00:21:49.509 --> 00:21:51.410 we talked about sitting in California trying 00:21:51.410 --> 00:21:54.990 to manage a contractor in Akron, Ohio. The contractor 00:21:54.990 --> 00:21:57.569 knows you aren't there to check on the progress. 00:21:57.869 --> 00:21:59.910 Maybe he doesn't show up for a week. Maybe he's 00:21:59.910 --> 00:22:02.569 juggling three other jobs. Maybe a bunch of expensive 00:22:02.569 --> 00:22:04.910 copper piping just walks off the job site. So 00:22:04.910 --> 00:22:06.829 you're just bleeding money every single day. 00:22:06.990 --> 00:22:09.309 You're bleeding money. Running out of funds is 00:22:09.309 --> 00:22:13.480 a huge, huge risk. If you run out of cash halfway 00:22:13.480 --> 00:22:16.220 through a flip, you are dead in the water. You 00:22:16.220 --> 00:22:18.059 can't sell a half gutted house for a profit. 00:22:18.140 --> 00:22:20.799 You're stuck. You might lose everything. So it's 00:22:20.799 --> 00:22:23.660 high risk, high reward. That's the game. But 00:22:23.660 --> 00:22:25.240 that's the legal version of the game. That's 00:22:25.240 --> 00:22:27.519 the, you know, I tried my best, but the market 00:22:27.519 --> 00:22:29.940 turned against me version. Now we need to move 00:22:29.940 --> 00:22:32.299 to the next segment. The part that I have to 00:22:32.299 --> 00:22:34.359 say really made my blood boil when I was reading 00:22:34.359 --> 00:22:37.359 the notes. We need to talk about the ugly. This 00:22:37.359 --> 00:22:40.200 is where we leave the world of legitimate. if 00:22:40.200 --> 00:22:43.720 risky, investment strategies. And we enter the 00:22:43.720 --> 00:22:46.259 world of actual crime. Because there are people 00:22:46.259 --> 00:22:48.720 out there who aren't just bad at flipping or 00:22:48.720 --> 00:22:52.079 cutting corners to save a buck. They are actively 00:22:52.079 --> 00:22:55.200 and systematically preying on people. Predatory 00:22:55.200 --> 00:22:57.880 behavior. And it often starts with the acquisition. 00:22:58.180 --> 00:23:00.460 We talked about those yellow signs, we buy ugly 00:23:00.460 --> 00:23:03.619 houses. But the tactics used to actually get 00:23:03.619 --> 00:23:06.480 the owners of those houses to sell can be incredibly 00:23:06.480 --> 00:23:08.440 manipulative. Let's talk about this concept of 00:23:08.440 --> 00:23:11.690 posing. What is that? Posing is a tactic where 00:23:11.690 --> 00:23:14.490 a corporate entity, a big real estate firm or 00:23:14.490 --> 00:23:17.069 a professional investment group disguises itself 00:23:17.069 --> 00:23:20.289 as a sympathetic everyday individual. So like 00:23:20.289 --> 00:23:22.269 you get a letter in the mail and it looks handwritten. 00:23:22.309 --> 00:23:24.710 Maybe it's on, you know, cute stationery. And 00:23:24.710 --> 00:23:27.069 it says something like, hi, I'm Jen. My husband 00:23:27.069 --> 00:23:28.750 and I are looking for our first home to raise 00:23:28.750 --> 00:23:31.009 our baby in. We just love your street. Please 00:23:31.009 --> 00:23:33.130 call us if you're thinking of selling. Right. 00:23:33.309 --> 00:23:35.849 And you, the homeowner, you think, oh, how sweet. 00:23:35.970 --> 00:23:38.410 Jen needs a house for her baby. Yeah. But Jen 00:23:38.410 --> 00:23:42.250 is a persona. Jen isn't real. Jen is a call center 00:23:42.250 --> 00:23:45.410 in another state. Jen is a shell company owned 00:23:45.410 --> 00:23:49.049 by a private equity firm. That is so dark. It's 00:23:49.049 --> 00:23:51.650 a psychological tactic. It's designed to lower 00:23:51.650 --> 00:23:54.349 your defenses. If you know you're negotiating 00:23:54.349 --> 00:23:57.450 with a sharp -suited professional shark, you 00:23:57.450 --> 00:24:00.349 keep your guard up. You hire a lawyer. You get 00:24:00.349 --> 00:24:02.609 your own appraisal. If you think you're helping 00:24:02.609 --> 00:24:05.390 a nice young couple start their family, You might 00:24:05.390 --> 00:24:08.089 accept a lower price out of kindness. You might 00:24:08.089 --> 00:24:10.519 be more flexible on the terms. And who are they 00:24:10.519 --> 00:24:12.359 targeting with these letters? They're not just 00:24:12.359 --> 00:24:14.539 sending them out randomly, are they? No, the 00:24:14.539 --> 00:24:17.339 targeting is very precise. The sources are very 00:24:17.339 --> 00:24:19.720 specific about this. They target the vulnerable. 00:24:20.140 --> 00:24:23.359 They pull public records to find the elderly 00:24:23.359 --> 00:24:25.619 who have owned their homes for a long time who 00:24:25.619 --> 00:24:27.920 might be looking to downsize and have no idea 00:24:27.920 --> 00:24:30.599 what the current market value is. OK. They target 00:24:30.599 --> 00:24:33.000 people who are in foreclosure or deep in debt. 00:24:33.299 --> 00:24:35.640 They target owners of properties with what the 00:24:35.640 --> 00:24:38.240 industry calls stigmas. Stigmas. What does that 00:24:38.240 --> 00:24:40.740 mean? It could be anything that makes a property 00:24:40.740 --> 00:24:43.960 hard to sell on the open market. A serious bug 00:24:43.960 --> 00:24:47.720 infestation, a hoarding situation, a house where 00:24:47.720 --> 00:24:50.140 a violent crime occurred, or even just a house 00:24:50.140 --> 00:24:52.819 with notoriously bad neighbors. They find owners 00:24:52.819 --> 00:24:55.900 who are embarrassed or desperate or just completely 00:24:55.900 --> 00:24:58.859 overwhelmed, and they offer them what seems like 00:24:58.859 --> 00:25:01.180 an easy way out. We'll pay cash, we can close 00:25:01.180 --> 00:25:04.059 in seven days, no inspections, no hassle. And 00:25:04.059 --> 00:25:06.420 for someone who is drowning in debt or shame, 00:25:06.660 --> 00:25:09.430 that sounds like a lifeline. But it's not. It's 00:25:09.430 --> 00:25:11.890 an anchor. Because the offer they make is almost 00:25:11.890 --> 00:25:14.190 always pennies on the dollar. They are stripping 00:25:14.190 --> 00:25:16.049 the equity from the people who need it the most 00:25:16.049 --> 00:25:19.069 under the guise of helping them. But even that, 00:25:19.230 --> 00:25:21.369 it's still technically legal, right? I mean, 00:25:21.369 --> 00:25:25.069 it's unethical, it's slimy, but buying low isn't 00:25:25.069 --> 00:25:27.670 a crime in itself? Correct. It exists in a moral 00:25:27.670 --> 00:25:30.890 gray area. But illegal property flipping is a 00:25:30.890 --> 00:25:34.240 crime. And the sources we reviewed and law enforcement 00:25:34.240 --> 00:25:36.720 distinguish this very, very clearly from just 00:25:36.720 --> 00:25:39.119 being a shrewd negotiator. OK, so this is the 00:25:39.119 --> 00:25:41.119 real criminal stuff. What makes a flip illegal? 00:25:41.500 --> 00:25:45.099 In a word, fraud. The mechanism here is completely 00:25:45.099 --> 00:25:47.880 different. In a legal flip, you buy a property, 00:25:48.039 --> 00:25:50.480 you add value through improvements or you wait 00:25:50.480 --> 00:25:53.140 for the market to rise and then you sell. In 00:25:53.140 --> 00:25:55.980 an illegal flip, the improvement is a lie. and 00:25:55.980 --> 00:25:58.519 the value is a complete fabrication. Okay, so 00:25:58.519 --> 00:26:00.599 walk us through the scheme. How do you pull something 00:26:00.599 --> 00:26:03.279 like this off? All right, step one, the criminal 00:26:03.279 --> 00:26:06.740 entity buys a property, usually a very distressed 00:26:06.740 --> 00:26:08.660 one, a real wreck. Let's say they buy it for 00:26:08.660 --> 00:26:12.660 $100 ,000. Okay. Step two, they make zero, and 00:26:12.660 --> 00:26:15.039 I mean zero, meaningful improvements. They might 00:26:15.039 --> 00:26:17.299 sweep the floor. They might put up a new house 00:26:17.299 --> 00:26:18.920 number to make it look like something happened, 00:26:19.019 --> 00:26:21.279 but they do nothing of actual value. Got it. 00:26:21.339 --> 00:26:23.779 Step three is the crime itself. They immediately 00:26:23.779 --> 00:26:26.259 put it back on the market, sometimes within days 00:26:26.259 --> 00:26:29.720 or even hours, and resell it for, say, $200 ,000. 00:26:30.000 --> 00:26:33.019 But wait, who would buy a $100 ,000 house for 00:26:33.019 --> 00:26:35.140 $200 ,000? Wouldn't the buyer, you know, see 00:26:35.140 --> 00:26:37.579 that it's a total dump? They would, unless the 00:26:37.579 --> 00:26:40.410 buyer is in on the scheme. Or, more commonly, 00:26:40.529 --> 00:26:42.470 the real victim isn't the buyer, it's the bank. 00:26:42.690 --> 00:26:45.210 The scheme requires collusion. You can't do it 00:26:45.210 --> 00:26:47.890 alone. You need a corrupt appraiser. Ah, the 00:26:47.890 --> 00:26:50.049 appraiser is the gatekeeper. The appraiser is 00:26:50.049 --> 00:26:52.890 the linchpin. The bank relies on the professional 00:26:52.890 --> 00:26:56.089 appraiser to tell them, yes, this house is indeed 00:26:56.089 --> 00:26:59.490 worth $200 ,000 and is adequate collateral for 00:26:59.490 --> 00:27:02.549 the loan. So the corrupt appraiser falsifies 00:27:02.549 --> 00:27:05.559 the report. They might use comparable sales from 00:27:05.559 --> 00:27:07.400 a totally different, much nicer neighborhood. 00:27:07.740 --> 00:27:09.880 They might lie about the square footage or the 00:27:09.880 --> 00:27:12.019 condition of the property. So the bank's underwriting 00:27:12.019 --> 00:27:14.859 department gets the paperwork. It all looks legitimate, 00:27:14.980 --> 00:27:17.440 they say, looks good. And they approve the loan 00:27:17.440 --> 00:27:20.460 and wire the $200 ,000. Exactly. The flipper 00:27:20.460 --> 00:27:23.720 gets the $200 ,000, pays off the corrupt appraiser, 00:27:23.779 --> 00:27:26.140 and walks away with a huge fraudulent profit. 00:27:27.450 --> 00:27:30.130 The buyer, who is often a straw buyer, who has 00:27:30.130 --> 00:27:32.109 paid a small fee to let the criminals use their 00:27:32.109 --> 00:27:34.569 good credit score, never intends to make a single 00:27:34.569 --> 00:27:37.289 mortgage payment. The mortgage immediately goes 00:27:37.289 --> 00:27:40.109 into default. The bank has to foreclose. And 00:27:40.109 --> 00:27:41.750 when the bank finally takes possession of the 00:27:41.750 --> 00:27:43.490 house and goes to sell it to recoup their money, 00:27:43.630 --> 00:27:45.829 they realize, wait a minute, this is a pile of 00:27:45.829 --> 00:27:48.789 rubble that's only worth $100 ,000. The bank 00:27:48.789 --> 00:27:51.279 is forced to take the massive loss. It's literally 00:27:51.279 --> 00:27:53.599 bank robbery with paperwork instead of a gun. 00:27:53.740 --> 00:27:55.900 That's a perfect way to put it. And when you 00:27:55.900 --> 00:27:58.799 multiply this by thousands and thousands of transactions 00:27:58.799 --> 00:28:01.339 across the country, you get systemic risk. You 00:28:01.339 --> 00:28:03.339 get bubbles. And this brings us to the big one, 00:28:03.440 --> 00:28:07.019 the 2008 connection. Because I think people remember 00:28:07.019 --> 00:28:10.079 the big short. They remember the term subprime. 00:28:10.299 --> 00:28:12.859 But I don't think everyone fully realizes how 00:28:12.859 --> 00:28:16.359 central this kind of flipping was to the entire 00:28:16.359 --> 00:28:20.089 crash. It was the gasoline on the fire. An accelerant. 00:28:20.089 --> 00:28:22.750 How so? What was the mechanism? Well, think about 00:28:22.750 --> 00:28:24.930 the incentives at the time. In the years leading 00:28:24.930 --> 00:28:28.450 up to 2008, lending standards were, well, they 00:28:28.450 --> 00:28:30.369 were basically non -existent. You had the infamous 00:28:30.369 --> 00:28:33.990 no income, no job, no assets loans, the NINJ 00:28:33.990 --> 00:28:36.250 loans. You could get a mortgage with practically 00:28:36.250 --> 00:28:39.079 zero money down. So you didn't need to be a millionaire 00:28:39.079 --> 00:28:41.339 real estate tycoon to be a speculator anymore. 00:28:41.500 --> 00:28:43.640 You just needed a pulse and a decent credit score. 00:28:43.799 --> 00:28:46.160 Exactly. So you had taxi drivers, strippers, 00:28:46.420 --> 00:28:48.980 school teachers, people with absolutely no background 00:28:48.980 --> 00:28:51.160 in real estate, buying three, four, five houses 00:28:51.160 --> 00:28:53.359 at a time, not to live in, not even to rent out, 00:28:53.420 --> 00:28:55.400 just to flip. They were betting on the market. 00:28:55.539 --> 00:28:57.059 They assumed prices would just go up forever. 00:28:57.299 --> 00:29:00.960 It was pure, unadulterated speculation. They 00:29:00.960 --> 00:29:03.480 were buying with the sole intent of reselling 00:29:03.480 --> 00:29:06.630 in a month or two for profit. And this created 00:29:06.630 --> 00:29:09.829 this massive artificial demand for housing, demand 00:29:09.829 --> 00:29:12.470 radically outstripped supply. And what happens 00:29:12.470 --> 00:29:17.089 then? Prices skyrocketed. Which in turn drew 00:29:17.089 --> 00:29:19.589 in even more flippers who saw the easy money 00:29:19.589 --> 00:29:22.569 being made. It was a feedback loop, an inflationary 00:29:22.569 --> 00:29:25.589 spiral. But it was a house to cards because the 00:29:25.589 --> 00:29:27.630 underlying value just wasn't theirs, all built 00:29:27.630 --> 00:29:29.930 on cheap debt. And the moment the prices stopped 00:29:29.930 --> 00:29:32.519 rising, the moment the music stopped. Everyone 00:29:32.519 --> 00:29:34.500 tried to sell at once. And there were no buyers 00:29:34.500 --> 00:29:37.640 left, just sellers. And prices collapsed. But 00:29:37.640 --> 00:29:39.660 the debt, the mortgages, remained. And because 00:29:39.660 --> 00:29:41.859 the banks had lent 100 % of the inflated value, 00:29:42.039 --> 00:29:45.000 or in some cases even more, they were left holding 00:29:45.000 --> 00:29:47.839 trillions of dollars in toxic assets. The flipping 00:29:47.839 --> 00:29:51.240 frenzy was a major, major component. of what 00:29:51.240 --> 00:29:53.559 became the global financial crisis. It's actually 00:29:53.559 --> 00:29:55.859 terrifying to think that a bunch of people slapping 00:29:55.859 --> 00:29:58.079 gray paint on houses in Florida and Nevada helped 00:29:58.079 --> 00:29:59.940 take down an institution like Lehman Brothers. 00:30:00.160 --> 00:30:02.180 It just shows how interconnected and fragile 00:30:02.180 --> 00:30:04.799 the whole system can be. So surely we learned 00:30:04.799 --> 00:30:07.640 our lesson from that, right? This brings us to 00:30:07.640 --> 00:30:11.559 segment five, regulation. What did the government 00:30:11.559 --> 00:30:14.240 do to stop this from ever happening again? Well, 00:30:14.299 --> 00:30:16.960 they tried. The FHA, the Federal Housing Administration, 00:30:17.240 --> 00:30:19.740 has always been wary of this stuff. They insure 00:30:19.740 --> 00:30:22.079 mortgages against default. So they are the ones 00:30:22.079 --> 00:30:24.400 on the hook financially when these fraud schemes 00:30:24.400 --> 00:30:26.740 go south. So they have skin in the game. A lot 00:30:26.740 --> 00:30:30.160 of skin in the game. So back in 2003, they already 00:30:30.160 --> 00:30:33.319 had rules about this. But in 2006, right as the 00:30:33.319 --> 00:30:35.640 bubble was really peaking, they introduced a 00:30:35.640 --> 00:30:38.400 very specific rule designed to stop predatory 00:30:38.400 --> 00:30:40.890 flipping in its tracks. It was called the 90 00:30:40.890 --> 00:30:43.170 -day rule. Okay, the 90 -day rule. How did that 00:30:43.170 --> 00:30:45.250 work? It was very simple and very effective. 00:30:45.450 --> 00:30:47.910 If you bought a house, you were prohibited from 00:30:47.910 --> 00:30:50.589 reselling it to a buyer using an FHA -insured 00:30:50.589 --> 00:30:53.990 mortgage for at least 90 days. Why 90 days? What's 00:30:53.990 --> 00:30:56.829 magical about three months? It stops the churn. 00:30:57.349 --> 00:30:59.630 The illegal fraud schemes we just talked about, 00:30:59.890 --> 00:31:03.269 the buy at noon, sell at 1 p .m. scams, those 00:31:03.269 --> 00:31:06.450 rely on incredible speed. By forcing the investor 00:31:06.450 --> 00:31:09.269 to actually hold the property for 90 days, you 00:31:09.269 --> 00:31:12.230 force them to incur real costs. Holding costs. 00:31:12.589 --> 00:31:15.210 Exactly. Mortgage payments, insurance, taxes, 00:31:15.529 --> 00:31:18.029 maintenance, market risk. It makes the quick 00:31:18.029 --> 00:31:20.930 and dirty scam unprofitable and much riskier. 00:31:21.049 --> 00:31:23.289 So it's basically a speed bump for the market. 00:31:23.529 --> 00:31:27.230 It's a fantastic speed bump. And it worked until... 00:31:28.149 --> 00:31:30.089 Ironically, it became a problem. Wait, how did 00:31:30.089 --> 00:31:32.529 a rule that stopped fraud become a problem? Because 00:31:32.529 --> 00:31:34.950 of the crash it was meant to prevent. By 2010, 00:31:35.170 --> 00:31:37.670 the housing market was a corpse. Foreclosures 00:31:37.670 --> 00:31:39.549 were everywhere. Banks were drowning in this 00:31:39.549 --> 00:31:41.890 bad inventory they couldn't get rid of. The government 00:31:41.890 --> 00:31:45.099 needed someone. anyone to come in and start buying 00:31:45.099 --> 00:31:47.440 up these foreclosed homes to stabilize the market. 00:31:47.539 --> 00:31:49.400 They needed the flippers. They needed the flippers. 00:31:49.480 --> 00:31:51.539 But the flippers, the legitimate ones, were saying, 00:31:51.700 --> 00:31:53.799 hey, we can't buy these thousands of foreclosures 00:31:53.799 --> 00:31:56.220 because the 90 -day rule ties up our capital 00:31:56.220 --> 00:31:58.680 for too long. We need to be able to move fast 00:31:58.680 --> 00:32:01.839 to make the business model work. Wow. So the 00:32:01.839 --> 00:32:03.759 government was stuck between a rock and a hard 00:32:03.759 --> 00:32:06.920 place. Do you keep the rule that stops fraud 00:32:06.920 --> 00:32:09.740 or do you get rid of it to save the entire market 00:32:09.740 --> 00:32:12.440 from collapsing further? And they chose the market. 00:32:12.799 --> 00:32:16.000 In 2010, the FHA issued a waiver that greatly 00:32:16.000 --> 00:32:19.220 relaxed and for a period of time essentially 00:32:19.220 --> 00:32:21.660 eliminated the 90 -day requirement. They took 00:32:21.660 --> 00:32:23.920 down the speed bump to get traffic moving again, 00:32:24.000 --> 00:32:26.079 even if some of that traffic was dangerous. That's 00:32:26.079 --> 00:32:28.240 the perfect analogy. It was a calculated risk. 00:32:28.400 --> 00:32:31.259 They hoped that other newer oversight mechanisms 00:32:31.259 --> 00:32:33.700 like stricter appraisal standards and smarter 00:32:33.700 --> 00:32:36.420 bank algorithms would catch the fraud this time. 00:32:36.890 --> 00:32:39.190 And to be fair, we do have things now like U 00:32:39.190 --> 00:32:40.869 .S. PAPE, which are the professional appraisal 00:32:40.869 --> 00:32:43.349 standards. And Fannie Mae has these collateral 00:32:43.349 --> 00:32:45.809 underwriter programs that automatically flag 00:32:45.809 --> 00:32:49.369 suspicious rapid flips. But the fundamental tension 00:32:49.369 --> 00:32:52.869 remains. Regulation slows down market. Deregulation 00:32:52.869 --> 00:32:55.130 invites fraud. It's a pendulum that just keeps 00:32:55.130 --> 00:32:57.609 swinging back and forth. Now, I want to pivot 00:32:57.609 --> 00:32:59.529 from government regulation to something that 00:32:59.529 --> 00:33:01.710 I think is in some ways just as powerful and 00:33:01.710 --> 00:33:04.170 shaping this industry. And that's the culture, 00:33:04.369 --> 00:33:07.410 the media. Oh, this is huge. You can't understand 00:33:07.410 --> 00:33:09.890 modern flipping without talking about TV. Right, 00:33:10.029 --> 00:33:12.769 because as we said, after the 2008 crash, flipping 00:33:12.769 --> 00:33:15.450 was a dirty word. If you called someone a flipper, 00:33:15.529 --> 00:33:17.130 it was an insult. You were basically calling 00:33:17.130 --> 00:33:20.069 them a shark, a scammer, a person who helped 00:33:20.069 --> 00:33:22.210 cause the recession. It was a derogatory term. 00:33:22.250 --> 00:33:24.190 It was associated with financial ruin and greed. 00:33:24.690 --> 00:33:28.490 But then... Yeah. Something shifted. The reputation 00:33:28.490 --> 00:33:31.690 got laundered. And I think we can trace it back 00:33:31.690 --> 00:33:34.369 to a specific network and a specific genre of 00:33:34.369 --> 00:33:38.920 television. Reality TV, HGTV, A &E. Bravo. And 00:33:38.920 --> 00:33:40.740 the sources mentioned a really specific moment 00:33:40.740 --> 00:33:45.259 in July 2012. CNBC, which is a serious business 00:33:45.259 --> 00:33:48.599 news network, greenlit multiple new pilots, all 00:33:48.599 --> 00:33:50.440 focused on house flipping. That was the signal. 00:33:50.500 --> 00:33:52.279 That was the moment the industry came out of 00:33:52.279 --> 00:33:54.759 the penalty box. When a network like CNBC says 00:33:54.759 --> 00:33:57.240 this is legitimate business content, they are 00:33:57.240 --> 00:33:59.420 re -legitimizing the entire practice for the 00:33:59.420 --> 00:34:01.420 public. They are saying this is a valid business 00:34:01.420 --> 00:34:03.420 again. And then the flood gets just opened. Flip 00:34:03.420 --> 00:34:05.680 or flop. Flip this house. Property ladder masters 00:34:05.680 --> 00:34:08.369 a flip. Then the crazier ones like Zombie House 00:34:08.369 --> 00:34:11.050 Flipping, Flipping Vegas, Flipping Boston. It's 00:34:11.050 --> 00:34:13.329 an endless list. But think about what these shows 00:34:13.329 --> 00:34:17.030 actually do psychologically. They gamify housing. 00:34:17.230 --> 00:34:19.789 They absolutely do. Every single episode has 00:34:19.789 --> 00:34:22.869 the exact same formulaic structure. The brave, 00:34:22.869 --> 00:34:25.469 telegenic hero buys the ugliest house on the 00:34:25.469 --> 00:34:28.230 block. They encounter a scary, unexpected prop. 00:34:28.369 --> 00:34:31.280 Oh no, the budget. Which usually happens right 00:34:31.280 --> 00:34:33.679 before a commercial break. Of course. They heroically 00:34:33.679 --> 00:34:36.420 solve it. They stage the house with beautiful 00:34:36.420 --> 00:34:41.539 furniture. And then the payoff. The big reveal. 00:34:41.800 --> 00:34:43.940 And the graphic on the screen. Purchase price, 00:34:44.059 --> 00:34:47.599 $6. Renovation cost, 36 city. Total profit, $50 00:34:47.599 --> 00:34:50.860 ,000. And then everyone high fives and the credits 00:34:50.860 --> 00:34:53.349 roll. It trains us as viewers to view the house 00:34:53.349 --> 00:34:56.110 solely as a profit center. It trains us to root 00:34:56.110 --> 00:34:58.590 for the highest possible sale price. Exactly. 00:34:58.750 --> 00:35:00.349 You're sitting there on your couch and you are 00:35:00.349 --> 00:35:02.389 actively cheering for the house to sell for the 00:35:02.389 --> 00:35:04.170 highest number imaginable. You were cheering 00:35:04.170 --> 00:35:06.349 for housing inflation in your city. You never 00:35:06.349 --> 00:35:07.949 stopped to ask, wait, who can actually afford 00:35:07.949 --> 00:35:10.389 that house now? Or what does this do to the property 00:35:10.389 --> 00:35:12.849 taxes of the neighbors? You're just happy that 00:35:12.849 --> 00:35:15.119 the nice couple on TV made their money. And it 00:35:15.119 --> 00:35:17.800 completely, totally glosses over the lipstick 00:35:17.800 --> 00:35:20.619 issue we talked about. We are trained by these 00:35:20.619 --> 00:35:23.860 shows to applaud the gray floors and the subway 00:35:23.860 --> 00:35:27.360 tile and the barn doors. That specific visual 00:35:27.360 --> 00:35:31.199 language, the HGTV aesthetic, becomes the new 00:35:31.199 --> 00:35:33.960 standard for what value looks like. And we don't 00:35:33.960 --> 00:35:36.400 ask if they properly replaced the 80 -year -old 00:35:36.400 --> 00:35:39.280 wiring. We just ask if they successfully opened 00:35:39.280 --> 00:35:41.420 up the floor plan. It creates a whole generation 00:35:41.420 --> 00:35:45.159 of buyers who value aesthetics over mechanics. 00:35:45.780 --> 00:35:48.300 And maybe even more dangerously, it creates a 00:35:48.300 --> 00:35:50.960 generation of amateur flippers who watch these 00:35:50.960 --> 00:35:52.960 shows and think, hey, I can do that. It looks 00:35:52.960 --> 00:35:54.719 so easy. And then they go out, they get a hard 00:35:54.719 --> 00:35:56.539 money loan, they buy a house in Akron, and they 00:35:56.539 --> 00:35:59.019 get absolutely crushed by that demo discovery. 00:35:59.340 --> 00:36:01.760 Right. The media narrative just fuels the cycle. 00:36:01.840 --> 00:36:04.239 It keeps the fresh, naive capital flowing into 00:36:04.239 --> 00:36:06.559 the system, which helps keep the prices up, which 00:36:06.559 --> 00:36:08.860 keeps the pros in business. It's a self -perpetuating 00:36:08.860 --> 00:36:12.900 machine. So after all of this, where does this 00:36:12.900 --> 00:36:15.360 leave us? We've looked at the economics, the 00:36:15.360 --> 00:36:17.300 incredible 100 percent margins in the Midwest. 00:36:17.820 --> 00:36:20.380 We've looked at the good, the real value of fixing 00:36:20.380 --> 00:36:22.860 broken windows and saving homes. We've looked 00:36:22.860 --> 00:36:25.659 at the bad and the ugly, the fraud, the displacement 00:36:25.659 --> 00:36:28.820 and the systemic risk to our economy. I think 00:36:28.820 --> 00:36:30.750 we're left with a spectrum. That really is the 00:36:30.750 --> 00:36:32.409 most important takeaway for anyone listening. 00:36:32.909 --> 00:36:35.750 Flipping isn't inherently evil and it isn't inherently 00:36:35.750 --> 00:36:38.769 good. It is a tool. It is a mechanism for capital 00:36:38.769 --> 00:36:40.829 allocation in the housing market. In the hands 00:36:40.829 --> 00:36:43.329 of a responsible local contractor in Cleveland 00:36:43.329 --> 00:36:45.750 who really cares about the neighborhood, who 00:36:45.750 --> 00:36:48.530 buys a rot infested shell of a house and genuinely 00:36:48.530 --> 00:36:51.030 turns it back into a safe, beautiful family home. 00:36:51.389 --> 00:36:53.929 That's a win for everyone. That is rejuvenation. 00:36:53.929 --> 00:36:57.090 That is saving a dying asset and adding value 00:36:57.090 --> 00:36:59.130 to a community. But in the hands of a remote 00:36:59.130 --> 00:37:01.110 speculator who has never set foot in the state 00:37:01.110 --> 00:37:03.590 or a criminal fraudster or a lipstick artist 00:37:03.590 --> 00:37:05.670 just looking for a quick buck. It is a predatory 00:37:05.670 --> 00:37:07.909 practice. It extracts wealth from the community. 00:37:08.050 --> 00:37:10.250 It degrades the long term quality of the housing 00:37:10.250 --> 00:37:12.869 stock and it fuels instability for everyone. 00:37:13.090 --> 00:37:15.329 It creates wealth for investors. There's no doubt. 00:37:15.449 --> 00:37:17.329 It creates tax revenue for struggling cities. 00:37:17.670 --> 00:37:20.050 But it so often comes at the direct expense of 00:37:20.050 --> 00:37:22.489 long term residents and overall affordability. 00:37:22.610 --> 00:37:25.179 And that tension isn't going away. I mean, as 00:37:25.179 --> 00:37:27.679 long as housing in our society is viewed as an 00:37:27.679 --> 00:37:30.280 investment vehicle, as one of the primary ways 00:37:30.280 --> 00:37:32.880 to build wealth, rather than just as a place 00:37:32.880 --> 00:37:36.039 to sleep flipping, is going to be a central and 00:37:36.039 --> 00:37:38.539 controversial part of the American economy. So 00:37:38.539 --> 00:37:40.320 here's the question I really want to leave you 00:37:40.320 --> 00:37:43.500 with today. We all love a good before and after 00:37:43.500 --> 00:37:46.019 picture. It's satisfying. It triggers something 00:37:46.019 --> 00:37:49.159 in our brains that loves order from chaos. But 00:37:49.159 --> 00:37:52.059 when does a smart investment cross that invisible 00:37:52.059 --> 00:37:55.079 line and become predatory behavior? And I would 00:37:55.079 --> 00:37:57.539 add this final thought to that. The next time 00:37:57.539 --> 00:37:59.739 you see that for sale sign on a newly renovated 00:37:59.739 --> 00:38:01.780 home, the one with the perfect fresh sod and 00:38:01.780 --> 00:38:04.199 the trendy modern fawn, ask yourself about the 00:38:04.199 --> 00:38:06.480 invisible costs. Who lived in that house before? 00:38:06.639 --> 00:38:08.800 Why did they have to leave? And who is really 00:38:08.800 --> 00:38:10.920 truly paying for that profit margin you see on 00:38:10.920 --> 00:38:14.360 TV? Is it the new buyer? Is it the bank? Or is 00:38:14.360 --> 00:38:16.210 it the neighborhood itself? Something to think 00:38:16.210 --> 00:38:18.130 about the next time you drive past one of those 00:38:18.130 --> 00:38:21.590 little yellow we buy ugly houses signs. Thanks 00:38:21.590 --> 00:38:23.849 for diving deep with us. We'll see you next time.