Craig King is a real estate guru who frequently is quoted by national business publications, and made his mark as an auctioneer of high-end properties such as ranches, mansions and developments. President of J.P King in Alabama, he wrote recently of the current TV commercial for an investment firm that does such a great job of pointing out the silliness of "in and out" trading. We've all seen it: A gentleman has just purchased artwork at an auction and immediately turns back to the auctioneer, saying, "I'd like to sell it now." "Sell what?" the puzzled auctioneer asks. "Uh, that thing I just bought." Such a scenario applies equally to certain real estate investing, King writes, and I couldn't agree more.
Let me go on the record. I don't like flipping. There is too much risk for the potential reward. And you don't get any of the tax advantages of long-term investing. It's quick money here and there, but does nothing to build long-term wealth. In the go-go 2005 market, when property flippers were "having their fun," sales and prices were being driven by what King calls the "greater fool theory" -- that is, buyers were paying inflated prices, assuming they'd find a "greater fool" who would pay even more.
So what happens next? "Every time speculative fever takes hold of a market -- any market -- it's just a matter of time before you run out of fools," King says. Boy is he right! It happens with stocks, coins, gold, futures trading and more. King points out the classic case of "Tulip Mania" that gripped the Netherlands in the 17th century. Tulip bulbs were traded on stock exchanges at outrageous prices and speculators were even trading in tulip futures. The Dutch lost sight of what a tulip is - a lovely flower to be planted, watered and enjoyed."
That's where the lesson sits for all of us, and Craig has hit the nail on the head. Homes and condominiums exist to provide shelter and comfort. They're intended to be lived in, loved, personalized, and enjoyed. When they turn into commodities to be traded for a quick profit, you can be sure that "silly season," as Craig calls it, is here. Seasoned investors and investment brokers understand this. When real estate is sold without regard to its underlying value or function, the pros will step out of the way and let the novices tear each other apart in a questionable profit feeding frenzy.
In a business networking group to which I belong, one colleague mentioned a friend who invested in and fixed up a Florida house to resell. The friend intended to take advantage of the outrageous appreciation that was taking place on homes there. Ultimately, he wound up upside down (owing more to the bank than the property was worth) because of sinking values. But my colleague (a human resources guru) says his friend admitted that he didn't know the Florida market very well when he got in, and used a real estate agent -- his wife -- who also did not live in Florida (nor, I suspect, did she know the Florida market). Someone talked him into jumping on the bandwagon without his taking a moment to look and see whether the economic wheels were tightly affixed, or in this case, ready to fall off. He crashed.
Feeding frenzy indeed....there is a lot of chum floating around in the flipping waters these days. It's what's left of those who don't do their homework, don't use an knowledgable real estate investment adviser to go to war for them, and who forget (or never learned) that property investments should be about ongoing income, not "one-off" turnarounds that are full of unnecessary and often unmanageable. Craig King says it differently: The novices "soon learn an eternal truth -- that at the worst possible time, the world will run out of fools."