“It’s all wrecks and flips.” You may have heard this phrase or even uttered it yourself, if you’re looking to buy a townhouse in Brooklyn.
Property flipping was huge during the pre-crash years in New York City. It has not returned to anywhere near those levels, but is rampant in Central Brooklyn neighborhoods where property values have risen sharply in recent years, finds a new report [PDF] from the Center for NYC Neighborhoods.
The study contends that flipping — defined here as an arm’s length home sale done within a 12-month span — can have a troubling impact on Brooklyn’s affordability crisis.
Flipping is holding steady at about half pre-crash levels
Following the housing crash, the frequency of flipping dramatically dropped, from a high of about 4,000 in 2005 to about half that in recent years. Citywide, about 1,800 one- to four-unit residences were flipped in 2015, the report shows.
In Brooklyn, neighborhood with the most flips were East New York and Bed Stuy, with 94 and 75 flips in 2015, respectively. Bushwick had 58 flips and East Flatbush had 36.
Flatbush, Bushwick and East New York were the Brooklyn neighborhoods with the highest gross returns from flipping, ranging from 117 percent in East Flatbush to 105 percent in the case of East New York. (Gross return in this case is merely the difference in the sale prices — costs such as paying off liens or renovating were not considered.)
Does flipping price out homeowners and renters?
While flippers profit from their transactions, the process removes affordable homes from the market and drives up home prices, according to the study. The spike in prices makes it harder for less-wealthy families to find affordably priced homes, it continues.
The median initial purchase price of homes that were flipped in 2015 was affordable to families making 95 percent of the average median income (AMI). But the median post-flip price was affordable only to families making at least 163 percent of the AMI, said the report. Rents in flipped homes were also found to be more expensive.
The report found post-flip monthly rents per unit in 2015 to be just over $1,600 in Brooklyn, while the median rent per unit for all Brooklyn rentals was under $1,200. The higher rents are necessary to sustain a flipped property’s resale price, according to the study.
What’s more, “rental units in small homes that have been flipped are often subject to sharp increases in rent as new investor owners look to maximize profits,” the study said.
Tenants are often evicted when a home changes hands, the report noted.
What the stats show
The study is one of the few (if not the only) in recent years to study the flipping phenomenon in depth in New York City. Not all of its claims — that house flipping “is on the rise” in New York City and is “increasingly profitable” — were supported by the data, however.
The report’s own charts show flipping has grown slightly in each of the last five years but is down vs. 2007, 2009, and 2010 — and that flipping overall is holding steady at about half the rate of the boom years of 2004 through 2007.
There is no way to gauge profitability without knowing flippers’ costs. These can include paying off liens as well as other issues and renovation.
As housing prices have risen throughout the borough, the finishes and styles of flipped properties have also become more sumptuous, with flippers frequently retaining original details and introducing higher-end upgrades such as marble, air conditioning, and glassy rear walls, as Brownstoner has reported extensively.
Flipping and affordability
The study’s biggest claim — that flipping “negatively impacts housing affordability” — lacks context.
The study did not specify the median prices of the houses before they were flipped. Nor did the study consider the condition of the homes before and after flipping.
Typically, large price differences before and after flipping reflect either that the initial buyer purchased below market (as can happen in the case of distressed properties such as foreclosures, estate sales and when a longtime owner is not aware of current market values) or that the property was renovated between sales.
A renovated property is worth more than an unrenovated one. And very inexpensive properties may not be available to the average buyer because they are distressed, require a large amount of work to be habitable, or do not qualify for a regular mortgage.
On the other hand, a large number of renovated properties selling in an area could push up the average price per square foot, potentially affecting valuations overall, even of unrenovated properties.
The story implied but did not explore in depth the possibility that a strong rental market is increasing the value of flipped homes and making them attractive to absentee investors rather than owner-occupants in some of these markets, such as East New York.
The study echoes fears of displacement expressed by lower-income residents in many of the areas ranked the most profitable for flipping. Especially in East New York, which was recently rezoned by the mayor and City Council, residents fear they will be pushed out by gentrification and rent increases beyond long-time tenants’ reach.
Long-time residents also complain about tenant harassment pushing them out in areas where landlords can charge higher rents to newcomers.
Recommendations for retaining affordability
The study made three recommendations to improve affordability in Brooklyn and beyond:
- An anti-speculation tax, or a higher tax on speculative transactions. The tax would deter the transformation of New York’s small housing stock into investment properties, according to the study. The writers argue that the higher tax on speculative transactions would be a disincentive to potential flippers and generate tax revenue to fund foreclosure prevention and home repair programs.
- Increased foreclosure prevention. This would help stabilize distressed homeowners by supplying them with guidance and legal support in case of below-market price sales.
- Citywide cease-and-desist zones. In these areas, homeowners could opt into a no-solicitation registry, to protect them against offers that in some cases might reach the level of harassment, according to the study.
The Center for NYC Neighborhoods is a nonprofit created in 2008 to protect and promote homeownership for working class and middle class families in NYC. It was created “under the leadership of the City Council, Mayor Bloomberg, leading foundations, and other stakeholders,” according to its website. Partners include a wide variety of banks and financial institutions, other nonprofits, and government entities, including Goldman Sachs, NYC’s Department of Housing Preservation and Development and the Red Cross.
What do you think of the report and its proposals?