In a recent fit of insomnia, I noticed a commercial enticing “smart investors” to buy information teaching them how to purchase pre-foreclosed homes and resell them at market prices. I found this commercial troubling for several reasons.
Profits claimed by house flipping specialists are exaggerated: The infomercial was geared toward teaching every day people how to purchase homes below market and resell them at market prices. While in this current economy, it is very possible to purchase a pre-foreclosure home in a short sale (for less than the buyer owes) to sell a home at market prices these days is a near impossibility. The “investor” will not get the kind of money out of the home that the infomercials claim.
The house flipping infomercial had a sleazy aura: The infomercial tried very hard to convince viewers that the scheme was ethical. They claimed they would be helping homeowners by buying their homes they could no longer afford. Meanwhile they used words like “take advantage” of the current rise in foreclosures.
The house flipping infomercial was only selling information and a dream. The reality of the situation is most buyers will only read the information and move on. Of those who do follow through and make the purchases, few will ever make a profit. Many may end up losing their homes themselves when they find they are saddled with paying mortgages on homes that will not sell. At best, they will end up renting out the houses instead.
I cannot really blame the infomercial experts for trying to make money off unsuspecting “investors”. After all, people are already convinced thanks to TV shows like “Flip this House” that house flipping is an excellent investment. What not everyone may realize however, is that reports of flipping houses are greatly exaggerated. For example, Sam Leccima, the star of several episodes of “Flip This House”, has been accused of fraud. It turns out that he took investors money that was supposed to be used to buy, rehabilitate houses, and resell them, and spent it on himself. In addition the houses that were profiles in the episodes were merely staged and in most cases incomplete. To top it off, the houses with sold signs on the front, did not actually sell. Still, these shows worked the country into a frenzy, and laid the foundation for fraudsters who would try to convince them that flipping houses was a good idea.
I am not saying that there is necessarily anything wrong with buying houses at a discount and reselling them for a profit. I am just saying that it is wrong to convince people to participate in house flipping when it is not in their best interest. What would make house flipping not in the best interest of a prospective investor is when they do not have excess money to invest, but are made to believe that they can do it with little available funds. It is also not in their best interest if the housing market will not support the activity.
