SterlingResidential.com | Buying & Selling Residential Properties in Texas | Houses for Rent Houston Area | Humble Atascocita Kingwood & Spring Texas Realtors | Sterling Residential®, Realtors® | Real Estate Broker: Speculative flipping burns investors in a glutted market

Let’s begin in Miami where a condo construction boom during the last few years added tens of thousands of properties to the market. In 2004, when Miami’s market really got rolling, there were fewer opportunities than investors, so purchase offers were driven beyond their original list prices. Once prices escalated beyond reach for working people, many home buyers left the market leaving the speculators to bid against each other. There was lots of investor-on-investor action as properties flipped between speculators. Profit stories circulated and everybody knew somebody that made a killing in the market — suddenly, everybody’s Donald Trump.

Eventually, all the speculating was done and buyers turned into sellers. Because most home buyers were priced out of the market some time ago, sales aren’t closing fast enough to make the investment profitable. Holding costs have been eating away at the bottom line, and the remaining sellers are looking to cash out quickly. Price reductions, short sales, foreclosures, and bankruptcy — everything’s on the table because it’s “get out fast” time while there’s still money in the checking account. Eventually, some deep-pocketed investors will step in from the sidelines to pick up deals at deep discounts. What’s left after the fire sale will be disposed of through trustee sales and auctions to the highest bidders.

And that’s how a Miami real estate fairy tale turned to dust for thousands of speculative flippers. Caught at the end of the line with no buyers, they’re walking away from their investments in record numbers, often forfeiting large deposits on homes they never planned to occupy. Of those who closed on their investments, many are carrying mortgages on empty properties in a declining market. Unfortunately for Miami, the worst may not have come yet, as many new construction condo units are due to hit the market soon.

In some US markets, up to half of available new construction housing was purchased by speculators having no intention of occupying the property. In Miami, that number approaches 70% for condos according to the Sun-Sentinel. Builders were burned too as speculators walked away from large deposits on homes with no buyers. California, Arizona, Nevada, and Florida have experienced the worst of it — but it’s effect won’t be limited to those states. Houston’s real estate market saw few speculative investments, and most of those were limited to condo developments like the Tremont in Montrose, where some investors are facing foreclosure.

Speculative flipping often results in burned investors who misjudged a turning market — typically getting into deals based on bad or incomplete information and betting that they’ll cash out before the market runs out of buyers. This type of speculative flipping is akin to a pyramid scheme and shouldn’t be considered an investment strategy. Basing purchase decisions on anecdotal evidence rather than due diligence, many speculators were caught holding title to properties with negative investment returns. In many markets, what’s left for them are more trustee sales and auctions.