Flipping as an Evolutionary Response Pt 2

In my last post, I discussed why house flipping seems like a guaranteed way to lose money most of the time - how it violate both common sense as well as standard real estate rules of thumb. However, it's unmistakable that many people became flippers. Why?

The solution that I propose is this: the flipping business model was an evolutionary response to a unique set of conditions or environment. In this environment, the model flourished and multiplied. But like a specialized organism adapted to a single niche, it has not been able to survive in other environments and now faces extinction. Think of the deep sea worms that live among the volcanic vents at the ocean's floor - they are well suited to that environment, but take them out of that ecosystem, and they die.

What was the environment where they flourished? Firstly, they grew from 2001 to 2005 when prices were appreciating in CA, FL, etc. at rates of 20%+.



And because the classic flip has a cycle of 3 to 6 months, the profits from success allowed the flippers to "breed" incredibly quickly. Let's say a flipper started off in 2001 with one house. Six months later, he would be able to take his winnings and finance 2 or more new deals. Thus, one would expect to see rapid growth of this profitable business model.

The second environmental feature required was loose financing - particularly of the zero down, interest only, negative amortization variety. This was the high growth "food" that the model lived on, allowing the flippers to carry the properties for a fraction of the out of pocket costs that would have prevailed in a normal environment. Indeed, with no money down and the negative amortization feature, a flipper could carry the home with essentially no out of pocket expense during the holding period. With this, the flips could grow and multiply even faster.

But the environment has changed and is no longer hospitable to the flipping model. Now, prices are dropping and exotic loans are rare. This has caused the extinction of the model. Those, like Casey Serin, who tried to use the model too late in the game have found that it no longer works in the current environment - that it is poorly adapted to current condition.

This evolutionary approach is not unique to the flipping model. Think of the late '90's where companies such as pets.com and eToys, companies with no profit and no viable business model could launch IPO's raising billions. Those same models were supremely adapted to the internet bubble but faced extinction in the 2001-2002 climate. Expect the same for the flippers.