Home flippers are making big bucks flipping properties in areas like East New York and Bed-Stuy, according to a new study.
“They're all abandoned or resale.” If you're considering buying a townhouse in Brooklyn, you've probably heard this phrase before, or even uttered it yourself.
Property flipping has not returned to the levels that boomed in New York City in the years before the recession, but it is rampant in central Brooklyn neighborhoods where property values have soared in recent years, a new report says. [PDF] From the New York City Neighborhood Center.
The study argues that resales (defined here as fair home sales that take place within 12 months) could have a worrying impact on Brooklyn's housing affordability crisis.
Photo by Mary Hortman
Resale prices have stabilized at about half the level they were before the crash.
After the housing bubble burst, the number of resales fell dramatically from a peak of about 4,000 in 2005 to about half that number in recent years. In 2015, about 1,800 one- to four-unit homes were resold citywide, according to the report.
The Brooklyn neighborhoods with the most resales were East New York and Bed-Stuy, with 94 and 75 resales, respectively, in 2015. Bushwick had 58 resales, and East Flatbush had 36.
Flatbush, Bushwick and East New York were the neighborhoods in Brooklyn that saw the highest gross profits on property resales: 117 percent in East Flatbush and 105 percent in East New York. (Gross profit in this case is simply the difference between the sales price and doesn't take into account expenses like mortgage repayments and renovations.)
Will resale price out homeowners and renters?
The study found that flippers make a profit from the transactions, but in the process they take affordable homes off the market, driving up home prices, which makes it even harder for less affluent families to find affordable housing, the study continued.
The median initial purchase price of homes resold in 2015 was affordable for households earning 95% of the median income, but the median post-resale price was only affordable for households earning 163% of the AMI or higher, the report said. Rent for resold homes was also found to be higher.
The report found that the average monthly rent for a resale unit in Brooklyn in 2015 was just over $1,600, while the average monthly rent for rental units across Brooklyn was less than $1,200. The higher rents are necessary to maintain the resale value of resale units, according to the study.
Additionally, “resale tiny home rentals often see skyrocketing rents as the new investor-owners seek to maximize their profits,” the study said.
When a home changes ownership, tenants often face eviction, according to the report.
Graphs from reports
What the statistics show
The study is one of the few (if not the only) to take an in-depth look at the home flipping phenomenon in New York City in recent years, but the data doesn't back up all of the study's claims that home flipping is “on the rise” in New York City and “more profitable.”
A graph in the report shows that property resales have increased slightly each of the past five years, but are down compared to 2007, 2009 and 2010. And property resales overall have remained steady at about half the rate they were during the boom years of 2004-2007.
You can't gauge a property flipper's profitability without knowing their costs, which include mortgage repayments and other issues, renovations, etc.
As home prices rise across the borough, resale properties are becoming more luxurious in finishes and styles, with resellers often preserving the original details while adding more high-end upgrades like marble, air conditioning and glass back walls, Brownstoner detailed.
Resale and Affordable Prices
The study's biggest claim — that resale has a negative impact on home affordability — lacks context.
The study does not state the average price of a home before it is resold, nor does it take into account the condition of the home before or after it is resold.
Typically, if there is a large difference in price before and after the resale, it reflects that either the original buyer purchased it for less than market value (which can happen in the case of a distressed property, such as a foreclosure, estate sale, or where the longtime owner is unaware of the current market value) or the property was renovated between sales.
Properties that have been renovated are worth more than those that haven't, and very inexpensive properties may be out of reach for the average buyer because they are in distress, require significant work to make them habitable, or don't qualify for a typical mortgage.
On the other hand, if a large number of renovated properties sell in an area, the average price per square foot can increase, potentially impacting the overall valuation even of properties that haven't been renovated.
The article suggested that in some markets, such as East New York, a strong rental market may be driving up values of resale homes, making them more attractive to absentee investors than home occupants, but did not delve deeper.
Optimizing housing prices
The survey reflects fears of eviction expressed by low-income residents in many of the areas rated as most lucrative for resale, particularly in East New York, an area recently rezoned by the mayor and city council, where residents fear they will be pushed out by gentrification and rising rents that are out of reach for longtime residents.
In areas where landlords can charge new tenants higher rents, longtime residents also complain that they are being pushed out by harassment from existing tenants.
Brownstone on Jefferson Street in Bed-Stuy. Photo by Kate Corcoran.
Recommendations for maintaining affordability
The study made three recommendations to improve housing affordability in Brooklyn and the surrounding areas.
Anti-speculation taxes, or increased taxes on speculative transactions. According to the study, this tax would discourage the conversion of New York's smaller housing stock into investment properties. The authors argue that increased taxes on speculative transactions would discourage potential flippers while generating tax revenue to fund foreclosure prevention and home repair programs. Strengthened foreclosure prevention. This would help stabilize distressed homeowners by providing them with guidance and legal assistance if they are sold below market value. Citywide foreclosure-free zones. According to the study, in these areas, homeowners could join a no-solicitation registry to protect themselves against offers that, in some cases, could reach the level of harassment.
The New York City Neighborhood Center is a nonprofit organization founded in 2008 to protect and promote homeownership for working- and middle-class families in New York City. According to the center's website, it was established “under the leadership of the City Council, Mayor Bloomberg, major foundations, and other stakeholders.” Partners include a variety of banks and financial institutions, other nonprofits, and government agencies, including Goldman Sachs, the New York City Department of Housing Preservation and Development, and the Red Cross.
What do you think about this report and its recommendations?
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