some reason the buyer then can't hold onto the property, the bank has to take it over through foreclosure, sell
it at a discount, and lose money.
Obviously, banks aren't in the business of losing money, and they complain loudly when they feel they've been
conned. But as we see it, the problem isn't in the flip itself; it is in the bogus appraisal. Never mind that
the bank could have (and should have) looked after its own interests more effectively. Buying an inflated
appraisal is simply dishonest, and dishonesty is never the right way to do business. And it's unnecessary: if
you're any good at flipping, there are always legitimate opportunities out there, and you don't have to resort
to crookedness to make money.
Flipping also gets bad marks when it is seen as contributing to the overheating of a real estate market. A
rising tide of condo flips, in particular, tends to signal a hot real estate market—in many cases, an overly
hot market. Investors rush to buy pre-construction condos and flip them prior to closing. In Miami,
things are so hot in the condo market that there is talk of creating a Web site exchange just for
flipping condos before they close.
We agree that this level of froth has negative consequences. It creates an overpriced market, which usually
means that people (generally unsophisticated investors) take a financial beating when reality finally sets in.
In the past, banks also took a beating, but after the 1989-1990 real estate crash, they became much more
conservative in their lending. We're less sure about the best way to take some of the hot air out of a
"flipping bubble." In some cases, lenders refuse to loan money to developers who don't have strict anti-
flipping provisions in the contract. Others refuse to loan money based on an appraisal that is higher than the
original
These are reasonable steps. But the truth is that when investors get caught up in a bubble mentality, it's very
hard to protect them from themselves.
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