Posted on: Friday, October 1, 2004
'Flipping,' tax code drive property boom
By Mary Umberger
Chicago Tribune
CHICAGO — Patrick Pucher is thinking ahead. At 23, just out of college and into the work force, he's tossing around the idea of investing in real estate. He's looking at becoming a landlord. He's mulling the possibility of fixing up properties for quick resale. Maybe both.
"I've lost faith in the stock market a little bit," said Pucher, who has a degree in finance from Ball State University in Indiana. "I don't have a ton of money, but I think real estate would be a better way to create wealth."
Legions of kindred spirits await him. The nation's seemingly endless property boom has intersected with widespread disillusionment with Wall Street and an unemployment picture that has many people scrambling for new careers. As a result, "dabbling in real estate" has turned into the modern equivalent of whispering "plastics" into the ear of graduate Dustin Hoffman.
One of real estate's attractions is that there are lots of ways to go about it, from investing in specialized mutual funds to becoming a landlord to merely selling one's own house for a profit and moving up.
But many experts say that it's "flipping" — the practice of buying, fixing and reselling properties for quick profit — that puts stars in people's eyes. Urged along by investment infomercials, seminars and an avalanche of how-to-do-it books whose covers flatly promise that flipping is the way to "secure your financial future" or to "unlimited riches" or "instant cash profits," it's become a real estate traffic jam out there.
"It's unbelievably hard to find the deals because there are so many people out there," said Jane Garvey, a full-time investor for many years who said she can't remember exactly how many properties she has bought and sold. "I've never counted. Let's just say dozens."
Garvey may grouse about what the competition is doing to prices, but she realizes she's part of the cause. As president of Chicago Creative Investors Association, she organizes classes on real estate's ins and outs for part-timers, full-timers and wannabes. An August meeting devoted specifically to rehabbing and flipping drew an overflow crowd to a College of DuPage meeting room that seated 100 people; numerous attendees sat on the floor, she said.
"I asked how many of them were already doing it, and about two-thirds raised their hands," said Garvey, whose group is based in west suburban Glen Ellyn, Ill. "I know they're buying. I just don't know that they're making money at it."
That's because Garvey and others say the enthusiastic crush may be shooting itself in its collective foot.
"There are so many amateurs who are willing to pay too much," she said. "It has made the market extremely difficult for the people who have been doing it for years."
Not all the upward pressure on prices comes from the beginners. Certain tax laws encourage buyers and sellers to keep on buying and selling, which can turn an investment lark into an ongoing proposition that pushes prices ever higher.
In simplest terms, Section 1031 of the federal tax code allows investors to defer paying capital gains taxes when they sell if they reinvest in "like kind" properties.
But time is critical in so-called 1031 exchanges, according to real estate broker and investor Mark B. Weiss.
"The government says (to sellers of investment property), 'Pay me a tax or reinvest the money,' " he explained. "I have a 45-day window to make a choice of the potential reinvestment properties, then I have 180 days to close the sale. I'm playing 'Beat the Clock.' "
And so, investors may conclude that, with the meter running, paying a little extra for the replacement property is a better alternative than writing a check to the IRS.
"It feeds on itself," said Weiss, who is also the author of "Real Estate Flipping: Grow Rich Buying and Selling Property."
Among all the "it's a jungle out there" warnings, Weiss ventures an apparent minority opinion that, based on his research into some properties earlier this year, the overbidding wars may be easing up.
There may be several reasons, he said. One of them is that lenders definitely are becoming more demanding. Another is that the upward trend in property-tax assessments has tacked a considerable surcharge onto sales prices. Then there are the wizened ones who, weary of the competition and the hard work of rehabbing, have thrown up their hands and walked away.
"In the first quarter of this year, market time was getting longer," Weiss said. "People were more critical and prices were coming down."
However, many sellers may not have gotten the message yet, he said. "Sellers need to adjust to the reality of the marketplace. When there's a good, reasonable deal, there's a waiting list. You used to have a line of people who would overpay, but now that line is shorter."
Meanwhile, Patrick Pucher continues to study his options, and flipping is one of them. The way he looks at it, time is on his side.
"I think if I did a quick-return thing now and if I would fail, it's not that big a thing," said Pucher, a financial analyst for the Metropolitan Water Reclamation District Retirement Fund in Chicago.
"I'm young. I could recover."
