A survey of recent condo sales in Miami showed that nearly half the condo owners were LLC’s. It is believed that these are mainly speculators. Corporations and foreigners often create an LLC when purchasing real estate to protect themselves from liability. Speculative flipping appears to be on the rise in metropolitan areas around the country.
If you have been appraising for a while, remember the painful experience the FDIC’s bailouts starting with Vernon Savings and Loan in Vernon, Texas in the late 1980’s? This was often claimed as the straw that broke the camel’s (FDIC’s) back and a flood of bailouts soon followed. One of the reasons for the collapse was the high volume of property flipping, with the same property often transferring several times in the same day. While the stories are different today, flipping is still occuring.
Buyers and sellers are increasingly withholding information that as appraisers, we are bound to verify. According to USPAP, we are supposed to report all prior transfers within the past three years. Our licensing requires us to disclose what we were unable to verify that is needed for the valuation.
It is now even more important than ever to get a copy of the contract and review it. We are stumbling into undisclosed flips more than in prior years. Flipping appears to be one of the reasons Fannie Mae recently redesigned their appraisal forms.
How do we determine if there is a flip? Usually, an experienced appraiser will notice that the sales price, even considering an optimistic appreciation assumption, doesn’t make sense and match the names in the contract with the owner on record. For the appraisal firms that do high volume with trainees, I hope you have good E & O insurance. 😉