While we’re talkin’ real estate…
Interesting op-ed on house flipping & rehabbing up at mises.org. I don’t have any major beef with the general thrust of the piece, but I’ve got a few quibbles:
Several years ago, the Department of Housing and Urban Development (HUD) passed a rule penalizing property owners who resell the properties within a short period of time, citing concerns about property flipping. (The penalty is a restriction on obtaining mortgage insurance from the Federal Housing Administration.)
Umm, well, shouldn’t a ‘free marketeer’ be steering clear of HUD & FHA programs to start with? And if we are going to have such programs, isn’t it wise to design the programs with safeguards that prevent or discourage their use in unintended manner? If I’m to have no qualms about entrepreneurs ‘flipping’ houses, I’m going to have to at least insist that my taxes not subsidize the financing they use.
…certain types of real estate investing might violate laws like the Texas Deceptive Trade Practices Act. [4] This law (Texas Business and Commerce Code Section 17.45) prohibits “an act or practice which, to a person’s detriment: (A) takes advantage of the lack of knowledge, ability, experience, or capacity of a person to a grossly unfair degree, or (B) results in a gross disparity between the value received and the consideration paid….”
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Since all transactions involve unequal knowledge (and opinion) between buyer and seller, who is to say what is “unfair”? This leaves all transactions open to potential cancellation by the state…
Here again I find perhaps some mild stretching of the definition of free market. If the law states that the party in question should be arrested, fined, or otherwise punished — ok, yes, that might raise some flags (clearly it would be OK to punish true fraud, but the article correctly complains of the ambiguity in the law which could affect above-board situations as well).
But if the concern is just having transactions “open to potential cancellation by the state”? Well, when two parties make a contract, they expect that contract to be enforced by someone — the state. It is not really an encroachment on the free market for that state to specify in advance the conditions under which it will do so.
In the process of buying, fixing up, and reselling properties, real estate investors tend to leave neighborhoods much improved. This is urban renewal free-market style, in which property is paid for at a price voluntarily agreed to by the seller, not condemned or designated as “blighted” by the city and seized.
On this I agree, insofar as we’re discussing flippers & rehabbers. But I think a side mention needs to be made about a different sort of real estate investor, the land speculator. For land speculators the reverse is true: their interest lies in holding the property as cheaply as possible, for what may be extended times.
For example, if I had the money, and if I was a scumbag, right now I’d be buying up anything I could get my hands on in the area between SoBro and the Fairgrounds. Here’s an area of blighted residential slums and industrial wasteland less than 3 miles from the downtown core, with urban renewal squeezing in from three sides, talk of 8th & Lafayette as a possible convention center site, and the prospect of redeveloping the Greer location once the Sounds move. In other words here’s a place where you’d want to buy blighted properties on the cheap, sink as few dimes as possible holding on to them, to flip ‘em later on the land value alone.
In such cases it’s actually in your interest to let the housing devalue further. The less valuable the structures on the land, the less you pay in property taxes. It’s actually in your interest to rent the houses out to crackheads — people who will do your dilapidation work for you and would never dare complain to the authorities. Sure they won’t pay the rent every month, but as long as you get more than you would for a parking lot, you’re OK with it. And when the parking lot becomes more valuable, you’re OK to go that route as well.
Of course my long-term solution to this is a full fledged geolibertarian rent-sharing cooperative. But though that’s not going to happen anytime soon, we can do a lot to mitigate the problem in current realpolitik just by making a revenue neutral shift from traditional property tax to a Land Value Tax, moving all taxes off of the improvements and onto the land — simultaneously encouraging efficient development and discouraging speculation, sprawl, and deliberate blight. This is already in use and working well in cities around the world, including parts of Pennsylvania and Australia.
