Proposed House Flipping Legislation

[TheAnk]

Urb, the landlord couple you described is basically me as well... I have been invited to tenants weddings.. Anyone who invests hard earned money will learn that this is the only way to go in this gig.. It is your tenants home, not the landlords house.. And if this is the mentality, things will work.. The people that fail to follow this high line become slumlords.. Or bankrupt..

To Mr. Segal, the "middle class" doesn't exists.. The reason being.. They are the middle, and do not have a voice.. The fat stogie smoking vision is what replaces the couple you explain..

Because the truth of the matter in life today is.. you can have a two income family, college educated.. And they could still be paycheck to paycheck.. So in order to "get ahead", you need something else.. Someone may have a home business making doilies.. Another may be saving for a worm store.. Yet another may sell the Six Million Dollar Mans' boss figurines in original packaging on eBay..

And for many people, an income property will be that something else.. Retirement income.. Others use them to trade up the ladder.. Through the "value" of inflation, buying a property @ a fixed rate provides you with a REAL hedge against it.. (For sake of this point pete11, this is long term historic example, not the fire and brimstone current market, just to be clear)

And when some swash buckling young trust funder from the East Side decides to descend from up on high to us low classers on the West Side trying to earn an honest living, and whip together a heavy levy on these "evil oppressors", all the while handing out free property to SWAP, and giving BILLIONS of dollars in tax credits to big business.. Being one of these evil oppressors, you can bet I'll be there to fight it tooth and nail..

I mean, what other avenues are left? where is there incentive to succeed and advance?? There is only property for us middle class.. Property is the last great equalizer, and people like Mr. Segal do not see this..

What I fear more than anything is the erosion of the middle class via taxation and loss of quality of life.. Eventually, the low class could consume the middleleaving the cash caw AKA taxable middle class empty..

Then who will you tax State Rep Segal??

[Jerry2]

I feel that the people who are in charge of making decisions "for" the people don't even take the time to think through simple logic.. Its a maddening situation, where the middle class is increasingly levied to pay for the top and bottom.. And your seemingly harmless nonchalant post really drives this home for me.. Its not "I'm likely to be introducing legislation that'd put a pretty hefty penalty on welfare fraud." Or "I'm likely to be introducing legislation that'd would provide REAL job training and an exit strategy for people off the welfare rolls."

[urbie]

David, thanks for adding the link to the VT law. I'm not going to waste any more breath on this one, other than to say that I'm dead-set against it because I do not consider short-term buying-and-selling of real-estate (or any other asset) to be a problem. To the extent that it is, capital-gains taxes are remedy enough.

Thanks for asking for our input, though -- it's nice to have a chance to interact directly with policymakers. Please keep us posted on this issue -- even if it's just so us crusty low-taxers can give you some more flak!

Urb

[eltron]

Again, the new legislation hasn't been drafted yet, so everything is on the table.

Here's Vermont's law.

Vermont's law taxes only profits on land values -- profits only. I'm trying to understand the implications of including the values of some structures too.

It'd be easy to write this such that it wouldn't have an effect on new housing starts, by exempting land on which new units have been constructed. The purpose of the bill would be to reduce the number of (and generate revenue via) people who are buying houses, putting little or no work into them, and dumping them at huge profit, without concerns for the ramifications of doing so. Riding the market, driving up costs for others, increasing crazy fluctuations in their neighbors' property taxes, and making life a lot harder for tenants. This is less of a problem now than a couple of years ago, but it'll come around again soon. People who are renting to people wouldn't see any new tax, so long as they're holding onto their property for a few years. And Vermont's law completely exempts owner-occupant to owner-occupant transfers.

To Urbie- the people you describe wouldn't be affected by this law at all (Even if their properties were in RI, I mean.) Except that they'd have more stable taxes, and might've bought those homes at lower costs, because there'd have been fewer speculators playing the market and driving up prices.

To TheAnk- this isn't socialism. (And plenty of people would of course disagree with the notion that socialism is anti-democratic. Some would argue that it's quite democratic. It is, of course, an economic system, often instituted within democracies, by democratically-elected representatives.)

[TheAnk]

The Ankodus: "This vexes me. I am terribly vexed."

[Garris]

First, thanks to David Segal for soliciting the opinions of the people on this forum. It is enormously appreciated.

Reviewing the issues, as a non-developer and non-economist, this is a shining reason why it's so hard to be an engaged citizen these days and made educated decisions. This stuff is complicated!

That said, I am finding myself very much falling into the line of Urbie's and Eltron's logic here. I don't see the inherent evils of "flipping" (more on that in a minute) and know several people who have made a good, middle-class living off of genuinely valuble property turnovers.

I think, in a mental list of problems I would like to tackle, this ranks mighty low... I'd rather see the aforementioned streamlining of development rules and laws (fire codes, etc), promotion of Quonset as a port, and streamlining of RI tax code and laws to make us competitive with neighboring states (especially with Duval Patrick coming out of the gate with some strong pro-growth policy so far for Mass).

As far as why I don't see the runup of property values discussed by Jen and David as such a problem... Because, ultimately, someone still is paying for that property, and thus, in a sense, it is "market" rate. It's like people bemoaning the inflated salaries Major League Baseball players make. Are the too high? Absolutely... Are there teams out there still willing to pay them, and do those teams still make money? Yup...

In baseball, there has been something of a plateau set where player salaries have stopped going up because teams won't be able to make money beyond a point. If they did continue to pay those increased levels, they'd lose money, and the process (and the runup) would stop.

The same correction will happen (and as Pete and Jerry have long pointed out, has likely already started happening) in real estate. In this way, the market is self correcting and, thus, this is trying to throw a level of oversight where it likely doesn't need to belong.

While I'm as much for legislation and protection of the "little guy" as anyone, I'd much rather see some hardcore economic growth policy, which I think would value RI citizens "little" and big much more right now...

- Garris

[quente]

David -

I read/reviewed the VT law. Perhaps I'm missing something but according to Sec. 10002 Land and residences it seems that only the sale of properties over 10 acres can be taxed - is that correct? If that's the case, then it would seem that the VT law was designed to slow down large-scale development rather than deal with smaller properties that are flipped. On the face of it, the VT law seems more smart-growth oriented.

I do agree with the majority of the board about this legislation - I don't see a need for it now or in the future. If the scenario for this tax is what was outlined by Jen's example (which I found quite interesting), then I think you'd want to prosecute rather than tax such illegal activity.

Thanks for giving us the heads-up and asking for input.

[DavidSegal]

To Urbie, Eltron, and Garris-

I disagree, in that I think it's a pretty big problem. Thanks for being civil and interested. I'd be interested in talking off-line or meeting up, perhaps with some others who've thought a lot about this issue and see things as I've come to. Garris -- do you still have my contact info?

I don't think that the baseball analogy holds -- housing and baseball players are very different commodities. People might be paying for the housing under current rules, but if values are inflated, and property taxes and rents with them, then that creates a real burden for the people who are trying to live in those places. The "free market" breaks down in the case of housing moreso than with most other markets, as knowledge is especially asymmetrical, needs are particularly dire, and the universe of housing that any individual is actually considering living in is very small. The market might be "self-correcting" but the bubble's left a lot of people in its wake. As will the next one.

Additionally, if we can generate revenue via a tax on practices that are of little or no social value, it means we can reduce property taxes and income taxes. Something along the lines of the Vermont model could be worth tens of million a year to the state.

To TheAnk-

As I posted, if you're really in the same boat as that couple, you wouldn't be affected -- obviously, after all, as you "don't even exist" to me. You might even benefit, as your taxes might be more predictable, and housing costs would probably go down.

To Jerry-

Ad hominem attacks aren't going to make me take your position seriously. Please grow up.

Generally speaking, if you want policy-makers to be accessible, and to hear and consider your views -- especially those who are interested in having an actual dialogue and are reaching out to you -- then, well, it's better not to be a jerk. It might be nice, even, were you to engage with the specific policy considerations at hand. (ie, Does property flipping have the affects that I've come to believe it has? What are the legitimate benefits and downsides of the practice?)

Great to have a place to yap about how everybody is stupid and annoying, but if you want to have influence over policy, you should reassess your conversation skills.

David

[DavidSegal]

David -

I read/reviewed the VT law. Perhaps I'm missing something but according to Sec. 10002 Land and residences it seems that only the sale of properties over 10 acres can be taxed - is that correct? If that's the case, then it would seem that the VT law was designed to slow down large-scale development rather than deal with smaller properties that are flipped. On the face of it, the VT law seems more smart-growth oriented.

I do agree with the majority of the board about this legislation - I don't see a need for it now or in the future. If the scenario for this tax is what was outlined by Jen's example (which I found quite interesting), then I think you'd want to prosecute rather than tax such illegal activity.

Thanks for giving us the heads-up and asking for input.

[Cotuit]

The purpose of the bill would be to reduce the number of (and generate revenue via) people who are buying houses, putting little or no work into them, and dumping them at huge profit, without concerns for the ramifications of doing so.

[pete11]

David,

Taking into account the high transaction costs associated with the transfer of Real estate (anywhere from 4-10%) in a declining or even flat market, this law is like putting up a no diving sign at an empty pool.

Having said that, you have warned against LLC's (and by association LP's). Would this proposal possibly also contain language that would tie personal responsibility to the prinipals of these, if they had used Tax dollars (in the form of Historic tax credits) in the event of insolvency, or criminal misconduct, in the event of any misreporting of costs to obtain such funds (using independent auditors of course)?

P.S. the largest transgressors of your law the last few years have been funded by the state of RI. Let the law suits begin

[DavidSegal]

I wonder how "little or no work" would be gauged. Would a new state agency being checking receipts? Would someone on Smith Hill decide that TheAnk and Urbie's landlord have put enough money into their property to add value to society?

I also have to wonder where the statistics are that show that this is a problem. Are there really lots of people out their putting little to nothing into a property and reaping huge windfalls?

Why do you say that renovating and reselling property has little or no social value? I personally certainly don't have the money, the skill, the patience, or the time to buy and renovate a run down property. I'm willing to pay a reasonable price for someone else to take the effort and the risk to do it for me. If they are charging more than their renovations are worth, then I'll continue to rent. I'm failing to understand how I'm being hurt. I'm willing to be educated on how this hurts me and society at large, but I must say, I tend to respect TheAnk's and eltron's opinions on these issues (yes, you two agree way more than you realize).

[Cotuit]

-Yes. We're still working on a more detailed analysis, but the indications are that this is a pervasive phenomenon. Literally thousands and thousands of properties -- worth hundreds of million of dollars in aggregate -- sold multiple times over the last few years within the borders of Providence alone.

[DavidSegal]

According to Providence Plan there are just under 68,000 housing units in Providence. Of those, thousands and thousands are being bought, having little to no physical improvements made, and sold at hugely higher prices? Really? I'm not trying to be obstinate, but I'm wondering where all these housing units are.

Where's the carrot, this is all stick. So what is the state going to do to try to help someone like me, of a lower income bracket, who is a resident of Providence who wants to buy a primary residence?

OK, but how do I not live in dilapidated housing? I already said, I don't have the means to improve a property myself, if we're going to disincent people from improving properties, how do we improve the housing stock?

[urbie]

ease taxes. That'd be a start, anyway.

[jencoleslaw]

Of those, thousands and thousands are being bought, having little to no physical improvements made, and sold at hugely higher prices? Really? I'm not trying to be obstinate, but I'm wondering where all these housing units are.

[Garris]

I don't know what legislation would look like on this matter or even what it would do, but i will continue to argue until i'm blue in the face that it does happen... It is the folks who buy property--hold it for two months and resell it for more $, and the folks who do the illegal flipping, which does happen...

[Jerry2]

Additionally, if we can generate revenue via a tax on practices that are of little or no social value, it means we can reduce property taxes and income taxes. Something along the lines of the Vermont model could be worth tens of million a year to the state.

David

[TheAnk]

I am not terribly worried about this seeing the reaction here.. I have found that this forum generally gives the pulse of RI on things political.. I admire your undying do-good attitude for the little guy as many forunate people such as yourself adopt.. Except in this occurence, you could not be more off kilter.. You are killing the little guy with this.. I means this in the least offensive way of course..

In a related note, I agree to an extent with your fiercely debated "living wage" ideas in that things need to change, which many people in here find insane from The Ank's typical views.. It is the correct, economical decision right now to be on welfare instead of working.. That is rational behavior.. So it needs to be changed to where there is incentive to work.. I have actually said in here a few times a while ago that a $10 min wage is needed to make working more appealing than welfare..

I just think the mistake was the packaging.. The term "living wage" implies that you are paying people to exist in the minds of many.. Perhaps repackaging this term would be beneficial.. It needs to portrayed as a stimulus to get people off welfare and being self sufficient instead..

But since there is universal total agreement about the ridiculouslness of this knee jerk, attention whoring idea of penalizing "evil rich flippers" on this forum.. I feel very confident that the backlash you will recieve for this will be similar to the living wage deal.. Although, I do think that the $10 minimum wage is completely correct and the detriment to business, small biz in particular is way overblown..

[Recchia]

in the illegal house flipping scenario, how does the person actually profit? when a house is foreclosed on, doesnt the bank sell it, and then the person who defaulted on the loan has to then pay the bank the difference between the amount loaned to them and the price the house is sold for? am i missing something?

[DavidSegal]

But I don't see what's wrong with someone legally buying something and then selling it for a profit two months later, be it homes or stamps or cars or coins. I know people who make a living doing this with antiques back home in NY. They are knowledgable, search for bargains or check out estate sales, and then resell the items in their stores for what they think they are worth. What's wrong with someone doing this with property?

[Cotuit]

You've exagerrated what I said a bit

[Cotuit]

Federal Hill, Olneyville, Silver Lake, it happens all over on our side of town. I suspect it isn't as lucrative as in the late 90's and early 2000's but when i was toying with the idea of buying a house (on vinton street) over in Federal Hill in the past year i looked at some properties, and checked the tax asessors office to see what they had been sold for before, and you can see that houses are still being flipped, especially if you've lived here as long as i have and know whether specific houses have had any work done on them.

[DavidSegal]

No I am quoting you directly to find out if you are being hyperbolic or if what you are stating is fact. Your reaction leads me to believe you are being hyperbolic.

[DavidSegal]

Also, I am very interested in talking about all of this in more detail. I'd be happy to pull together some kind of meeting about this specific idea and others relative to housing costs, with you guys and people who work on housing issues at the state level.