New Business March 31, 2010, 11:05PM EST

Return of the House Flippers

That symbol of real estate fever—the investor who buys, fixes, and sells homes quickly—is back. This time it's a good thing

By Prashant Gopal

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Bidders at a Phoenix foreclosure auction. Joshua Lott/Bloomberg

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On an unusually hot March afternoon, the steps of the Maricopa County courthouse in downtown Phoenix fill with people in sunglasses, shorts, and flip-flops whispering urgently into cell phones. They are "flippers," here for the daily outdoor auction of foreclosed homes—bidding for themselves or clients who plan to buy houses cheaply and fix them up for a quick sale. And with the economy starting to percolate and real estate markets bottoming out, the auctions are drawing bigger crowds. "A year ago, bums outnumbered bidders at the courthouse steps," says Sergio Rodriguez, who bought and sold 48 properties last year even as falling home values scared other investors away. "Now the bums are way outnumbered."

Improbable as it sounds, house flipping—that hallmark of American real estate mania—is making a comeback. All around the country, but especially in some of the regions hit hardest by the housing slump, investors are swooping in on distressed properties and banging them into shape for sale to first-time home buyers, vacation-home seekers, and people looking for rental income. In Phoenix last year, the number of foreclosed homes that changed hands within six months of being purchased—the best statistical measure of flipping activity—increased 81% from the previous year, to 4,661, according to RealtyTrac, which compiles foreclosure data. Las Vegas flips rose 38%, to 8,042, in 2009; in Riverside and San Bernardino counties in California, they climbed 45%, to 17,203; in the Cape Coral (Fla.) area, flips almost tripled.

This may look like another case of "here we go again" (like Wall Street pay), but flipping 2.0 has some important differences from the previous version. In fact, flipping may now serve a constructive purpose, helping to clear out backlogs of foreclosed homes and stabilize distressed neighborhoods. "We're the good guys because the government doesn't have enough money to fix these homes up," says 42-year-old Phoenix investor Harry D'Elia.

Federal Approval

Indeed, the government has given its seal of approval to house flipping, an activity it used to discourage. At the Federal Housing Administration, a one-year waiver of anti-flipping rules took effect Feb. 1, so borrowers can now get FHA financing to acquire homes from investors who have held title for less than 90 days. "We do believe investors will play an important role in today's marketplace because they tend to be more liquid than first-time home buyers," says Vicki Bott, a deputy assistant secretary at the Housing & Urban Development Dept. in Washington.

As prices soared from 2000 to 2005, buying and selling homes for quick profits was such an obsession that it inspired cable television series including Flip This House on A&E and Flip That House on TLC. "Everybody made money on the way up," says Richard C. Davis, who helped create Flip This House and appeared in its first season. When prices began to fall and credit tightened, speculators who bought at the top were stuck with houses they couldn't unload. Many lost homes to foreclosure; others are renting out their flips as they wait for values to rise. "Amateur hour is over," says Davis.

Some professionals who had the capital or nerve to ride out the lean years are still in the game. Rodriguez and his business partner, Brian Bogenn, have been flipping houses for more than six years. They survived by switching tactics. During the boom they bought most of their houses on the open market and could take their time with renovations. Now they buy cheap houses in foreclosure and patch them up quickly. "One of the reasons we're still doing it is that we keep changing as the market changes," says Bogenn.

Davis, CEO of Trademark Properties in Charleston, S.C., says he has flipped 25 homes since returning to the business in October. And yes, he's filming a new series about empty multimillion-dollar homes that he buys, repairs, and peddles for half what they might have fetched in the boom.