Ep 12: House Flipping

Capitalist doctrine does not specify the extra reward for the capitalist, beyond the reward to the rentier who makes only a static contribution to society.  Think of a classical, feudal landlord in 16th Century Europe.  Whereas he merely maintained the land, status quo, the capitalist farmer of the late-18th Century, instead, expanded output and created new wealth for himself and for society.  This is the model Adam Smith championed.    

In this podcast series, a feudal definition of landlord is used.  There is no intent to demean all contemporary landlords.  Many are legitimate capitalists, while some may be pseudo-capitalists, of course.  

One landlord pseudo-capitalist, allegedly, is Steven Croman who, according to the New York Times, bought up 140 Manhattan apartment buildings.  His alleged crimes, however, are not about buying buildings, per se.  In May he was charged by New York Attorney General Eric Schneiderman with 20 counts of fraud.  Schneiderman calls Croman the Bernie Madoff of landlords and we will examine why.  

Let’s look at a few illustrations, starting with a single-family house-flipper, the sort who became infamous during the Great Recession.  Most anyone can flip a house, but some develop a knack for turning the housing and finance industries on their heads—into cash cows—solely to quickly build personal net worth.  While most Americans add social value by making responsible housing choices, serial flippers typically suck out social value, instead.

Simplistically, this is how they do it.   

Before becoming a flipper, suppose one begins with the intention of providing better housing for their family, a noble aspiration within the capitalist narrative.  Then, if one is a savvy strategist, they may notice in their area, a limited supply of housing units, upward-spiraling prices, and responsive public housing policies promoting home ownership.  The attractiveness of lucrative income tax write-offs also figures prominently.  

Rather than a mere occasional purchase primarily for shelter, then, the addictive serial flipper creates a cottage industry focused on getting rich, quickly.  If only a few become players, then probably house flipping will not break the system that is not designed for this.  However, when flipping becomes widespread, the system may crack open and hemorrhage the lifeblood of the entire U.S. economy.  Simplistically, this describes the Great Recession of 2008.

Next stop, let’s move beyond serial house flipping, to condo conversions.  Some apartment building owners find it lucrative, rather than to continue to rent to tenants, instead, to evict them and sell off their units as condos.  Indeed, some apartment buildings are bought specifically with this intent.  Like serial flipping, it is another take the money and run, strategy.  The more civic-minded alternative, of course, is same-old, same-old; to stay put and provide apartment rental services to families in need of stable, affordable housing.  Not a particularly sexy, go-go business strategy, however.

Well, next time we’ll look at what happens when the logic of serial house-flipping goes viral.  We’ll unpack the business strategies of alleged pseudo-capitalist landlords including Steven Croman.  Stay tuned.  

From Boulder, Colorado, this is Jim Sawyer for Capitalism in Crisis.