Foreclosure Buyers at Forefront of Housing Comeback

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During the go-go days of the housing boom, thousands of amateur speculators rushed into the real estate market to buy and quickly sell new houses and condominiums even before developers could build them, as rising prices and easy lending financed their giddy dreams of real estate riches. Today, in a declining real estate atmosphere, a new breed of flipper is emerging: professional cash buyers.

Armed with fistfuls of cash, Phoenix power flipper Brandon Hunt is transforming the financial mess left behind by Wall Street buccaneers by buying, rehabbing and flipping foreclosed properties for a quick buck. In 2009, Hunt said he flipped 46 properties, netting a seven-figure income. This year, he’s on target to match last year’s volume.

“Knowing how to find bargains is the key to flipping,” said Hunt, broker/owner of Show Appeal Realty and an experienced cash buyer. “In this business, you make your money when you buy, not when you sell. Last year, we were making over 20 percent profit. This year, the margins are a lot slimmer. We’re down to 10 percent, but we’re still making a profit.”

Hunt said he buys foreclosures at public auctions, using a local bidding service. An employee at Posted Properties — one of the many companies that have sprouted up in Phoenix to serve flippers — bids on Hunt’s behalf, while he researches other properties online. He said competition at auctions is brutal. On average, he spends $75,000 on auctioned homes in the southeast valley cities of Chandler, Gilbert and Tempe. He flips them in 15 days to first-time homebuyers or wholesales them to other investors.

Hunt said flippers are at the vanguard of the housing recovery. He and other real estate investors are fueling a nascent real estate recovery and are flipping the old-fashioned way — with cash.

Another serial flipper, Armando Montelongo (photo at right), former star of A&E’s reality show “Flip This House,” said flipping requires deep pockets and nerves of steel. The San Antonio, Texas, investor said he goes to great lengths to minimize risk by sticking to a few simple rules.

Safety, Speed, Money
“One formula that works for me is safety, speed and money,” said Montelongo, who flips about 18 properties a month in San Antonio, California and the Midwest. “My philosophy is safety first, speed second and money third. First of all, I ask myself: Can I do this investment safely? Secondly, how fast can I sell the property? And then third, how much money can I make? I tend to be a very safe investor.”

Montelongo is also a strong believer in teamwork. “Teamwork is incredibly useful when flipping properties,” he said, referring to the professionals he works with in his business. “First, I have a highly trained Realtor who helps me locate deals. Moreover, I use the same title company, contractors and real estate attorney on all my deals.”

The 65 Percent Rule
Montelongo also uses what he calls “the 65 percent rule” to decide whether an investment makes financial sense. He multiplies the after repair value (ARV) by 0.65 and then subtracts the total repair costs equals the maximum offer (MO). Here’s his magic formula:

(ARV x 0.65) — repairs = MO

“I use the exact same formula, but I take 55 percent less repairs,” said David Dweck, of Charles Rutenberg Realty in Fort Lauderdale, Fla., who is an investor, Realtor, mortgage broker and founder of the Boca Raton Investment Club. “I’m on track to do 100 transactions this year as the buyer, the broker or the lender. This year, I’ll exceed the past two years. The volume has increased, but the size of the deals has decreased.

FHA’s New Policy Flip
It’s not surprising, Hunt noted, that the sudden increase in flipping homes started in February, when the Federal Housing Administration issued a one-year waiver of the 90-day flip rule that lifted the restriction against FHA borrowers from purchasing a home that had been previously sold less than 90 days later. The suspension of the “no-flip rule,” he said, is encouraging investors to buy, repair and sell foreclosed homes. And the one-year suspension is boosting investor activity.

In Florida, flipper Amy Agricola, a relative newcomer to real estate investing, has caught the flipping bug too. She prospers by quickly flipping foreclosed properties in Ocala, Fla., buying distressed properties at the courthouse steps and fixing and flipping them for a tidy short-term profit.

“The margins are getting tighter because more players are entering the market,” said Agricola, a horse trader turned foreclosure flipper. “It’s quite risky. But it’s an absolutely fascinating business. I’m hooked on it.”

Agricola, like most flippers, looks to pre-foreclosures for motivated sellers willing to cut a deal. She also buys at the courthouse steps. Before bidding, she runs through a mental check list: “Are the schools good? Are the repairs just cosmetic? Can she make 20 percent profit? Can she flip it in 30 days?”

Over the last 18 months, Agricola has purchased four foreclosure properties, plus the home she currently lives in. She pays cash at auctions and looks for 3-bedroom, 2-bath homes in the $50,000 to $75,000 price range.

Nationwide, investors are starting to move on the market, and house flipping is making a comeback. In Phoenix, the flipping rate is twice as high as it was a year ago. Cash is coming from people weary of the stock market, or retirees using their savings. Some investors are pulling together cash in a hedge fund-style approach, according to investors.

But hard-core flipping isn’t for everyone, warned veteran REO listing broker Pete Nyiri, owner of Top Producers Realty in Corona, Calif., who specializes in selling bank-owned homes in Southern California’s Inland Empire. He said he’s seen an increase in investor activity in Riverside and San Bernardino Counties.

“We’re seeing a lot more investors,” said Nyiri, a 40-year real estate veteran. “They’re smart enough not to broadcast their business.”

Milwaukee, Wis., foreclosure investor Eric Dale, of the National Fix and Flip Network, said “there’s no better time to fix and flip foreclosures.” He said his website gets over 1,000 new members a day.

“It’s definitely going to continue,” said Dale, referring to the number of flippers entering the marketplace. “It’s no secret that banks are holding foreclosure inventory to control the price of housing. A lot of people are getting free rent right now. That can’t last forever. I think this is the perfect time for foreclosure investors. It’s just going to explode soon. We’re poised for that growth.”

This article is excerpted from the October 2010 issue of RealtyTrac’s award-winning newsletter, the Foreclosure News Report. Order a free trial issue of the newsletter. As a RealtyTrac member you can also save 50 percent off the cover price for an annual subscription.