Seasoned real estate investor Kurt De Meire led an eager group of students on a field trip to a recent foreclosure auction. He wanted to show them how to flip homes ? find bargains and resell them quickly at a profit.
At one point, he nonchalantly pulled an item out of an envelope from one of his clients, an investor who couldn?t make it to the Pomona, Calif., auction that morning. The newbies ogled it.
It was a cashier?s check for $1 million.
?There will be millions of dollars of real estate sold here,? De Meire said, gesturing toward veteran bidders in T-shirts and jeans as the auctioneer began rattling off property addresses. ?These people would not be here if they weren?t getting good deals every day.?
The house-flipping frenzy of the mid-2000s, glamorized on TV reality shows such as ?Flip This House? and ?Flipping Out,? helped drive up prices to unrealistic heights before the housing bubble burst. Since then, however, investors paying cash for distressed properties have been credited with helping the real estate recovery.
Relatively low housing prices and interest rates have fueled a renewed fascination with flipping in the past few years. But competition from large private funds buying homes to rent out and rising prices are changing the market.
House flipping increased 19 percent year-over-year across the nation in the first half of the year, a July report from housing data firm RealtyTrac shows.
?I would say the climate is getting a lot more difficult for the house flipper,? said Ryan Meltcher of Brea, Calif., who invested in about 80 homes last year. ?It?s harder to find good inventory.?
Investors have various ways to buy available, lower-cost properties. One route is to attend the auctions of homes going into foreclosure.
Homes aren?t the only properties on the block; apartment and commercial buildings are part of the mix, too. Postponements are common, as owners in default scramble behind the scenes for loan modifications, try to sell the home at a loss or file for bankruptcy. De Meire?s client who gave him the $1 million check didn?t score the property he wanted at the auction in Pomona. The sale rolled.
De Meire owns CountyRecordsResearch.com in Huntington Beach, Calif. The firm ? operating in California, Arizona and Nevada ? processes foreclosures for lenders, tracks distressed real estate and teaches investors how to buy the properties. He also provides a bidding service at auctions for investors who can?t attend.
When he takes would-be flippers on field trips to the auctions, De Meire, in his wide-brimmed hat, speaks in a slow, instructive style as he explains the auction process. He also ticks other ways investors can find opportunities, all before a home is relisted on the market.
You can approach a homeowner long before the foreclosure auction, he tells the students, once the property goes into default, which is the first step in the repossession process.
Or you could buy a delinquent note from the bank at a discount and take over the home loan, he suggests, essentially becoming the lender, and eventually foreclosing on and reselling the property at a profit.
Another idea: Try to buy the home from the lender immediately after the auction in what?s technically called the trustee sale, after no one has bid on it and the home has just reverted to the bank.
Or snap up the home from another investor who bid successfully on the property at the auction ? an on-the-spot flip. This scenario offers the luxury of an escrow period, De Meire said, and a chance to get financing and title insurance, which can?t be done before bidding at the auction.
But, De Meire said: ?Don?t ever limit yourself to bidding at these sales. There?s much more to this business.?
Virgil Thompson of Los Angeles, who performs energy audits on buildings for a national company, came to Pomona to learn how to buy properties at the foreclosure auction. But after listening to De Meire, he left with another idea.
?I like his smart strategy of buying the note,? Thompson said.
De Meire, 57, became an investor when he was in his 20s. At that time, he said, he heard, ? ?People my age would never be able to afford real estate.? ?Values are too high.? ?The opportunities are behind you.? ?
But that wasn?t true. ?There?s no end to opportunities if you know all the different ways to take advantage of the marketplace,? he said.
No matter what the housing market does, he noted, people will always get into trouble with their money. Homeowners run into problems because of a divorce. Some borrowers become alcoholics or gamble away the mortgage.
?There?s never an end to people going into foreclosure, for so many different reasons,? De Meire said.
Other investors bypass foreclosure auctions entirely.
Every home Meltcher buys is distressed ? the owners are in default or the residence is in some other stage of foreclosure. He buys the homes on the open market ? including properties on the multiple listing service and pocket listings from agents ? rather than at the auctions. Meltcher, owner and principal of real estate investment company The Investment Division in Brea, said he?s on track to buy at least 80 more properties this year, outpacing last year.
But with housing prices and interest rates rising, he said, fewer buyers have materialized: ?I have a lot more property today in my inventory that I?m holding than I ever did.? That means reselling in six to eight weeks, he said, rather than three to five weeks.
Meltcher said the market has attracted amateurs who cut corners, which creates a negative ripple effect.
?I see a lot of armchair investors coming into the market and not taking the time and energy to do things correctly,? he said. ?People take a lot of shortcuts. People think it can be done cheaply, that quality doesn?t count. They?ll put in new carpet and paint and walk away.?
When the restoring of a home isn?t up to par, he said, it won?t appraise for top dollar, which hurts comparable property sales nearby.
Robert Ganem of Ladera Ranch, Calif., has bought about 60 homes in the past four years. Ganem stopped going to foreclosure auctions in the past year, he said, because the bidding had gotten out of hand, especially since Wall Street investment firms such as Blackstone Group and Colony Capital began stocking up on homes.
Now, Ganem buys homes on the open market and through contacts. His properties range from two-bedroom condos to $800,000 houses.
In one of his more successful flips, Ganem recently made a $115,500 profit on a Ladera Ranch townhome. He paid $347,000 for it, spent $10,000 to $15,000 in cosmetic improvements, then sold it for $477,500 in three months.
?You have to make it while you can because there?s some lean years,? he said, noting 2010 was rough. ?Almost every house I bought went down (in price). You throw in some you actually lose money on ? and you throw in a lawsuit or two; it?s not all glamorous.?
At a recent foreclosure auction in Orange, Calif., the auctioneer, waiting for lenders to decide which homes would sell, brought a suspense novel to kill time. In the end, not a single property sold. Each one was either postponed or canceled.
Mark Gallop, an investor from Alberta, Canada, who has bought properties throughout California, attended the auction but wasn?t discouraged. ?There are always good deals,? he said. ?You?ve just got to find them.?
House flipping has its own curious, cryptic and colorful lingo. Here?s a sampling of terms:
?30-60-90 list: A compilation of borrowers 30, 60 or 90 days late on their mortgage payments. Housing data companies sell lists tracking the status of delinquent mortgages to investors.
?ARV: After repair value. The phrase translates to what the value of the property will be after it?s been restored. Estimating the ARV correctly is important for obvious reasons.
?Bene: Pronounced ?benee.? Short for beneficiary, meaning the bank or lender. When a home fails to sell at a foreclosure auction, it?s automatically ?sold? to the beneficiary.
?Crying the sale: What the auctioneer does when a home is sold at a foreclosure auction; also known as a trustee sale.
?Dollhouse: A home needing just cosmetic improvements before it?s resold.
?Hard money loan: A loan made by a person or business with the borrower using real estate as collateral. The loan comes at a much higher rate than a bank loan, but flippers take them out because they can be arranged more quickly and for a short term.
?Haircut property: These places need even less work than a dollhouse ? maybe just some landscaping and trash removal.
?OPM: Shorthand for ?other people?s money.? Flippers often seek money from others to avoid tying up their own cash.
?REO: Real estate owned. These are properties that reverted to the lender at foreclosure and go back on the open market for resale.
?Sweat equity: Whatever value flippers put into a property by doing renovations themselves.
?Trustee: Someone who holds the title to property under the terms of a deed of trust. In some states, if a borrower defaults on a home loan, the trustee has the power to foreclose on behalf of the lender.
?Trustee?s sale: A nonjudicial foreclosure auction, meaning a ruling by a judge is not required to foreclose.
?Weekend warrior: Part-time flipper who does renovations on the weekend. The phrase typically denotes an amateur.
?Wholesaler: A flipper who buys a distressed property and immediately resells it to another investor willing to rehab it.
THE FLIPPING NUMBERS:
In the first six months of the year, investors flipped 136,184 single-family homes across the nation, meaning the homes were bought and resold within six months.
That number had increased 19 percent from the first half of 2012 and 74 percent from the same period in 2011.
Real estate investors made an average gross profit of $18,391 on single-family home flips in the first half of the year, leaving them with an average gross return of 9 percent.
That was up 246 percent from an average gross return of $5,321 in the first half of 2012 and an average loss of $13,206 for the same period two years ago.
On average, those who flipped homes in the first half of the year bought them for 5 percent less than the estimated market value and sold them at a premium of 1 percent more than the estimated market value.
Source: MCT Information Services