Monday, March 8, 2010

The fliptards return

On the last month I've noticed a lot of new flips hitting the market. There seems to be a ton of money being made by these guys. The new flipper is a far cry from the ones we saw on TV a couple of years ago. Those guys would buy a wreck, fix it up and make a healthy profit. The new breed are not having to put nearly as much effort into it. They buy house that's a few years old at the trustee sale, replace the carpet, paint the walls and put down some sod and list the place for $100k to $200k more than they paid. It's quite a scheme.

16967 Hazelwood in Riverside. This house is only 2 years old. They paid $369k on Feb 4th. It gets paint and carpet and is listed Feb 10th for $462k! Will they get it? I dunno, the price seems a little high but I ca see this easily selling for $420k-$440k. Even at the low end that's a good paycheck for a few days work.

17229 Bluff Vista, Riverside. This house is 6 years old. It was picked up for $330k in Feb and listed 2 days before the sale even posted for $426k. This one doesn't even look like it got carpet or paint. It's looks like grass and a good cleaning was all this got and they are looking to make nearly $100k (before selling costs). Again the asking price is probably a wee bit high. These have been selling in the high $300s but they still stand to make a very healthy profit.

3241 Crestview in Norco. This one was picked up for $501k Feb 22nd. It's now listed for $570k. This one isn't a no brainer. At $570k this might be a tough sell. The house is nicer than most in this tract and that might save it but at $501k there isn't much room on tis one. I'm not totally confidnet these guys will make any money on this one. There's been a couple sell in the mid $500s but those were on the highest street in the tract and that's a serious lot premium. This one does not have a view it looks at the nieghbors house across the street. I'm thinking low $500s and at that price they lose money.

Here's another one that isn't looking good to me. 18410 Lakepoint Dr up in Lake Hills Riverside. This is right at the top of the hill so you better have stock in an auto repair shop because you will be going through brakes and gear boxes living up there. The big homes in Lake Hills have been selling for around $100 sq/ft give ro take $10 s/f. The really big ones are often selling in the high $90s s/f. This house is 4576 s/f and they bought it for $415k or about $90 s/f. That's a pretty good deal but not "flipping" good. They listed it a week later after slapping on some paint and laying down some sod for a mind numbing $675K! Now that's reaching for the moon. They've have several price reductions but are still WAY overpriced at $624k. There are two identical comp sales in the last 2 months of $450k and $500k. Are they going to make any money? That depends on them they could propbably sell this fairly quickly at $450k but that's a break even price or close to it. They might get $500k if they are lucky but every month it lingers it's eats at that profit. It's already been on the market 3 month, they are slow to reduce so they could lose some money on this deal if they don't snap out of their delusion of making $200k.

This is just a small sample of the many flips I'm running across. Most of them are going to make a very healthy profit for a few days work.


BrianH said...

I picked Hazelwood because it was first.
Paid 370k
Sell (middle of your range) 430k
Gross spread of 60k
To sell a 430k house will cost you about 20-23k if the owner lists it and only pays a 2.5% commission to a buyers agent, OR 27-30k to sell if the owner pays a listing agent 5% commission. Lets assume a for sale by owner which is how I sell all my trustee sale acquisitions. We are now looking at a 40k spread after selling costs. Ok, now we can't forget about fix up, no matter how little you are going to spend 5-10k on junk, lets call it 5k. We are now down to 35k spread. When you purchase at the trustee sales you will more than likely purchase a home with occupants so you either have to fork over a grand for attorneys on an eviction, or 3-5k cash for keys to the hold over occupants. We will split the difference and call it 2.5k so we are now down to 32k spread. Then, no and's if's or but's about it, start to finish is a minimum of 3 months more likely 4-6 months hold time at around 500 bucks a month in holding costs. Plus you have to insure a vacant home which is going to cost you about 1800 a year so when all is done and said with you will net around 28k or so on this deal assuming all the easy peasy numbers. Two agents, a little extra repairs, angry hold over occupants and you are easily looking at 20k in net spread.

Now, to put this in perspective. Netting 28k on a 390k or so out of pocket investment is only about 7% cash on cash return. If you turned this money two times a year you are looking at massive risks for a 14-16% annualized return. Another perspective to keep in mind. Buying at the trustee sales is a team sport, the very smallest operation like mine requires 3 people and that means we only work one sale location each day. A large operation working multiple locations daily requires tons of man power which translates into lots of overhead.

Most people absolutely underestimate the true risk in purchasing real estate at the trustee sales and I will not risk my and my investors cash for a 15% annualized return. So much can go wrong buying like this that I am absolutely amazed that there is all these TS buyers risking huge amounts of cash for such paltry returns. The risk reward ratio is way out of whack right now and even though these folks have a pay day coming from the looks of things these pay days are not at all what they seem.

Also, if a house only needs a little paint and carpet to be worth X why would we be expected to do more work just to sell for the same price. We don't control what the bank opens bidding at a publicly held auction with all the numbers being public information in advance. So if the bank opens the bidding 100k lower then market value, we can buy it, clean it up and sell it for fair market value why do the normal folks think we are scum sucking bottom feeders who haven't earned a pay check for having the balls to fork over cash on the spot for a house that we have not even seen the inside of yet???

ButterMonkey said...

Here's one in my neighborhood that made me scratch my head.

There was a for sale sign outside, but it never appeared on the MLS (I watched for it). Then *POOF* it was sold for $310k and a sign appeared on in the front yard announcing that it would be flipped and available soon. What makes me go "hmmm" is that a similar home around the corner (on Falkirk) just sold for $400k and this wasn't a repo. The old lady just moved to a home. Surely they could have got another $50k out of that place if they'd waited for a real buyer. So strange!

golfer_X said...

Thanks for your insight Brian. I don't have a issue with flippers. I think they serve a vital purpose, taking trashed homes and fixing them up. I do have a problem though with banks selling these newer homes at a ridiculous loss (to us taxpayers in most cases) at the trustee sale. Why on earth do they do this. There is no reason not to ask a price closer to market value, a price close to what they will net after costs incurred if they sell it as an REO. To offer these homes $100k under market at the trustee sale seems underhanded. I feel ripped off. Not because I am not getting in on this action but because my tax money is being used to subsidize the losses. It's like the banks are in bed with a group of flippers to rip off the public and get rich in the process.

BaseballDad2011 said...

That Lakepointe house was on my radar to buy. I offered 475K for the home when it was a short sale, the banks decided to forclose and sell it at auction for 415K. go figure. to the ones that bought the house, if your reading this, my offer still stands at $475K!

golfer_X said...

Write them an offer. You never know they might snap out of thier greed induced haze and realize that they are not going to get $600k for it.

Sara said...

If anybody decides to put an offer on such flipped houses, make sure you do a THOROUGH inspection (I can't emphsize this enough). What you see might not be what you get.

Neudi said...

Agreed, from what I've seen they will update or replace will the absolute cheapest stuff they can find. Can't imagine buying a 400k home with the same carpet you'd get in an apartment. Plus, all the little extra shortcuts they took that you just won't notice until later.

Neudi said...

Heard on 640 today Tim Conway is doing a program this evening at 7pm on the pros and cons of a short sale. Might be interesting.

golfer_X said...

Some of them do just slap lipstick on a pig. I've seen a couple of really bad flips in the last 6 months. Most of them do put in the cheapest carpet they can get. The appliances if replaced are also pretty low end usually. But that's to be expected. After all the original builders don't exactly equip new homes with high end stuff either. But you really need to look for water damage, and other stuff that might be hidden by fresh paint. Also if you walk into a house with 20 air fresheners in it BEWARE!

Sara said...

You hit the nail on the head with the water damage point. A friend of mine just canceled escrow on their dream home. The house looked perfect in every way. You wouldn't suspect anything (2 year old house). The inspector , however , was smelling mold and couldn't find evidence. She said he was so frustrated and kept saying they painted over everything. Then he discovered that most of the walls had tiny bubbles. You couldn't tell unless you looked carefully. The inspector concluded that there was moisture and mold inside the walls and suspected that the house was flooded. He said he's certain that before the flipping, the walls were black. He said the house couldn't have been in a worse shape. So these flippers, he said, got a lemon in auction and tried to unload it to an unsuspecting buyer who was putting everything she had into this house. It's better to get a fixer. At least you know what you're getting.

B said...

I agree, I'd rather buy something torn the hell up and tackle it myself.
Funny blog comment from a homeowner facing foreclosure on the ocregister talking about the 1500 move out bonus.

"No thank you, you can have your $1,500
Im just gonna take a mallet to the drywall and pry the kitchen tile up, destroy the bathrooms, and run a running garden hose in the attic for two days, cut the electric from the out lets and drill holes in the copper pipes and take the three year old windows that i paid for out.
oh yeah, and then move out"

Hilarious, love to see the flipper that buys that mess.

BrianH said...

Something to also keep in mind Golfer. It costs a bank around 50k simply to own a REO, that 50k number came from a article a couple years ago.

So, the bank has to make a financial decision, spend 50k to lose 150k or simply lose 200k and not have the administrative headaches of another REO.

Also, to those of you with the story of bad flip products. You are absolutly correct, there are some real scum bag investors out there however lets put it in perspective. Just in Riverside County each day roughly 30 houses get sold to third party bidders, so that means approximatly 200 houses a month are fixed up and sold by investors in Riverside County. So a hand full of people know someone who's cousin saw a crappy rehab. Added up the % of crap rehabs is probably right about the same as the stories of bad Visio flat screens flying out the door of Costco each month.

See, most of us make a full time living producing a marketable product, houses purchased by retail buyers. Those of us doing this full time need to avoid things like lawsuits over poor work and/or over fraud such as covering up defects and then lying about it on the California property transfer disclosure statement.

Just saying, please keep things in perspective because there are bad apples in all industries.

BrianH said...

PS. Golfer I love the site and having tried to create my own blog I really take my hat off to you. The amount of effort that goes into keeping a current, active blog with good content is more than I ever imagined.


smf said...

Years ago, we looked at a high-end flip. I walked into the kitchen, and saw the dishwasher... was the same model of dishwasher I had purchased in 1994 for a whopping $250! In a house that was asking $700K!! We walked out.

Saw million dollar homes, too. When I saw the lights in the bathrooms I cracked up. Cheapest lights ever for bathrooms.

golfer_X said...

While on average it may cost a bank $50k to hold an REO the delta between that $50k and the $150k extra they would have recieved selling that house is a sizable sum. Especially whey you consider the quantity of these. 100 homes at$150k is nothing to sneeze at. Especially right now when homes are not sitting on the market. Most REO's are sold in a matter of a few weeks. So holding costs are relatively low. Transfer fees, comissions, taxes and other misc costs still have to be paid but with the current market the holding costs should be as low as they will ever get. I don't see any reason for the lenders to sell at lowball prices or do bulk REO sales right now. There are enough regular buyers willing to pay market prices. If that changes and the regular buyers vanish then I could see the banks pursuing other options. But currently they should not be selling homes for less than they need to.

golfer_X said...

Here's another flip attempt up in lake hills that looks iffy.

MLS#: K10026352

Paid $525k, trying to flip for $629k. Is anyone going to pay that kind of money for Lake Hills? I can't see an appraisal coming in that high so are they hoping to snag a crazy cash buyer?

BaseballDad2011 said...

@*#@&$^$!! Stupid property at 18338 Lakepointe Dr. I have been watching this area like a hawk. This one was on the market for ONE day. It was an insider deal for sure. The day it was listed, my agent called the listing agent and they said the propery was already closing escrow. I don't understand how they can do this.

There is another house my wife and I love that is a REO. When my agent called the agent on the property, they said the bank's asset manager told the agent that they were selling the house to someone internally. Can they do this?

Buying a house in this market is so frustrating.

Jay & Christina said...

golfer_X: Often the price at the trustee sale is the amount owed from the original 1st mortgage from the pre-boom years. The owner then got a HELOC for full value during the peak years while keeping the low 1st mortgage intact.

When he walks away from the house, the 1st mortgage holder can only ask the amount owed to them at the trustee other words the amount of the partially paid down 1st mortgage which was made before the boom at pre-2002 prices. The 2nd mortgage is a total write off. That's why you see some very underpriced trustee sales, and these are great bargains to snap up.

golfer_X said...

Most of these homes were built in the last few years so the lenders are taking FAR less than the loan amount.

BrianH said...

Lakepointe that Golfer posted a couple above was originally sold as a short sale. I logged on to the MLS system that originated this listing and it looks like it was input into the MLS on 11/22 as an active listing and then immediately the status was switched to HOLD from active and than escrow was opened 1/31/10. It just so happens that the 60 or so days between the entry and pending date are about what it takes to get a short sale approved. So what that PROBABLY AND I AM SPECULATING HERE means is the original listing agent is friends with the current owners who are attempting the flip and pulled a fast one. It is pretty common right now. Find an upside down owner who will cooperate, get the short sale listing, don't actually let the public know about the listing by having it sit on HOLD or as PENDING while you are working to get a short sale price approved.

You can complain all you want about what is absolutely a dirty tactic. However ultimately the fault lies with the buyers agent. It took me 3 minutes to look at the listing history and recognize what is going on. If I had legitimate buyers and wanted to slap the Realtor label on myself I would have presented an offer to the listing agent's BROKER in person and let them know that I wanted some form of acknowledgment from the bank's representative that they have seen my offer. If that didn't happen a DRE complaint would be filed.

Or, you could do A: Think that your R/E agent is the best in the world and blame everyone else as to why you can't buy a home. B: Do what thousands of others before you have successfully done and that is to find a neighborhood you really want to own a home in and spend some time knocking on doors and talking to the owners until you find someone who will sell you their house. Maybe that person will be upside down so you then get to go find someone who actually knows what the hell is going on and have them help you fanagle the system so you get the be that lucky buyer. C: Do nothing and be bitter about those of us who actually get off our asses, learn what the hell is going on in the real world and hustle up some good deals.

But most people will never actually go through the trouble of HUSTLING themselves into a good deal. See, there is nothing illegal about what this agent did. There are violations of the Realtor code of (cough laugh laugh) ethics for sure and I bet some California Dept. of Real Estate code but nobody is going to jail over this kind of thing. If you have a good agent they can still search listings under "hold" status, recognize the ones where funny games are being played and take action. But, every buyer out there has the best agent in the world yet for some reason you keep spending countless hours in the back seat of a Realtors car, looking at houses, making offers that never get accepted and completely missing the glaringly obvious fact this is the most hard core local sellers market and it requires a different approach.

Ah, but what the hell do I know...

golfer_X said...

Actually that is totally illegal. They are basically defrauding the lender by not putting the home on the open market. The lender sure doesn't know about these inside deals. The FBI is now investigating short sale fraud and if this is a blatant case of it, then you should report it.

Here's a FBI report of just such a transaction.

golfer_X said...

Here's the email address to reprt fraud,