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The dirtiest job in real estate has grown more complicated than buy, repair, sell
The first thing you notice is the smell.
Mike Baird walks into his first real estate investment, an REO once owned by the Department of Housing and Urban Development, and finds a disaster. Pet feces and urine are scattered across the floor. Other wreckage adds to the carnage, but he sets to work anyway. By the time he’s fixed up the property and resold it, he nets $17,000. Not bad for his first flip.
Doug Clark used to be an airline pilot before he met Baird at the courthouse steps in Salt Lake City.
“The only thing I knew about real estate was that I flew over it,” he says.
But the crowd circling the foreclosure auctions drew him in. There was no Wall Street gloss among the buyers, just Main Street grit. T-shirts, jeans and worn-out backpacks replaced polished suits and briefcases. There, he met Baird.
“What I saw rocked me. I went down there almost everyday, and it fascinated me, learning what he was looking for,” Clark says.
Over the next decade, the two became friends as they mastered the trade. Somewhere between art and science, flipping homes has become over the years an alchemy of data, instinct and, of course, timing. Baird locked in early on. His parents rented out properties when he was a child. Clark graduated with a financial degree, became good at buying and rehabbing homes, and today hosts a show on Spike TV called “Flip Men.”
“There’s something about being able to touch and feel a tangible asset as your investment even if it’s held in a short-term period. It’s been kind of a drug,” he says.
The chemistry of the drug has become increasingly complex. With so much volatility in not only home prices but also the availability of financing for the investor and the would-be buyer, flipped foreclosures have dropped off since the crisis.
According to RealtyTrac, roughly 31,500 REO homes were resold within six months of the original foreclosure sale in 2010, about 7% of all foreclosures sold to third parties that year.
In 2009, it was 11% or 68,000 REO flipped. And in 2008, roughly 18% of all resold foreclosures were flipped within six months, equal to roughly 145,000 transactions.
Alex Villacorta, director of research and analytics at Clear Capital, said there are storylines in the most granular data that could change how home flippers are gauging price changes in their particular areas.
“There was some price growth in sectors that were typically seen as the drags on the market, particularly in the REO segment. We saw only REO prices in Miami actually grow 5% for the calendar year 2011. Contrast that with the fair market prices, homes not in foreclosure, which saw the mirror opposite, down 4.8% for the year,” Villacorta said.
The proverbial “floor” for these markets could occur where the REO prices and the traditional home prices meet. Prices in the sub $75,000 area have actually increased 15% in Miami over the last year. Behind the price increase is investor demand, which home flippers can often target for those investors who would want to hold and rent out until prices improve further.
These investors, in the most fertile flipping markets, are mostly foreign. In Miami, it’s the Latin investor from Central or South America, looking to take advantage of these new bottoms. In Phoenix, surprisingly, Canadians are bringing dollars in looking to snatch up properties for that improving area.
Baird and Clark comb through hundreds of potential investments per week. A lot of it is making sure titles are clean, and as far as pricing goes, they look not just at ZIP codes but price changes in an area sometimes as small as an eight-block radius.
DEBUNKING A MYTH
“One of the myths, first of all, needs to be debunked. You hear the words location, location, location is the most important thing. That’s absolutely not the case,” Clark says. “The single most important factor is the price. It’s completely price driven in a short period of time. In regards to what prices will do in the next three years or whatever, no, we’re looking at a three- to six-month window. ...”
But what makes this time so unknown for flippers is financing for potential buyers. Banks have put such strict standards on mortgage lending that often only the most pristine, risk-free borrowers can obtain financing. For the first time in history, the average FICO score on a Federal Housing Administration insured loan was above 700 in 2011.
Credit was even tighter for those buying from flippers until HUD waived its embargo in 2010. Seven years before that, HUD issued a rule that prohibits the FHA from insuring a mortgage on a home that was owned by the seller for less than 90 days. This past January, HUD extended the waiver through 2012.
Since the original waiver went into effect on Feb. 1, 2010, FHA insured about 43,600 mortgages worth more than $7.3 billion on properties resold within 90 days of acquisition. Baird and Clark said this single waiver has been instrumental for a shocking 90% of their buyers.
“It’s massive. It’s astronomically huge for us,” Baird says. “We are all about inventory turn over, and the inability to sell a property to a willing and able body because of legislation is crippling. The waiver keeps the market moving.”
“It has been absolutely key,” Clark says. “That waiver has taken the handcuffs off.”
Salt Lake City is something of a hidden flipper’s paradise tucked away between Wasatch and Oquirrh mountain ranges and the Great Salt Lake. Employment is stable and inventory is available but not inundated, unlike the endless suburban sprawls in cities to the south, where buyers can simply move down the highway if they don’t like a price. This sort of “boxed in” geography spurs activity and movement.
Clark said roughly 77% of the homes listed in Salt Lake at some point in the fourth quarter of last year have already changed hands.
Baird says while it’s important to monitor how some markets are faring, maybe the most important data point for would-be flippers is where they live.
“The first thing I tell people is you want to flip wherever you will spend the majority of your time. I live here in Salt Lake. I don’t tend to flip outside of our state. I want to be investing and flipping in the geographic area I live,” Baird says.
But if you’re bent on striking out for home flipping fortune, HousingWire has some suggestions on where you might want to land. HousingWire analyzed home price expectation data from Clear Capital, employment data from the Labor Department, and the percentage of competition for REOs on the market to determine a collection of the top five and bottom five metros for flippers. But the most crucial data came from the Department of Housing and Urban Development Department and showed where FHA insured the most mortgages for buyers purchasing “flipped” properties under that critical waiver.
Click on the March 2012 magazine Flip book to see the top five and bottom five markets for home flippers.
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