Flipping in a falling market

Conventional wisdom considers a declining housing market unfit for flipping property. In such a market, the conservative and safe strategy is to buy and hold property in portfolio — at least until prices bottom out and begin to appreciate once again.

But some highly successful investors are rejecting this conservative approach in favor of high-stakes property flipping in a falling market. Here are five such risk takers who are doing well by defying conventional wisdom.

Josh Blank

A resident of St. Charles, Ill., Josh Blank has invested in nearby Elgin, Aurora and Naperville, where some homes can be bought for $50,000 to $60,000 and rented out for as much as $1,200 a month.

The average house Blank looks at is a three bedroom, one bath measuring 1,000 square feet. He looks to flip first but doesn’t rule out rentals when the opportunity presents itself.

“I’m getting some for 30 cents on the dollar. They’re almost too good to flip. I can sell them for a quick buck today, but it’s hard to sell a house that cash flows $400 to $500 a month when you can make that the rest of your life.”

Blank recently purchased a home in Naperville for $200,000 and sold it for $425,000. But for another house he recently bought he wrote a check for the entire $7,000 purchase price and plans to hold onto it because he can get $900 a month in rent for the home.

“I’m trying to buy as much inventory as I can right now,” Blank said. “I can get a house for half of what it sold for three years ago.”

Blank typically brokers or sells an average of 150 deals a year. However, this year he expects to close on almost 200 deals, 15 of which he bought for himself.

“I’d say 10 percent of the deals I do a year I’m the sole owner,” he said. “The other 90 percent I broker or wholesale to an investor or joint venture with them. The vast majority I do someone else profits more than I do. But my income allows me to go out and do the houses I want to do myself.”

When looking for property to buy, Blank aims for a purchase price of 60 cents on the dollar or less. Once he controls the property his contractors come in for rehab. The rest of his investment team include a property management company, attorneys, an accountant, and a partnership with a local community bank which has given him a guidance line of $1.6 million to spend on anything involving real estate.

Bruce Norris

When he is not investing in real estate himself, Bruce Norris is teaching new investors what he does and how he does it. As any good real estate investor should be, Norris is an avid student of his real estate market — both statewide and locally.

Norris prefers to focus his attention on his home territory in the Inland Empire region of Southern California. With the economy on the fritz, Norris is looking to invest in, and flip, the types of properties that attract the average buyer for the area. In his region the average buyer wants a three bedroom, two bath single-family residence around 1,000-2,000 square-feet.

“In a downturn the majority of the market becomes first-time homebuyers so we focus on that sort of inventory,” said Norris, president of The Norris Group. “We’re not looking to purchase properties that have location problems. We’re mainly looking for properties that don’t need much more than deep cosmetic rehab.”

Norris focuses his attention on the local REO inventory and works with the auction companies and real estate agents who control that inventory. He expects to have flipped around 40 properties by year’s end, and hopes to up that number to about 100 properties in 2009.

In order for a property to pencil out, Norris requires a 70 percent discount minus repairs, financing and sales costs.

“If you’re coming in with all cash you can be more aggressive, but you have to know your local market extremely well. The formula will change as the market worsens. In the 90s I was purchasing properties for no more than 50 percent ARV (After Repair Value). I fully expect this to happen again,” Norris said.

Despite the struggling economy, Norris finds that many buyers are willing to pay a higher price for property in mint condition — but with a purchase price still well below the market highs — rather than buy a trashed REO property at a lower price and fix it up themselves.

“The market has shown us it will pay a nice premium for a perfect rehab even though they could purchase the home at sometimes $50,000 to $90,000 less,” Norris said.

Norris has several general contractors he works with who bid on his rehab jobs. At present he has several rehab projects in the works so all the contractors are busy. He actively pursues long-term financing for long-term holds, but he has no problem obtaining short-term financing since he has his own hard money loan business.

William Bronchick

Working the Denver metropolitan area (Denver and Aurora specifically), William Bronchick deals in lower-end homes that sell for $200,000 or less after repairs.

“I’m looking for a minimum of three bedrooms in 800 to 900 square feet,” said Bronchick, president of the Colorado Association of Real Estate Investors. “Whatever will ultimately resell.”

Bronchick will invest in five or six properties in 2008, and he expects that number to grow in 2008. Although flipping is his first choice, he doesn’t rule out renting because of the favorable purchase price-to-rental rate ratio in his area. For example, a $100,000 house can rent for $1,000 a month, especially since foreclosures have increased demand for rentals by turning many former homeowners into renters.

Like Norris out in California, Bronchick requires a 70 percent discount off retail value, less repairs, in order to make a property worth his while. Once the properties are rehabbed, he retails them to homebuyers or wholesales them to other investors.

Bronchick’s team consists of building contractors, a real estate agent, a hard money lender, title company, insurance company, accountant and lawyer. Utilizing hard money lenders, he has no problem getting financing to purchase the property on his end.

“I’m pretty much using private money and hard money lenders, so I’m not affected too much by this economy. The going rate is 3 to 4 points and 13 to 14 percent interest. The challenge is getting your buyer financed,” Bronchick said.

As for future opportunities in the marketplace, Bronchick believes 2009 will be a year of greater opportunity as the bailout works its way through the system, leaving more foreclosure bargains — for buying and holding as well as flipping — in its wake. Still, an abundant inventory currently exists, so finding properties to buy and flipping them is easy.

Lance Young

The Washington Post recently reported that the western suburbs of Northern Virginia were undergoing one of the greatest home shopping sprees the region has ever seen.

As a real estate investor working the region for 21 years, Lance Young can substantiate that claim. Right now there are plenty of good deals available in Northern Virginia, as well as in Maryland and in D.C. Although he has done deals before in Maryland and inside the beltway in D.C., there are enough foreclosures in the Virginia counties of Arlington, Alexandria, Fredericksburg and Leesburg alone that Young feels no need to go anywhere else right now.

Having sold off his inventory, Young is on the hunt for new properties. Young focuses in on three things when deciding on what properties to invest in — location, price and condition. The further the commute to the beltway, the cheaper the price of the home.

“It can be a one bedroom; your least desirable piece of real estate,” he said. “A young guy working in the federal government is OK with a one bedroom because he is 15 minutes away on the Metro and doesn’t even own a car.”

Young, who has authored a series of eBooks on buying foreclosures, looks for properties in poor condition so he can buy them at enough of a discount, repair them and then flip them or cash flow them. He’s on track to flip six properties this year even though he did not start buying until April.

Young looks for a 30 to 40 percent discount if the property is outside the beltway, and 25 to 30 percent discount inside the beltway. He puts down 20 percent and expects to spend at least $20,000 in rehabbing the property. As a result, when he goes to flip the property he has no problem turning them over.

“I sell my places in about a week. They’re exceptional,” he said. “I’m getting them in top-notch condition, fixing them up and selling them. I’m retailing them at aggressive prices. I have to take every possible excuse away from the potential buyer. I’m buying them cheap so I’m selling them cheap. Often for less than the bank foreclosures in the neighborhood.”

Young is into buying lower-priced housing because the banks are more willing to loan on them. He has worked with the same bank since 1987. He sticks with what he calls “bread and butter housing” meaning single-family homes, condos and townhomes in better locations. His buyers have no trouble getting loans because they have clean credit, have saved some money and have a job history.

“The only reason it takes a week to find a buyer is we have to get them out there looking,” Young said. “If they knew of the condition these places are in then they would sell the next day.”

Besides working with the same banker all these years Young has a real estate agent who represents him, giving him discounts on commissions because of the repeat business he gives the agent. The buyers are supplied by their own agents.

“I’m not doing anything magical. My agent doesn’t have to do any heavy lifting. Just put it in the multiples. That’s all I ask of my agent. My properties sell themselves,” Young said.

Tom Duncan

Today St. Louis and the state of Missouri, tomorrow the nation. That’s the way former horse trainer and trader turned investor Tom Duncan sees the potential for real estate investing in today’s lackluster marketplace.

Duncan is a wholesaler. He buys properties, whether they have equity or not (and most don’t in this market) and then sells them to investors, to prospective homeowners, and to real estate agents.

Once he ties up the properties and rehabs them, he puts together a wholesale contract and sells for between $5,000-$10,000.

“I have no problem getting rid of these contracts. In today’s market I don’t have to push them. I have buyers lined up who want these properties. A lot of my customers are people who went through foreclosure themselves. I put them into the lease-option market. It gives me a year to clean up their credit and get them back into a homeowner situation instead of a rental situation.”

Two years ago Duncan was more like other investors today, looking for the typical three bedroom, two bath home to sell to professionals looking for their piece of the American Dream. He had certain prerequisites to meet like no properties with damaged foundations, etc. Now those prerequisites are out the window.

“The market has changed so much. In the next 12 months we’re looking at 2 million more foreclosures. That’s a wonderful inventory to choose from. There’s a buyer for every property here: rehab properties, damaged properties,” he said. “Now I package them and sell them.”

Although he keeps around 10 properties under contract at a time, Duncan likes to close four deals a week on average. He gets his buyers mostly from referrals and from the letters he sends out to people facing foreclosure.

“I don’t care if deal has no equity in it whatsoever. I know how to create the equity. I don’t care what the market is doing. I am recession proof,” Duncan said.

In order for a deal to pencil out for him, Duncan requires a minimum buffer of $30,000 or he doesn’t do the deal. Due to be released later this year, Duncan’s first book, “Mortgage Defaults: Short Road to Riches,” explains his favorite techniques for succeeding in real estate investing no matter what the market.

Different Strategies, Same Result

Although they may have different ways of working their local markets, the five investors profiled above all have one thing in common: they have all figured out what works best for them in their chosen market.

Most prefer to stay close to home, working the neighborhoods they are most familiar with. Some work only a handful of deals every year, while others prefer the volume approach. All will flip properties to retail buyers as well as investors, and all have formulas to identify profitable purchases.

Most fundamentally, all have found that there is money to be made flipping property in 2008 and plan to continue investing in 2009, when more properties will likely end up in foreclosure and be offered at deeply discounted prices.

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