March 2010

By Prashant Gopal March 31 (Bloomberg) — During the U.S. housing boom , even amateur investors could buy and sell a property within a couple of months and turn a profit. Today there’s nothing amateur about house flipping. Homes with punctured walls and missing appliances draw multiple offers from professional investors at auctions in foreclosure-ridden states such as Arizona, California, Florida and Nevada. Competition is so stiff that experienced flippers such as Sergio Rodriguez and Brian Bogenn look back with nostalgia at last year, when they turned over 48 residences in the Phoenix area. “A year ago, bums outnumbered bidders at the courthouse steps,” where many foreclosure auctions take place, Rodriguez said. “Now the bums are way outnumbered.” In Phoenix, 4,661 foreclosed homes changed hands within six months of being purchased in 2009, an increase of 81 percent from the year earlier, according to RealtyTrac Inc., which sells foreclosure data. Flips in the California counties of Riverside and San Bernardino rose 45 percent to 17,203. In Las Vegas, which has the highest foreclosure rate in the country, they climbed 38 percent to 8,042. Nationally, flipped homes gained 19 percent to 197,784 in 2009. Final figures may rise because some homes bought in the fourth quarter may get flipped this year, said Daren Blomquist , a spokesman at Irvine, California-based RealtyTrac. FHA Waiver Sales could get a lift from the Federal Housing Authority’s one-year waiver of anti-flipping rules that took effect Feb. 1, allowing FHA borrowers to acquire foreclosed homes from owners who have held title for less than 90 days. That gives first-time buyers a shot at investor-renovated homes, said Vicki Bott, a deputy assistant secretary at the Department of Housing and Urban Development in Washington. The change also may help clear properties from markets such as Phoenix, where one in 124 homes in the metropolitan area received a foreclosure notice in February, the ninth-highest rate in the nation, according to RealtyTrac . Real estate values usually fall in neighborhoods littered with vacant homes. The steps in front of the Maricopa County courthouse in downtown Phoenix are crowded most afternoons as dozens of people wearing sunglasses and ear buds plugged into their cell phones gather around auctioneers. The bidders speak in hushed voices by phone to the investors they represent — both flippers and those who plan to rent out the properties — as they work out their “number,” or maximum offer. High-Stakes Poker “It’s like a high-stakes poker game out here,” said Frank Gerola, 34, who represents buyers for PostedProperties.com , one of many companies that have sprouted up in Phoenix to serve flippers. “They want to know what you’re bidding on. You’ll have one guy bidding and another guy around him seeing if he can peek at his number,” said Gerola, who competes against representatives of companies such InvestAZHouses.com and TopPriorityInvestments.com. Some investors try to cheat. Hours before the foreclosure auction for 7848 East Pampa Avenue in Mesa, Arizona, visitors were greeted with a handwritten sign pasted to the inside of the front window: “OCCUPIED. NO TRESPASSING,” read the note on the 12-year- old beige stucco house. “Needs carpet, paint. Tile is cracked.” It also warned of missing appliances and fissures in the pool and foundation. New Paint, Carpet It was a ruse, said Rodriguez and Bogenn, who checked out the house on March 18, the day after their $181,200 offer beat out a handful of bidders. An investor probably was trying to ward off competitors, Bogenn said. The house, which was vacant for months, only needed new paint, carpet, fixtures and a pool cleaning, they said. They planned to put it on the market this week for about $230,000. Rodriguez, 31, and Bogenn, 47, didn’t see the house before making an offer. Like many investors, they subscribe to a service that checks titles and sends drivers to properties before the auction to relay photos and descriptions by mobile phone. As the median existing price of U.S. homes climbed an average of 8.1 percent a year from 2000 to 2005, amateurs by the thousands jumped into flipping. Buying and selling homes with the aim of a quick profit was such an American obsession that it spawned two cable-television series — “Flip This House” on A&E and “Flip That House” on TLC — that debuted in 2005 as the market peaked. The reality shows, now in re-runs, tracked people as they tried to flip a home. Back to Flipping “Amateur hour is over,” said Richard C. Davis, who created “Flip This House” and appeared in its first season. Davis, now chief executive officer of Charleston, South Carolina-based Trademark Properties, said he has fixed and sold 25 properties since returning to the business in October and is filming a new series about multimillion-dollar homes built during the boom that he is buying, repairing and selling for half their original price. “The professionals will make more money in a down market than they ever made during the boom,” Davis said. In job markets decimated by the housing crash, flipping is also putting carpenters, construction workers and home inspectors back to work and attracting a new generation of real estate professionals. Josip Eljuga, 25, left a $9-an-hour job as a lot attendant at a car dealership nine months ago to work as a driver, or runner, as he is sometimes called. The pay is better — about $14 per house — and the days are unpredictable. Tell-Tale Signs Sometimes occupants scream at him, other times he comforts them, he said. Most often, his knocks go unanswered, and it’s his job to find signs of occupancy — water flowing from the hose bib, a car in the garage, a container of coffee creamer left on the kitchen table. A rotting pumpkin mixed in with scattered toys in the backyard of a house on South 30th Avenue in Phoenix one recent afternoon suggested the four-year-old home had been vacant since some time after Halloween. Eljuga wants to get into the flipping business and has already discussed pooling money with friends. “It seems like there can be good money if you do it right,” he said. “Based on what I have seen, I think I have enough knowledge to do fairly well.” Brandon Hunt, 28, said he and his business partner flipped 46 homes in the Phoenix area last year and made $1 million in profits. Hunt, who became a real estate agent during the housing boom, said he doesn’t have much in common with many of the flippers who jumped in at the top of the market . For one thing, he said, he buys low. “There was no buying at the courthouse steps in 2005 and 2004, because there was no foreclosure,” Hunt said. Helping Home Values Another important difference, said 42-year-old Phoenix investor Harry D’Elia, is that flippers in 2010 are stabilizing neighborhoods. “We’re the good guys because what’s happening is that the government doesn’t have enough money to fix these homes up,” said D’Elia, who also flipped properties during the boom. The FHA has given investors such as D’Elia a new stream of potential customers with the flipping waiver. “We do believe investors will play an important role in today’s marketplace because they tend to be more liquid than first-time homebuyers,” said Bott of Housing and Urban Development. Hunt said the FHA waiver might take time to have an impact because cash buyers are easy to find. Selling to an FHA borrower requires added paperwork and two appraisals when a property is sold for more than 20 percent of the seller’s acquisition cost. International Buyers Investors expect to be busy for years to come as continued weakness in home sales fuels foreclosures, which will climb to more than 4.5 million this year from 3.96 million in 2009, according to an estimate by RealtyTrac. In February, sales of new homes in the U.S. fell 2.2 percent to a record low annual pace of 308,000, the Commerce Department reported March 24. Sales of existing homes dropped 0.6 percent last month to a 5.02 million annual level, the lowest in eight months, the National Association of Realtors said March 23. U.S. median home prices dropped 28 percent to $165,100 in February from the peak in July 2006, according to the Washington-based trade group. In Florida, which along with Arizona has the second-highest foreclosure rate in the U.S. after Nevada, international buyers are scooping up blocks of rehabbed houses, said real estate agent Brad Cozza. Foreign Connections “The investors are re-emerging,” said Cozza, who flips foreclosed homes in the Cape Coral area on the west coast of Florida to Israeli, German and Spanish investors and vacation- home buyers. “These are wealthy people who have considerable amounts of savings.” In Lee County, Florida, which includes Cape Coral, flips almost tripled to 2,617 last year. Cozza said his business got a boost after he gave a presentation to 925 Israeli investors last month in Tel Aviv. The conference was organized by America Israel Investments LLC, which buys foreclosed homes in Lee County and sells them to Israeli buyers. Edmon Mamane, the company’s owner, said he pays $48,000 to $60,000 for residences, some of which have never been lived in, and flips them for about $80,000. Israeli real estate investor Dror Shlomi, 50, bought a 2,200-square-foot duplex from America Israel Investments a few weeks ago for $79,000; the two families occupying the four-year- old property pay a combined $1,300 a month in rent. Shlomi said he’s in the process of selling his 10 investment properties in Israel and shifting his focus to Florida. “Last year, prices in Israel went up and in the states they went down, so we decided this is the right timing to try to find interesting things in the U.S.,” he said. Grind It Out Robert Fahn, 50, who along with a partner has bought and sold 10 homes in the Sacramento area since last February, said he’s pleased with his 10 percent to 15 percent profit margin. But the window for house flipping is closing as newcomers are bidding up prices, he said. “If someone is thinking about quitting their day job, they should think twice because the market is going to go away at some point and margins are getting squeezed,” said Fahn, who is investigating opportunities in Florida and Phoenix. “This is not a get-rich-quick business,” he said. “This is a grind-it-out business. But once you know how to do it, you only have to commit resources when the price is right.” To contact the reporter on this story: Prashant Gopal in New York at pgopal2@bloomberg.net .