There has been a lot of speculation about house flipping-- foreclosure flipping, to be specific. Is foreclosure flipping dead?
Of course, the promising economic data and the raw figures of new foreclosures may have drove foreclosure flipping to its end, but thereâ€™s a new player in town thatâ€™s killing it even moreâ€”the hedge fund. How?
Hedge funds are experimenting with real estate investment strategies, more so the flipping foreclosures properties. In simple words, they are purchasing real estate properties in bulk (remember, these are the same foreclosures that may have been bought by you or any other flipper for fixing and reselling) from banks directly.
Hedge funds are well capitalized and so large that they can uniquely buy up thousands of foreclosed properties all at once. As a result, small investors--if lucky--are comparably left with table scraps to raise their spirits with.
How Deep Do Their Pockets Go?
Well, in 2012, Blackstone hedge fund bought foreclosed homes that amounted to $100 million every week. If you multiply this amount by the 52 weeks that made up the year, youâ€™ll get a total of $1.5 billion dollarsâ€”the amount that the company used in acquiring more than 10, 000 foreclosure properties that year. So if youâ€™ve been flipping an average of one or two houses a month, how can you compete with such behemoths?
Frankly speaking, thatâ€™s an uphill battle. But before you predict your doom, hedge funds have actually provided a number of great opportunities to smart investors like you. Hereâ€™ are a number of them:
To start with, while hedge funds are busy engulfing real estate properties and flipping every foreclosure within their vicinity, home prices will eventually begin to rise. And if you happen to have been doing some foreclosure flipping near an area where the hedge funds have purchased properties, your property will definitely appreciate in value.
Secondly, hedge funds operate on one simple goal: buying properties and renting them until the market presents a price that will excite them to sell. Now, if youâ€™re the type that buys properties and holds them instead of selling immediately, you may take advantage of the escalating rental prices.
The Major Downside Of Hedge Funds To House Flippers
If youâ€™re a house flipper, then what should be worrying you is whether such hedge fund purchases wills, in the long run, be making the gap between the prices of a market-ready-home and foreclosed one extremely narrow. A classic example of a region that has been affected by such an occurrence is Las Vegas. At the moment, the difference between the prices of market-ready-homes and foreclosed homes in Las Vegas is as little as 1%.
As you would expect, making money on foreclosure flipping when the margin is that small is a bit challenging. And since thereâ€™s nothing you can do to prevent the situation, all you can do is to hope that the hedge funds will not drive the house flip market into a pitfall.
How To Stay In House Flipping Business When The Profit Margins Are That Low
Hedge funds may be well-equipped when it comes to capitalization, but they definitely donâ€™t have the necessary boots and enough creativity to compete effectively against a smart investor like you. As a flipper, you can easily source in house flips from the hedge funds and use them to come up with a better ready-made-property to sell.
Also, unlike you, hedge funds are generally not nimble. With that in mind, you can easily use that as your greatest asset to stay in business. Nevertheless, while doing this; be keen to check that you donâ€™t end up lowering your standards by getting into house flips that donâ€™t make any financial senseâ€”to stay safe, stick with the 70% rule.
Now your greatest defense mechanism that will always keep you in business every time hedge funds seemingly displace house flipping investors is to use what they donâ€™t haveâ€”personal relationships. And if youâ€™ve been keen to follow all the posts here, then you probably know what team work can do in setting a solid foundation when it comes to house flipping business.
From experience, a great house flipping team will always keep you in business regardless of what hedge funds do. You can even go ahead and add an acquisition manager and a wholesaler to your team to serve this very purpose.
Your Best Plan
If foreclosure has always been your thing, you may consider branching out the flow of your deal stream by trying out short sales, probates or any other form of distressed properties. Often times, banks are motivated to sell such properties, but are restricted by the foreclosure laws the government passes all the time.
From the illustrations above, hedge funds are nothing more than a small challenge that smart investors walk over in their house flipping journey. As a smart investor, all you need to have to remain in business is a never-ending brook of creativity. And since hedge funds are also at risk of failing, you should always be ready to pick up their pieces in case it happens.
If you have come this far, please leave a comment below. I'd love to know what you think about foreclosure flipping and if it is truly dead.