Is Foreclosure Flipping Dead?
There has been a lot of speculation about house flipping-- foreclosure flipping, to be specific. Is foreclosure flipping dead?
Well, many people have their reasons as to why the number of foreclosures are on the decline, but the truth is; foreclosure is fading for a number of reasons many people haven't thought of.
Of course, the promising economic data and the raw figures of new foreclosures may have drove foreclosure flipping to its end, but there’s a new player in town that’s killing it even more—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, you’ll get a total of $1.5 billion dollars—the amount that the company used in acquiring more than 10, 000 foreclosure properties that year. So if you’ve been flipping an average of one or two houses a month, how can you compete with such behemoths?
Frankly speaking, that’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. Here’ 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 you’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 you’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 there’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 don’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 don’t end up lowering your standards by getting into house flips that don’t make any financial sense—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 don’t have—personal relationships. And if you’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.
No problem! Glad you enjoyed
Just starting out, Great Information
Thanks Mike! Anything in particular you need help with?
Let me know.
Thanks Beverly – now put it into action! 🙂
Good information! The Hedge Funds have obliterated the foreclosure inventory in nearby Tampa! However, here in Sebring we still have a fairly large inventory of homes! I am a General Contractor just getting started in house flipping and I am thinking that the hedge funds could be a good source as a buyer for my flips! Just a thought, but now I need to get busy setting up some backup financing in case I can’t flip in time! What is an average due diligence period?
Back up financing is always a good idea in general because you may find something you want to keep or flip yourself so it is good to have your lenders lined up. If you referring to the due diligence period for inspection 10 days is normal. We use 5 in many cases to make our offers stronger. Many variable to determine how you structure your offer which is always relevant to who the seller is. Let me know how you make out with the hedge fund buyers if you choose that route.
I did 3 houses (1 short, 1 pocket listing and 1 major fixer) last year and have a couple of rentals. In this area (Sacramento, CA), it’s now much harder to find short sales. The hedge funds have bought a LOT of property here! Prices are rising as the market recovers. I’m going to attend my first auction (check in hand) as a different approach to buying a house. Another possible is partnering on a small multi unit. This has financing and personal challenges Yes, it’s definitely possible to make money but it’s not as easy.
I agree Jim and every location can be different. Your market is hot and the hedge funds drying up inventory make it more difficult. This should help drive out most investors which may eventually give you a better opportunity to find deals. You can also expand your market coverage when you see fit and are comfortable to do so. I travel about 60 to 90 minutes out if a deal makes sense. I would not have been comfortable to do this when I first started but no problem now.
Thanks for your comments.
Thanks for the information Mike I live in California in the LA county region. I am completely new to this and was wondering if you knew anyone that would be willing to take me under their wing and show me the ropes?