Is House Flipping Dead?
Is house flipping dead? Believe it or not I have been hearing that house flipping (foreclosure flipping to be specific) is indeed dead (and/or dying) from quite a few people.
Whether it is an email from a blog reader or a comment in a forum - it seems some people are worried that foreclosure flipping may be coming to an end. :0
Are you guys trying to scare me? Should I be changing the name House Flipping School to something else? How could someone say such a thing?
Well the truth of the matter is that these people have a very valid point. There is a new player in town (perhaps in your town) called the Hedge Fund.
The Hedge Fund: Death of Foreclosure Flipping?
Hedge funds are now dabbling with alternative real estate investing strategies like flipping foreclosure properties. To be more specific, certain hedge funds are now looking at purchasing bulk REOs from banks. These are the same foreclosed properties that you or I may be interested in fixing and flipping.
This is new territory for the banks, which have been for the most part slowly releasing foreclosed properties to individual investors. Now these same banks are talking with the hedge funds, which have the ability to buy up hundreds if not thousands of foreclosed properties all in one swoop.
If you didn’t already know it, hedge funds are enormous and have very deep pockets. How deep you ask?
During 2012 Hedge Fund Blackstone bought $100 million worth of foreclosed homes per week. Multiply that by 52 weeks and you get $1.5 BILLION DOLLARS. All in all Blackstone purchased around 10,000 properties last year.
Kind of puts my 1 house flip per month to shame! How in the world is the individual investor like you or I supposed to compete with these behemoths?
Competing with the New Kids on the Block
So what does all this hedge fund activity mean for individual investors like you and I who are trying to flip foreclosed homes?
Believe it or not there could be some good that comes out of this. With hedge funds now foreclosure flipping and sucking up inventory in staggering amounts, home prices may begin to rise. So if you happen to purchase a foreclosed property next to a zip code where a hedge fund purchased properties, your property may appreciate in price.
And if you lose a good deal to a hedge fund at a foreclosure auction, remember that these hedge funds will want to sell these same properties again a few years down the road-albeit at a higher price than what they are selling for now. The hedge fund’s goal is pretty simple – buy and rent the property until the home appreciates to the point where it makes sense to sell.
The thing that many people are worried about is if hedge funds purchase so many foreclosed properties that the difference between the prices of a foreclosed home versus a market ready home simply evaporates. Said another way, in certain areas of the country the difference in price between a foreclosed home and a market ready home is a small as 1%. This is already happening in Las Vegas.
Needless to say it is pretty difficult to flip a foreclosure and realize a profit when the margins are 1%. Only time will tell how hedge funds will affect your geographic area.
How to Remain in Business
I think the most important thing for house flippers to do is remain proactive and get creative when foreclosure flipping. Currently there is still plenty of inventory out there so I recommend going out there and getting it - of course as long as the deal works numbers wise (don't forget your 70% Rule!).
And how do you find this inventory and those hidden “home run” deals to begin with? It all comes down to the one thing that you and I have that the hedge funds do not – personal relationships. My real estate friends and wholesale real estate buddies will continue to bring good house flip deals my way regardless of what the hedge funds decide to do. It is these relationships that will continue to keep me in business and flipping foreclosures while hedge funds suck up inventory left and right.
I think it would also be wise to start going after short sales. Due to all the new foreclosure laws many banks are motivated to sell, because they are afraid of being sued. We'll talk more about this in detail in future blog posts.
Remaining ahead of the curve and using your personal network of contacts is the best way to beat the hedge funds to the best deals. It is also a great way to ensure a long and lucrative house flipping career.
So what is the moral of this story? In my opinion hedge funds are just another challenge to overcome. Our country got itself into one interesting real estate situation, so we can expect more challenges down the road. As house flippers, if we want to remain in business, all we need to do is get creative and not let challenges (like the big bad hedge funds) get the best of us.
If you liked this post, make sure you get our free eBook "How to Flip Houses in 5 Simple Steps", it's jammed packed with information on house flipping, real estate wholesaling and real estate investing and will jump-start your real estate career. Get it here.