During the go-go days of the housing boom, thousands of amateur speculators rushed into the real estate market to buy and quickly sell new houses and condominiums even before developers could build them, as rising prices and easy lending financed their giddy dreams of real estate riches. Today, in a declining real estate atmosphere, a new breed of flipper is emerging: professional cash buyers.
Armed with fistfuls of cash, Phoenix power flipper Brandon Hunt is transforming the financial mess left behind by Wall Street buccaneers by buying, rehabbing and flipping foreclosed properties for a quick buck. In 2009, Hunt said he flipped 46 properties, netting a seven-figure income. This year, he’s on target to match last year’s volume.
“Knowing how to find bargains is the key to flipping,” said Hunt, broker/owner of Show Appeal Realty and an experienced cash buyer. “In this business, you make your money when you buy, not when you sell. Last year, we were making over 20 percent profit. This year, the margins are a lot slimmer. We’re down to 10 percent, but we’re still making a profit.”
Hunt said he buys foreclosures at public auctions, using a local bidding service. An employee at Posted Properties — one of the many companies that have sprouted up in Phoenix to serve flippers — bids on Hunt’s behalf, while he researches other properties online. He said competition at auctions is brutal. On average, he spends $75,000 on auctioned homes in the southeast valley cities of Chandler, Gilbert and Tempe. He flips them in 15 days to first-time homebuyers or wholesales them to other investors.
Hunt said flippers are at the vanguard of the housing recovery. He and other real estate investors are fueling a nascent real estate recovery and are flipping the old-fashioned way — with cash.
Another serial flipper, Armando Montelongo (pictured at right), former star of A&E’s reality show “Flip This House,” said flipping requires deep pockets and nerves of steel. The San Antonio, Texas, investor said he goes to great lengths to minimize risk by sticking to a few simple rules.
Safety, Speed, Money
“One formula that works for me is safety, speed and money,” said Montelongo, who flips about 18 properties a month in San Antonio, California and the Midwest. “My philosophy is safety first, speed second and money third. First of all, I ask myself: Can I do this investment safely? Secondly, how fast can I sell the property? And then third, how much money can I make? I tend to be a very safe investor.”
Montelongo is also a strong believer in teamwork. “Teamwork is incredibly useful when flipping properties,” he said, referring to the professionals he works with in his business. “First, I have a highly trained Realtor who helps me locate deals. Moreover, I use the same title company, contractors and real estate attorney on all my deals.”
The 65 Percent Rule
Montelongo also uses what he calls “the 65 percent rule” to decide whether an investment makes financial sense. He multiplies the after repair value (ARV) by 0.65 and then subtracts the total repair costs equals the maximum offer (MO). Here’s his magic formula:
(ARV x 0.65) — repairs = MO
“I use the exact same formula, but I take 55 percent less repairs,” said David Dweck, of Charles Rutenberg Realty in Fort Lauderdale, Fla., who is an investor, Realtor, mortgage broker and founder of the Boca Raton Investment Club. “I’m on track to do 100 transactions this year as the buyer, the broker or the lender. This year, I’ll exceed the past two years. The volume has increased, but the size of the deals has decreased.
This article is excerpted from the October 2010 issue of RealtyTrac’s award-winning newsletter, the Foreclosure News Report. Sign up for a 7-day free trial with RealtyTrac and we’ll mail you a free issue of the newsletter. Simply opt in to receive your free issue at the end of the registration process.