Big risks, rewards in home 'flipping'
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By Jim Wasserman
jwasserman@sacbee.com
Published: Wednesday, Jun. 23, 2010 - 12:00 am
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This is no work for the faint of heart. Inside the real estate business, investors talk of unwittingly buying uncleaned scenes of suicides, taking on unexpected and expensive tax liens, finding air conditioners missing, and paying occupants nearly $2,000 to leave.
But oh, the upside to buying from banks that sell short on the courthouse steps.
From December through the end of April, 23 real estate investors and limited liability companies collectively earned $1.4 million in the capital region for less than a month's work, according to data from Onboard Informatics, a home sales tracker.
These investor groups bought severely discounted houses at auctions held by banks that had repossessed them from homeowners. Then, within days or weeks, but always in less than a month, they resold the houses. The average price gain: $40,000.
These lightning fast resales represent less than 1 percent of all transactions in the region, but the profit margins – even taking into account money spent on repairs – have made auction sales one of the hottest niches in Sacramento real estate.
"Being an auction investor is a good business if you have access to the capital," said Sean O'Toole, president of Contra Costa County-based ForeclosureRadar, a website that caters to such investors. "Most of the guys make good returns. But it's hard work. It's not a get-rich-quick thing."
Critics call the game "flipping" and blame it for a housing bubble that triggered the real estate crash in the first place. But others view it as Business 101, a critical piece of digging out from the crash. Houses with troubled histories get bought, repaired and quickly resold, generating cash for new business entities to do it again and again.
"It's something that's really taken off. We started seeing it popping up about the second quarter of last year," said Gold River attorney Eric Graves.
He found a new specialty setting up limited liability companies for auction investors and steering them funding from a Montreal equities firm.
Most investors don't resell their foreclosure properties in less than a month. But flipping within six months was back to 2005 levels early this year, researcher MDA DataQuick reported.
The Bee examined 35 real estate transactions from December 2009 through April 2010 in which investors bought houses and sold them within a month for more money.
Nearly every house examined shared some version of the same story: owners buying as prices peaked, or loading up on home equity debt at the height of the housing boom. Nearly all defaulted as home values crashed, sending their dwellings to the courthouse steps for bank auction.
The region's standout investor for quick resales was James York, agent for Sacramento's Palm Estates Mortgage Inc. He bought five houses at auction in late December, and resold them by mid-January to five Bay Area buyers for $198,000 more than he paid.
York is the courthouse-steps investor who made headlines in 2008 after buying the foreclosed Curtis Park home of U.S. Rep. Laura Richardson, D-Long Beach. Though York invested money in cleanup and repairs, Richardson prevailed on her lender to overturn his purchase. York sued the bank but later dropped the lawsuit.
York didn't return a telephone call to his real estate business, York and Associates. Neither did several other investors or agents called by The Bee. Several buyers of their homes also didn't return calls.
Auction investor Michael Blasquez of Folsom said that's because the business gets a bad rap in the media, and in public.
Early this year, he flipped two Sacramento houses within a month: one for $49,900 more than he paid, and another for $64,100 more.
"I had to stick money into both of those," he said. "Trust me, I didn't make anywhere near that amount of money."
Blasquez, Graves and O'Toole say the fast compensation is appropriate for a high-risk business.
"You have to pay cash in full. You don't get title insurance. You don't get to inspect the house, and you probably have to evict the current owner or occupant," said O'Toole. "It's because of these things that properties at the courthouse steps are sold at a discount."
Graves said one of his LLC clients discovered that "the prior owner (a drug dealer) had committed suicide in the home, and he had basically just bought a crime scene that had not been cleaned up." Though he sold it for $40,000 more than he paid, Graves said he still lost $12,000 after paying for the cleanup and an unexpected tax lien.
Money made on one deal can be lost on another deal, said Blasquez, a longtime real estate agent with Capital Income Properties. He said, "I'm a small guy, and I can't afford to make a mistake."
Most area courthouse-steps investors are locals, said Blasquez. Most of Graves' LLC clients are veteran area property managers, he said. But Onboard Informatics transaction records also show several LLCs, investors and a real estate investment trust from Hollywood, Phoenix, San Francisco and New York.
Even these out-of-town firms have local agents.
For auction investors, nothing beats knowing more than the banks about the neighborhoods where houses are located, said real estate agent Bruce Slaton in Elk Grove.
"Sometimes the banks get it wrong and let the property be sold too cheap at auction," he said. "The investor benefits."
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