Is House Flipping Dead?

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Believe it or not I have been hearing that house flipping is either dead or dying from quite a few people recently. I’m not talking about ALL house flipping. I’m specifically referring to foreclosure flipping to be specific.

Whether it’s an email from a blog reader or a comment here in the Bigger Pockets forum – it seems some people are worried that foreclosure flipping may be coming to an end. And the truth of the matter is that many of these people have valid arguments to think that house flipping of foreclosures is in fact on the decline. But it’s not due to what you might think.

Is it the encouraging economic data, the raw numbers of new foreclosures down, the better than expected unemployment numbers (released just this past Friday)?

Nope. Although all those factors probably pay a role. But it’s primarily due to a new player in town (and one that’s perhaps even IN your town):  the Hedge Fund.

Are Hedge Funds Causing the Death of Foreclosure Flipping?

Ah yes, the hedge fund guys…

They probably didn’t have enough money already in the equities world so they’re now (and have been for some time) invading the turf of the everyday house flipper.

Hedge funds are now dabbling with alternative real estate investing strategies like flipping foreclosure properties. To be even more specific, certain hedge funds are now  purchasing bulk real estate owned (REOs) from banks directly by the thousands. These are the very same foreclosures that you or I may be buying, fixing and flipping ourselves.

This is virgin territory for the banks, which have been over the past several years, slowly releasing foreclosed properties to individual investors.  Now these same banks are talking with the big guys, namely the hedge funds instead. And unless you have access to several hundred million dollars in ready capital like they do, you may not be able to compete.

Hedge funds are so large and so well capitalized, they have the unique ability to buy up hundreds – if not thousands of foreclosed properties all in one fell swoop….leaving the table scraps for us small (by comparison) investors.

Hedge funds have access to not just millions but in many cases billions of dollars in capitalization with seemingly bottomless deep pockets.

The Real Bigger Pockets Please Stand Up

You want REAL Bigger Pockets? No, not this BiggerPockets, though here you’ll find some of the best real estate investing information on the Internet.

However, if we are talking about big, deep pockets for investing…let’s talk about a hedge fund.

Just exactly how deep are their pockets, you ask?

During the calendar year 2012 the hedge fund Blackstone bought $100 million worth of foreclosed homes per week. Multiply that by 52 weeks and you get $1.5 BILLION DOLLARS in foreclosure purchases…go ahead, when you say that – do the little “Dr. Evil” thing with your pinky…

All told, Blackstone alone purchased around 10,000 properties last year.

That’s a lot of properties…putting us mortal house flipping guys to shame. How can guys like me who do on average one house flip a month (shooting for two or more in 2013 by the way) possibly compete with these behemoths?

That’s an uphill battle for sure…

How David Can Compete with the Goliaths

So what does all this hedge fund activity mean for individual real estate investor house flippers like you and I who are targeting foreclosures for our house flips?

Don’t get all doom and gloom quite yet, because believe it or not there could be some good that comes out of this. Here’s a few:

• With hedge funds doing all this foreclosure flipping, while devouring the foreclosure inventory at a staggering rate, home prices may begin to rise…and they already have. If you just so happen to be doing some foreclosure flipping next to an areas where a massive hedge fund is purchasing properties, your property will likely appreciate in price.
• If you lose out on a good deal in a bidding war with a hedge fund at a foreclosure auction, remember that these hedge funds are gonna want to sell these same properties again in a few years. They will surely sell them at a higher price, which could help the market there as well.
• 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. So if you’re a buy and hold investor in these markets you could see some rental pricing appreciation as well. Even though I’m a house flipping guy, I do have many buy and hold income properties. In fact, I just bought 13 of them just recently to add to my income portfolio.

The Downside of The Hedge Fund Incursion Into the House Flip Hood

The biggest thing that house flipping people are worried about is if all these hedge funds purchases of foreclosed properties will make the difference between the prices of a foreclosed home versus a market ready home extremely slim. The difference virtually evaporates.

Said another way, in certain areas of the country the difference in price between a foreclosed home and a market ready home is as small as 1%. One market where this is already happening in Las Vegas – which was one of the hardest hit markets in the Great Recession.

Needless to say it is pretty challenging to make money on a flipping a foreclosure without losing your shirt if the margins are only 1%.  Regardless, the old 70% Rule would be pretty tough to meet with margins like these.

The bottom line is this: only time will tell how hedge funds will affect your house flip markets.

How House Flippers Can Stay in The House Flipping Business?

One thing the hedge funds don’t have is boots on the ground and creativity. One of the most important things that house flippers can do is to be proactive in sourcing their house flips and get really creative when foreclosure flipping. As of right now, there’s still plenty of inventory out there to acquire and flip. Judicial states are backed up with inventory for as long as three to five years – which some say due to the complicated legal procedures required to foreclose.

My recommendation is to not be intimidated but instead get out there getting after it. One thing hedge funds are not is nimble. The individual real estate investor has that as their greatest asset.

Just make sure you don’t lower your standards and get into  house flips that don’t make financial sense (don’t ever forget your 70% Rule, MAO and ARV!)

How do you go about finding inventory you can actually purchase and at the same time uncover a few of those hidden “home run” deals despite the hedge funds?

It all comes back to the one thing that you and I have in abundance that the hedge funds do not have – personal relationships. If you’ve been reading anything here in the past nine months, you know the importance of team work when house flipping foreclosures or any other kind of house flips.

In my experience, my house flipping team members and wholesalers will continue to bring good house flip deals my way regardless of what the hedge funds decide to do.  I’ve even gone out an added both a wholesaler and an acquisition manager to my personal house flipping team for this very purpose.

Because it’s these relationships that will continue to keep me in business for a very long time flipping foreclosures or any other kind of ideal money-making flip and the hedge funds can just continue on their merry way, devouring inventory like a lioness gorging on a Wildebeest kill…

Foreclosure Flipping and Your Best Plan

If foreclosure flipping is your thing – your way of sourcing the vast majority of your real estate deals, – you may want to consider diversifying your deal flow stream into short sales, probates, tax lein’s and other kinds of distressed properties.  Due to all the new foreclosure laws being passed, banks are certainly motivated to sell, but only because they are afraid of being sued.  So it’s not all upside for the hedge fund guys.

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. As Wayne Gretzky once explained the key to his success is:

“I skate to where the puck is going to be, not where it has been.”

So what is the moral of this story here?  In my opinion hedge funds are just another challenge to overcome on your house flipping journey. Our country got itself into one interesting real estate situation, so we can expect more challenges ahead as it picks itself up and out of it.  As house flippers, if we want to remain in business, all we need to do is get creative and not let challenges like these or any others get in our way.

One other thought to leave you with: what will happen if the hedge fund plan fails?

As for me, I’m planning now to be there – picking up the pieces.

How about you? What’s your plan?

Please leave a comment below on what’s your plan for flipping in the future?

Photo: Cathy

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.