Tuesday, June 25, 2013

Real estate rebounding with the help of quick turnarounds

House Flipping
Real estate rebounding with the help of quick turnarounds
IT COMES DOWN TO THIS QUESTION: CAN real estate investors flip homes successfully through the second half of 2013 without flipping out of business, or are the evolving markets on both the southeast and southwest coasts increasingly perilous for quick-buck ambition?

The answers may be both yes and yes, according to Realtors and investors alike in the distinctive and sometimes dissimilar markets from Palm Beach Gardens on the east to Naples, Fort Myers and Punta Gorda on the west.

Here, through the eyes of the experts in several markets, Florida Weekly glances at both the opportunities and the complexities inherent in flipping — the investment art of buying property then reselling it in short order at a significant profit.

Although the process came to symbolize poor judgment and greedy excess during the recessionary years between 2006 and 2009, that’s changed significantly.

“First off,” says Rick Shaffner, a former Michigan bank president and now partner in a consortium of five investors who own about 300 rental properties on the southwest coast, “I wouldn’t call it ‘flipping’ — that’s a derogatory term going back to 2006-2007. Guys were going in and not even closing these deals, buying a property for a hundred grand when they already had it sold for $150,000, and taking $50,000 off the table and letting somebody else close it.”

For many banks and loan agencies, not to mention flippers, it was an anything-goes time.

“The flipping thing got a bad rep because there wasn’t any real value added,” says Tom Weekes, a Keller-Williams Realtor based in Charlotte County who teams with his wife, Gay Weekes, to do business from Cape Coral north to Sarasota.

“It was just a crazy market that allowed people to make a lot of money provided they flipped it over quickly and didn’t get caught without a chair when the music stopped, so to speak.”

Now, however, home-buying loans remain much more difficult to get from banks, and investors come to the game with money in hand.

Investors are also much more likely to restore the properties they buy nowadays — often they have to if they’re buying foreclosed homes that have sat vacant — adding value before they sell, or renting them out for the time being.

That way, they can capitalize on strong rental markets and bet with a bit more security on increasing home values as investment opportunities begin to shrink.

“I am seeing investors hold for rentals as rental prices are up,” says Kathryn Klar, a real estate agent for Lang Realty in Palm Beach Gardens. The comment might apply to many communities where investors appear to be profiting significantly, or waiting just a bit longer to profit significantly.
And now, nobody appears to be questioning flippers for lacking virtue or value.

“This is taking care of business,” says Jim Green, a Realtor based in Lee County. “Too often society ignores blight and proceeds to build anew in other places. Blight begets blight. These restorations cause values to go up, improving the tax base for the subject property and the surrounding community.”

As Naples-based, John R. Wood Realtors Karyn and Rowan Samuel see it, “every transaction generates cash; each sale affects the local economy,” says Mr. Samuel.

“Real estate has a tremendous trickle down effect on multiple industries — from the sellers cashing out, to the builders and contractors, the brokerages and Realtors, the closing agents, all the way down to retail — to furniture and car sales, to dining and entertainment.

“An improving real estate market (helped by flippers) is an economic powerhouse, and I think we are starting to see that, especially in areas like Naples and Miami that are in-demand real estate markets.”
Cause for excitement?

All that said, last month, Realtytrac Inc., a market analyst, published a survey that identified the 25 hottest markets for flipping homes in the United States, based on sales from the first quarter of 2012 through the first quarter of 2013.

The company defined a flip as the buying and reselling of a home within six months.
First, it picked 600 markets nationwide where flips occurred. From those, it picked metro areas where at least 500 homebuyers flipped their properties in 2012, winnowing that number down to metro markets with a 9 percent annual increase in home values over a year, or more.

From that grouping, finally, the surveyors listed the 25 top markets. They awarded list position based in part on gross profit defined as a percentage of the first selling price, explains company Vice President Daren Blomquist, in an online description of the process.

Thus, if a buyer picked up a home for $150,000 and sold it for $200,000 within six months, the gross profit of $50,000 would amount to 33 percent of the original price.

On the Realtytrac list, five of the first 10 markets appear in Florida, including Orlando (No. 1 in the nation), Tampa (No. 4), Miami (No. 6), Lakeland (No. 7) and Sarasota (No. 9).

Lee County’s Fort Myers/Cape Coral — the market once ranked first in the nation for foreclosures — came in at 20 on the list.

The results led Mr. Blomquist to offer a rosy prediction for those with the capital to flip homes in 2013.
“Flipping homes — buying, rehabbing and reselling for a profit usually within about 90 days — will likely become more favorable for investors in 2013 as home prices are expected to rise,” he writes.

“And while buying homes as rentals still offers a solid rate of return in many markets, many buy and sell investors typically flip properties periodically to fund their ongoing rental purchases.”
Optimism’s pitfalls

But experts on the ground may not be so quickly optimistic, or so blithe in analyzing the 2012 numbers, depending on the given market and on what some call the hidden costs.

“If it’s a foreclosure market, it’s all being purchased by investors now,” says Tara Bua-Bell, a Realtor and partner with her mother Emily Bua in Naples Estate Properties. “I’d say for those investors in the last six to nine months especially, it becomes a question of whether they’re going to make a profit.
“Collier County was not as affected as some outlying counties or communities like Lehigh Acres and Cape Coral by the recession.

In Lee County’s Cape Coral, together with nearby Lehigh Acres one of the markets hit hardest in the United States by foreclosures, that’s precisely what’s been happening, says Frank Ehrhardt, a Realtor with Cape Realty. Mr. Ehrhardt flipped houses in Los Angeles and Chicago before moving to Cape Coral three years ago to invest in an opportunity himself.

“It’s a perfect time to have gotten into this because we bought our home at close to the bottom,” he says.

“The low-range market is where it’s easiest to get in, and it’s where a lot of the flipping happens. Groups and companies buy in, and we’re seeing a lot of individuals, too.”

But sometimes, he says, those individuals regret their investments because they don’t see unanticipated costs before they invest.

Still, “flipping is becoming extremely competitive,” he notes.

In 25 purchase offers Mr. Ehrhardt has made for his clients so far this year, at least 20 have have faced competing bids on the same day, he says.

That experience is common.

“We recently listed a Cape Coral home that was attractive to investors and had five above-asking-price offers within 48 hours,” says Jim Green. “That has become the current norm.”

But Mr. Green echoes the voices of several of his colleagues by questioning the easy optimism of the Realtytrac survey, and data like it.

“The gross profit numbers used by the media have been very misleading,” he says.

“They exclude disaster remediation, renovation and improvements — say $20,000 on the average home purchased at $138,000. Typical cost-ofsale in our market is about 9 percent. If that home is sold at $189,000, the math says the investor made 9 percent on a $158,000 high-risk investment, less purchase fees and carrying costs.”

Mr. Green was using some other figures from Realtytrac in his example of built-in but unseen costs, in which the company described the Palm Beach, Broward, Miami-Dade metropolis as the number one market in the U.S. for flipping (taken together, those communities ranked ahead of Orlando).

There, from the first quarter of 2012 through the first quarter of 2013, about 4,300 houses were flipped by investors who bought in at an average price of $138,000 or so, and sold at an average price of about $189,000, within six months.

And finally, investors worry about other unseen factors, too — shadow inventories, for example.
“We think now we have an 18 to 36-month period left (for these investments),” says Mr. Shaffner.
“It’s more difficult to find deals that make sense on a rental program now. And there’s a caveat: Is there a shadow inventory? Are there a lot of homes that haven’t been released by the banks or Freddie Mac yet? Are they holding on to them and releasing them slowly because they can’t afford the capital hit?”

Nevertheless, Mr. Shaffner and his team of investors who can use family members to contract and restore properties, are sticking to an original plan defined in dollars per square foot.

In 2009 they started out paying about $35 a square foot for homes in Lehigh Acres and Cape Coral. Now they’re paying about $55, and their bet — this is the gamble bas

And that’s when they might sell significant numbers of their 300-plus rental properties, he says.
All of which seems like an opportunity to live with a lot of stress.
But that’s the life of an entrepreneur — any entrepreneur, but especially real estate investors, he says.
“Anybody who’s an entrepreneur wakes up every morning unemployed,” he explains.

“I don’t have Ford Motor Co., or Chico’s, or somebody else giving me a paycheck. So I wake up every morning unemployed, and figure out a way to create income.

“Anybody who’s 100 percent commission, that’s who we are.” 


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