experts: real estate column Saturday, September 07, 2013

'Flipping' in America

Ballsy residential flippers may make faster money in recovering U.S. housing market than in Canada

By Ozzie Jurock

There are many areas in Western Canada - northern British Columbia is a prime example - where I believe residential investors can make money. But, if you aspire to be a real estate flipper, you are perhaps better off aiming for fast money in the U.S. than in Canada.

Some U.S markets - particularly parts of Florida hit hard during the 2008 crash - have seen price hikes as high as 240 per cent in the past year. In Canada the overall price increase for a detached house from June 2012 to June 2013 was 3.2 per cent, and not all markets fared that well. The price a typical condominium in the City of Vancouver is the same now as it was a year ago, and up just 2.5 per cent in the past six months - the time frame for buying and selling that often defines an aggressive flip.

The U.S. on the other hand should lead the lead the world in residential price appreciation for the next 12 months. The Gobal Economic Research Survey from Scotiabank picks the U.S. as the only western country to see strong residential price gains this year, with forecasts for a 7 per cent increase from 2012.

Some U.S. centres are seeing rocketing price appreciation - and a lot of flippers.

A recent Realtytrac survey shows that the U.S. posted 136,184 detached-house flips - where a home is purchased and re-sold within six months - in the first half of 2013, up 19 per cent from a year earlier and up 74 per cent from the first half of 2011.

The average U.S. real estate investor made an average gross profit of $18,391 on single-family home flips in the first half of the year - a 9 per cent gross return on the initial purchase price. That was up 246 per cent from an average gross return of $5,321 in the first half of 2012 and an average loss of $13,206 in the first half of 2011.

Out of the 100 markets analyzed for the Realtytrac survey, flipping was on the rise in more than two-thirds of them. And some of the strongest flipping markets are not where most people would think (see chart).

TOP 10 US MARKETS FOR FLIPPERS - 1Q 2013

Top 10 US markets for flippers 1Q 2013

Source: RealtyTrac (realtytrac.com) Based on single-detached houses bought and sold within 6 months this year.

* Includes Metro area anchored by this city.

Short sales

Many Canadian investors are tantalized by U.S. "short sale" properties, and they can offer exceptional prices. But they are also a challenge for flippers because of the time it takes to buy and sell them.

Short sales seem like such smoking deals, don't they? And since these very cheap homes are listed on the Multiple Listing System (MLS), they must be real, mustn't they? Well, yes, they are listed on a type of MLS (or realtor.com) and the prices quoted are cheap, but it ends there.

I have made offers on 15 U.S. short sales, but have only closed on four of them. They were great deals but also required renovations from $4,000 to $12,000, and it took months to have my offer accepted.

A short sale is a method for a U.S. realtor to obtain interest and offers in a property. The realtor does that by putting up a ridiculous price. Say a home sold for $200,000 three years ago. Well, the realtor puts on a short sale at $45,000. The owner - likely owing the full $200,000 (in the U.S. there were tens of thousands of properties financed at 100 per cent to 125 per cent of value) - does not care, since he/she gets nothing anyhow.

You come along and quickly realize two things:

  1. there's often no financing available; and
  2. just because it seems listed at that price, this doesn't mean the bank will write off the outstanding balance over $45,000.

So you make the offer - all cash - and then you wait. And wait.

Nothing happens in 90 out of 100 cases. But, once in a while, you get a short sale accepted. So, patience and making a lot of offers is the norm for the budding investor.

When making offers, however, note:

  • you must submit "proof of funds" from your bank within 48 hours to the bank having the "short sale." If you can't do it ... don't bother offering they will not bother getting back to you;
  • properties are sold "as is" and you will need to sign a multi-page document designed to give you all the liability and the bank and former owner none; and
  • if you keep the property for less then a year, you cannot claim capital gains (you must own it longer than one year to do so).

Should you bother with U.S. short sales? Yes, go ahead. Just don't fall in love with a property because less than one in four offers will get through the process. Note also that the market is now attracting multiple offers on well-priced short sales.

From the Western Investor, September 2013

Ozzie Jurock is a Vancouver-based real estate investor and publisher of the Jurock Real Estate Insider. He is a contributor in Donald Trump's book, The Best Real Estate Advice I Ever Received. Reach Ozzie at oz@jurock.com or ozziejurock.com.




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