Wednesday, February 11, 2009

Flipping Foreclosures

The deals one can get at a foreclosure auction are amazing. Sure the house is a bit beat by the time it ends on the final auction block, but it is only a fraction of what the house was worth at peak.

During the bubble flippers, of the fix and flip persuasion, were buying outdated homes, modernizing them, then reselling for a hefty profit. Cable channels are filled with "reality" shows featuring this technique on becoming wealthy - for example Flip This House and Flip That House. But as the housing bubble deflated some were getting stuck with homes that could not have their investments recouped.

But foreclosure auctions can bring really cheap houses, that may need work but are still a bargain for this group of flippers. In the Star Ledger article titled As market stalls, home auctions lure interested buyers enlightens us about what the flippers are doing now. Lets take a look -

John Williams drove home from work in late January and noticed a bright yellow billboard on Route 280, announcing 125 foreclosed, bank-owned homes in North and Central New Jersey were days away from being auctioned to the highest bidder.

For example, a 1,750-square-foot home that made the list of properties to be auctioned by Hudson & Marshall, located on Sussex Avenue in Newark, sold to its last owner for $310,000 in 2006. That was before the market bottomed out, said real estate agent Gregory Panayoti.

Panayoti listed the pale green, 70-year-old home for $125,000, after the property was foreclosed, and a bank took ownership in April. Two families renting apartments in the home moved out about a month later. The home was then broken into twice, and its copper was stolen. The last asking price, Panayoti said, before the property was set to go on the auction block, was $65,000.

By then, the kitchen and bathrooms had been gutted, and the roof was leaking. Panayoti didn't expect the price to go any lower. "At some point the price of dirt kicks in," he said, referring to the value of the land.

Williams, who attended the Hudson & Marshall auction in Newark, said the crowd there was a lot larger than ones he had seen at other sales.

With three children he hopes to put through college, Williams, of Roselle, said he decided to take the risk of bidding, which required a nonrefundable $5,000 deposit. The auction house was to receive 5 percent of the $68,000 bid he placed on the three-bedroom property.

He must still add a kitchen and make cosmetic repairs to convert the home into a rental so that it delivers a return on his investment. Otherwise, he'll get stuck with the property, just as the bank was.

"I don't see that happening," he said. "Not with the price I got for it."

The house is almost 80% off the peak price! That is an amazing decline and loss of money for just three years. Makes one wonder what the real value at peak was. We know that houses were often inflated in shady deals, was this one. Or was the real value in 2006 $310,000 and now only $68,000? It is now worth 22% of the what is once was.

Next question will be the return on investment. Can Williams, who works for Verizon, can complete the repairs and turn the property around in time to actually make a profit? The property is in Newark, which is getting decimated with foreclosures, driving down the cities real estate values.

The holding costs, turn-around expenses and interest on the purchase will be significant, slowly adding up. We saw many flippers in 2005 and 2006 that sat on their properties too long and now are losing money. While on TV these deals always sound like win-win opportunities - real life does not always work so well.

No comments: