Flipping Phoenix Houses

“However beautiful the strategy, you should occasionally look at the results.”

-       Winston Churchill

When my business partner Manny Romero and I sat down three years ago and set a goal of fixing and flipping 60 homes a year in Phoenix we failed to consider something totally unexpected – a rapid recovery. Since last summer institutional investors, second-home buyers, one-off investors and first time homebuyers have descended on this market like the sparrows of Capistrano.

Which reminds me of another brilliant quote by a less than brilliant man:

“Everyone has a plan ’till they get punched in the mouth.”

-       Mike Tyson

The lack of supply (and profit margins) has led us to look as far a way as Tucson and Yuma for good deals. We used to buy all our houses at the auction. These days it’s all short sales and those are getting tougher too. The banks are negotiating for more because they know demand is up. Take a look at how much median prices have risen here since last fall.

Active listing count on the Arizona Regional Multiple Listing Service today sits at 12,883. That’s the lowest it’s been since 2005. So in keeping with the historical theme watch this video to see what former President Lyndon Baines Johnson has to say, and for more information on unemployment, job creation and home appreciation in the greater-Phoenix housing market.

Do NOT get your real estate license. He made it very clear. My attorney explained to me that, as a Realtor, buying a house directly from a homeowner in foreclosure was a big mistake.

Why I asked?

He told me that the home seller could mistakenly assume that I represented him in the transaction. If this happened my fiduciary responsibility would be breeched when I flipped his house for a profit.

The last thing I wanted was a breeched fiduciary. Sounded very painful. It basically means I could get sued if the seller decided I had my own interest ahead of his. Worse, I could lose my real estate license.

So from 2001-2007 I operated my real estate investment company – without a real estate license.

Then a funny thing happened in 2008. The market here in Phoenix collapsed and great deals could be had on the Arizona Regional Multiple Listing Service. Bank-owned properties and short sales were in huge supply. The only way I could get my hands on these properties AND get paid was to get my real estate license.

Here we are 5 years later and I have no regrets. Being a Realtor-investor has many advantages, the most important being access to the multiple listing service.

I’ve come to the conclusion that in order to operate a successful, large-scale fix and flip business (20-40 homes a year or more) a real estate license is required. With MLS access you can:

• Do your own market analysis
• Search the MLS for prospective deals
• View your competition’s listings
• Follow trends in the market like days inventory, median pricing, etc.

If that isn’t enough there’s the savings that goes along with buying and listing your own deals. On a $200,000 retail flip you’ll save over $10,000 in commissions. And who will be more committed to finding you great deals and keeping your sales pipeline full – you or your Realtor?

As for fiduciary responsibility – I don’t worry too much about that anymore. Since most of my deals come from the MLS the seller already has representation. And if by chance the seller doesn’t have a Realtor I will find them one so it’s not an issue.

On Tuesday, I taught my class, Attracting Investor Clients, to 29 Arizona Realtors at WEMAR in Peoria. By the way, if you ever want to hear me speak, get 3 hours of agency law for agent renewal hours, or just like hanging out with a bunch of Realtors and a red-headed instructor, click here for a link to my class schedule. The sponsor usually charges around $10.

I started teaching Attracting Investor Clients about 3 years ago.  I’ll never forget the first time I taught it – one person came (and she was a former co-worker that felt sorry for me). The next class, about 8 people attended.

Things sure have changed. Last month, I taught it at the Arizona Academy of Real Estate and 67 Realtors showed up.

Now I’m not vain enough to believe it’s because of my handsome face and funny jokes. It has a lot more to do with who is buying houses right now in the greater-Phoenix housing market. In March, 40% of homes purchased were paid for in cash. And according to Mike Orr’s monthly report for March, investors made up 26.4% of the buyers.

This leads me to believe that Realtors here want to learn more about how to work with investors because they represent 1 out of 4 homebuyers. Or maybe these agents just come for the free snacks?

Anyway, for a more detailed explanation of the numbers check out this video. I discuss price increases, new home sales and supply.

I am a home seller.

I know there are less than 13,000 active listings on the Arizona Regional Multiple Listing Service. I know there are only about 10,000 single-family homes available to buy in the greater-Phoenix housing market. I know in the last 30 days 8,221 houses have sold. And I know there is a 1.5-month supply of homes for sale.

These figures make it painfully obvious that the greater-Phoenix area is a seller’s market. But, if you’re not into numbers let me explain it another way.

When I list my remodeled, 4 bedroom, 2 bathroom home for sale like the one pictured to the right – complete with refinished cabinets, granite counter tops, new carpet, paint, stainless steel appliances, window blinds, light fixtures and door hardware – I will receive multiple offers. More than likely, at least one will be all cash.

If I accept your offer and you ask for a long list of minor repairs I may refuse to fix them.

If you fail to close in 30 days I will require you pay a $50 per day late penalty. If you need more than 35 days to close I will require that you release your earnest money to me immediately. It will be non-refundable. And if you decline I will put the house back on the market.

Forget about your dream home. You’ll have to cancel the moving van and unpack all of those boxes. You won’t get the $400 you paid for an appraisal or the $450 for the home inspection back. Worst of all, you’ll have to start looking all over again for another house in one of the hottest real estate markets in the country.

You say I would never do this? I just did. Last week.

After 35 days the buyer of this beautiful Peoria, Arizona home asked for a one-week closing extension. I agreed to do this IF they agreed to release their $1,000 earnest money deposit to me.

They balked. I walked.

The house went back on the market the following morning and I had three full-price offers by the end of the day – one all cash.

Don’t believe what you read or hear on MSNBC, CNN, FOX or the USA Today.  The greater-Phoenix area is a seller’s market. I am a home seller and I have the leverage.

For now.

The market will eventually shift. It always does. And when this happens you, the homebuyer, will have the upper hand and can write me a letter. You can remind me that there are hundreds, if not thousands, of other homes just like mine for sale. That the market is distressed and I need to discount my property, replace the HVAC unit and roof and re-plaster the pool. Yes, I’ll lose money. But at least the house won’t bleed me to death anymore. I’ll accept your offer, fix everything and throw in a bottle of $100 wine at closing.

I remember those days. Not fun.

The good news is, for both of us, prices and interest rates are about as low as they’ve ever been. We’re on the road to recovery. At least we’ll both benefit from that.

Many underwater homeowners in Arizona have been tossed a life preserver. Best of all, it didn’t come from our federal government.

Rapidly rising home prices here have bailed out some of those unlucky folks who purchased homes during the housing bubble. They’re discovering with prices AND demand up they’re not so underwater anymore. Take a look at this chart from Michael Orr’s Cromford Report:

The price per square foot value of a home here is up 15% from the bottom in September, 2011. And there’s more good news from Michael Orr in his update from May 3^rd, 2012:

“Just a couple of years ago Arizona ranked third highest in the nation at 16.3% non-current loans (30+ days delinquent or in foreclosure) when the national average was 13.5%. Arizona now ranks 33rd among the states for non-current loans at 9.1%, well below the national average of 11.7%. In the last month Arizona fell another two places by dropping below the states of California and Washington and now ranks equal to Missouri and just above Texas. These changes go a long way to explain why we are entering a period of sustained recovery in the Greater Phoenix housing market.”

Of course, this all makes my job as a fix and flipper more difficult. But, as a homeowner and community member I’m grateful we seem to be finally turning the corner. There’s light at the end of the tunnel and it’s not a freight train.

1826 S. Arroyo - Short Sale

Comparable – of equivalent quality, a worthy comparison.

In the real estate business we refer to comparable sales as comps because real estate professionals are way too busy to say comparable sales.

If I’m searching for comparable sales on a house I plan to fix and flip I call it comping. My spell check says comping is not a word. It suggests I use the word coping, or chomping. But since this is my blog I don’t really give a damn what my spell check says.

I hereby proclaim that the act of reviewing comparable sales is called comping. Being the editor of my own blog certainly has its privileges.

Finding a short sale in the greater-Phoenix housing market these days can be difficult. The market is red hot and the banks know it. You’re wasting your time, and your Realtor’s time, if you don’t know how to properly “reverse comp” a house before writing a short sale offer.

Here’s an example:

I found 1826 S. Arroyo on the Arizona Regional Multiple Listing Service last October.  The list sales price was $185,000. Before I wrote the offer I scoured the MLS for comps that would support my offer price of $179,000. I found comparable sales at 165K, 178K and 192K. These comps were crucial for offer success. The bank ordered a broker price opinion (BPO) and the real estate broker chosen to do the report used these comps to assign a value to the home.  If they came back too high the bank wouldn’t accept my 179K offer.

I call this process “reverse comping”.

Arroyo Kitchen Remodeled

My next step was to find comps that would support an after-repair price of 235-240K.  It took some time but I found a few traditional sales in this range. But here’s the problem – since I found them chances are the BPO agent could find them too, and use them.  There wasn’t much I could do about that. My only hope was that the broker would take into account that 1826 S. Arroyo was a distressed short sale.

Luckily for me, that’s exactly what happened.  The BPO came back at 179K. I bought the house, spent 18K on repairs and sold it 70 days later for $250,000. My net profit was $40,000.

That is okiiizzzaay. Alright. I made that word up too.

Yesterday, Inman News reported that Phoenix is the number one market in the country for rising list prices. According to Realtor.com, Inman News’ source on the story, list prices here are up 23.5% from this time last year.

This makes sense. Here are the latest figures from the Arizona Regional Multiple Listing Service:

• 13,403 active listings
• 8,943 closed listings (last 30 days)
• 1.5 month supply of homes

When demand increases, prices naturally go up.  And with less than a 2-month supply of homes we’re seeing bidding wars again. What doesn’t make sense to me is this quote from the article:

“However, Realtor.com analysts noted that the large shadow inventory of potential foreclosures in these states (Arizona, Florida) could undermine this optimism and keep prices low as supply floods the market.”

What shadow inventory? What supply? Don’t you think that if the banks were really sitting on a big supply of shadow inventory in Phoenix now would be the perfect time to unload these houses?

Even if the banks had a shadow inventory of 20,000 – 30,000 houses and dumped them all on the Phoenix market at one time (which they would NEVER do) at the rate we’re selling homes this new supply would be gone in 3-4 months.

I say bring on another wave of foreclosures! Us fix and flippers need more deals.  Surf’s up!

I’m no Martha Stewart.  However, I know a kitchen looks better with staging than it does without.

Professional interior designers will tell you that a vacant home’s kitchen, dining room, family room and master bedroom should be staged with furniture, pictures, bath accessories and greenery to help “identify” the space (a fancy way of saying these items help the buyer figure out how their stuff will look in the home).

It’s true, so I stage the kitchen, hang pictures and accessorize the bathrooms with shower curtains, towels and soap dishes.  But, I don’t put furniture in my flip deals because it’s cost and time prohibitive.  And as fast as houses are selling in Phoenix right now it’s just not necessary.

In this clip I explain how to stage a kitchen for around $100.  Below the video is a slide show of the entire house.  No doubt Martha Stewart would be jealous.

They say what goes up must come down.  This was true for the Phoenix housing market through much of 2009-2011.  It seemed like anytime we got any traction with upward pricing some external market force (i.e. expiration of the federal housing tax credit, robo-signing scandal) would push values right back down again.

With the worst of the foreclosure crisis behind us (trustee’s deeds for last month were the lowest since Q3 of 2007 – see chart below) many housing experts believe Phoenix is on the slow road to recovery.

Further proof is in median pricing.  According to Mike Orr’s Cromford Report graph below, it bottomed in May, 2011 at $108,000 and has been on the rise ever since.  As we sit today median pricing is at $135,500.

This is great news for home sellers.  However, as a fix and flipper rapidly rising values make me cringe.  According to Mike Orr’s mid-April summary:

“The current price level is now 14.3% higher than last year on April 15. We reiterate our forecast that positive annual appreciation will be recorded throughout 2012 is likely to exceed 25% by September 2012.”

When prices start going up like this everyone starts speculating; owner-occupants, buy and holders and fix and flippers.  I’d prefer a more stable rise in values.

But because of the lack of inventory (there are less than 9,000 active single-family homes for sale on the Arizona Regional Multiple Listing Service in the greater-Phoenix area as of today) a feeding frenzy has ensued at almost every price point.  We’re selling almost 9,000 houses a month, leaving us with about a one-month supply.

Which is why I find the “there’s another wave of foreclosures coming” story widely reported by the media to be so hysterical.  This market could handle a tsunami of 15,000 – 20,000 foreclosures.  They’d be devoured in 3 months.

Imagine you live next to a vacant home.  Not too ordinary given today’s real estate market right?  But this house has been vacant a long time, a very, very, very, very, very long time.

This home has been vacant so long all four seasons changed – twice.

I posted here about Las Arboledas on January 13^th.  I wrote a short sale offer on the Gold Canyon, Arizona property in August, 2010.  It had been vacant about 3 months at the time. The homeowner elected to walk away.  467 days later the bank finally foreclosed on the house and I bought it at the auction last November.

I sold it in February for a $44,000 profit.

While the average foreclosure in the greater-Phoenix housing market takes around 7 months, it took the bank almost 16 months to pull the trigger on this property.  Why?  The homeowner filed for bankruptcy.

I still can’t figure out why there was so little competition for Las Arboledas at the courthouse steps, especially considering the volume of investors we’re seeing in the marketplace.  The house had an amazing backyard pool and spa with desert/mountain views.

I guess every now and then good deals still fall through the cracks. It’s served me an important reminder – never stop beating the bushes.  Even a blind squirrel finds a nut from time to time.