Falling real-estate prices make turning a quick profit on home sales more difficult. Investors active in the market share their strategies.
In a booming real-estate market, making money investing in homes is easy. Buy a house, slap on a new coat of paint or replace the carpeting and ride the appreciation train to a quick, profitable resale a few months later.
When prices decline — as they have in the Puget Sound area over the past two years — the scenario changes. Most home investors disappear, as the risk is too high that property won’t be worth more in a few months.
The few who remain have experience and investment partners or other funding sources to avoid the loan process. They also know how to fix up homes fast and cheap, to keep expenses low.
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“It’s a definite science,” says longtime Bellevue investor Will Heaton, who’s partnered with other investors to buy 15 homes this year. “If you don’t know what you’re doing, you could lose money.”
In hot markets, home investors are often derided as speculating “home flippers,” and criticized for driving up prices. But with prices down, investors say they’ve been welcomed, particularly in neighborhoods where foreclosed homes sit empty.
Most local real-estate investors are still on the sidelines, waiting to see prices trend upward again, says Katherine Swanberg, president of the investor group Real Estate Association of Puget Sound (REAPS). “We think 2010 will be the turning point,” she says.
Until then, investors braving the current housing market say that if you’re patient and buy right, there is still money to be made buying and reselling homes.
Here are three success stories from our local real-estate investing trenches.
Bidding on high-end homes
While most investors focus on cheap homes, owner/broker Larry Cutting of American Classic Homes Real Estate in Renton has done eight real-estate deals this year using a different approach. He specializes in luxury properties headed to foreclosure auction.
Sometimes he pays a service for qualified leads; other times he peruses foreclosure listings in local business papers. He buys only when there are few competing bids and a bank offering a deeply discounted opening price.
“Lenders don’t want these expensive houses back,” he says. “So, they’re discounting notes 50 percent, hoping for a bidding war, or just that someone will take it away.”
On auction Fridays, Cutting arises before dawn. Armed with foreclosure listings and a laptop, he drives neighborhoods to inspect properties and researches comparable sales on Zillow.com. He arrives at the auction with a spreadsheet that helps him decide how high he’s willing to bid, based on values and how much work the property might need.
He generally uses his own cash to buy, but in recent months has found so many deals he says he’s also used hard money, or high-interest, short-term loans from private investors, to finance purchases.
This summer, he says he bought a pristine three-bedroom home in North Bend with a Mount Si view for $260,000 and resold it in a month for $340,000. His buyer had tried and failed to acquire the home in a short-sale negotiation with the home’s multiple mortgage holders.
Cutting bought a 7-year-old showplace home custom-designed by a builder as his own residence in the Fairwood area for $221,000. He cleaned it and added new carpet and interior paint. He says he received multiple bids and sold it for $350,000, netting about $80,000 after expenses.
He says he did even better with the 5-year-old Lake Washington waterfront home he now lives in. Assessed at $1.2 million, the spacious but dirty house had a minimum bid of $660,000, and Cutting turned out to be the only bidder. He says he may sell it and move, as he’s found a buyer at $900,000.
To save expenses, Cutting does most of his own fix-up and repair work. “I’m making as much money now as when we were booming,” he says.
Kirkland business owner Paul Schechter jumped into the market for the first time in spring 2008 with the intention of quickly fixing up five low-priced houses and reselling them. Schechter used his own capital and that of several partners in the investment company he formed, Pasana Properties. He also used hard money.
Then the market ground to a halt, and they rented the houses to bring in cash.
This year the scenario is different, Schechter says. Pasana has bought several South Seattle-area properties and found ready buyers at a modest profit, he says. For instance, a Kent home the group recently purchased for $148,000 at a foreclosure auction needed about $10,000 worth of repairs and Schechter has it back on the market now at $199,950, after a sale in September at $206,900 fell through. He estimates profit will be around $8,000 after fees — hardly a killing, but a return to profit.
The ability to quickly resell homes has him looking around for additional deals. Schechter looks for properties at auctions as well as through leads to sellers from attorneys, Realtors and mortgage brokers.
He says first-time buyers have been in the market, driven in part by the $8,000 federal tax credit included in the stimulus bill. (The credit has been modified and extended.) That’s giving him a ready market for his low-priced homes.
Buying “ugly” houses
Brian Dikeman says he’s stayed busy through the downturn. He paid a $50,000 franchise fee to join the national HomeVestors chain.
HomeVestors specializes in buying homes as-is at discounted prices then rapidly fixing them up with help from a seasoned contracting crew. The company attracts sellers through direct-mail fliers, Internet marketing and billboards featuring its mascot “Ug” the caveman.
Dikeman says he uses real-estate agents at his company, Symphony Real Estate in Puyallup, to market the properties. The company focuses on “ugly” houses or people in ugly situations such as divorce or job loss, where a home must be sold no matter the market conditions. Dikeman says his franchise has done 18 deals this year, partnering with investors to avoid paying high interest on hard-money loans. One recent deal: a Federal Way home purchased for $185,000 that needed $35,000 in repairs, including a new roof, carpet, landscaping, and interior and exterior paint. Dikeman had the work done in three weeks and hoped to sell for $249,000. Similar homes in the neighborhood recently sold for $265,000, he says. He expects to net perhaps $20,000.
“Margins are small right now,” he says, “even for folks like us who’ve been doing it for years.”