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Friday, August 1st, 2008 at 4:39 PM

Good Flip in 4S Ranch

I don’t mention my individual clients and sales here – I stopped about a year ago when the abuse went over the top. The REOs are an exception because there is a lot to learn from them about today’s market, and hopefully the folks at C-wide have a sense of humor.

But I thought today’s example would make for a good exception to the rule in order to answer a couple of questions: A) Can you flip a property in today’s market?, and B) Can the old man still pull off a miracle sale where others fear to tread?

This is a pure flip – purchased solely for the reason to sell immediately for profit. Let this be another reminder of one basic fact about the investment value of all real estate: You make your money on the buy side – you have to buy at the right price.

The property is the detached condo on Tallus Glen, a 3 br/3 ba + den + loft and 2,181sf in the heart of 4S Ranch. It was the model home, and was purchased for $700,000+ by the previous owner, but things didn’t work out. The trustee sale was June 19th, but it didn’t go back to the bank – my clients purchased it at the court house instead for $444,125. We put it on the market the very next day and within a week we had multiple offers. It closed on July 29th for $525,000.

For a little more depth on the listing, click here: Link to Bubbleinfo background story

The net profit to my client was a little over $50,000, or about 11% return for a 41-day investment. They deferred capital gains tax by directing the proceeds to a 1031 Starker account – hopefully we’ll be as lucky on the next one!

If you are interested, here is a video of the property:

Posted on Friday, August 1st, 2008 at 4:39 PM in About the author, Foreclosures | 19 Comments » | Print Print You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Reader Comments: 19 Responses

  1. Can we have some more facts about the purchase process?

    Here’s what I want to know…
    They had cash or financing before the sale? Did they already know their price before they got to the steps?
    They see the property before the trustee sale? Or did they base it on knowledge of the complex and the fact it was the model?
    Did they bid against anyone? Or were they the only one? Were they excited (they are going to make a score) or nervous (this will only work if we do it right so pay attention) on the courthouse steps? I imagine the adrenaline was pumping.

    Why do you think it worked? Simply because they bought it for the right price? Or did they do something that is reasonably repeatable?

    Keith Rettig | August 1st, 2008 at 6:13 pm

  2. Hi Jim,
    I have been a loyal reader of your blog and journal.for a long time. This is the first time I write. I am insterested in all those questions the previous commenter wrote. In addition, I’d like to add couple more:
    1) From my knowledge, the successful auction bidder needs to pay 10%. Does the number of $444,125 already include the 10% charge?
    2) How did they get access to see the property before the auction? This step is critical for any decision of purchase.
    3) If cash amount is not suffient, any other options? I indicated private fund in your journal, but I am not in San Diego.

    Thanks in advance,
    - a loyal reader

    AnotherCuriousReader | August 1st, 2008 at 6:42 pm

  3. They have to own the house and at least attempt to rent it out for 2 years to complete a 1031 exchange. They could be in for quite a surprise come 4/15.

    CPA Guy | August 1st, 2008 at 6:48 pm

  4. Keith,

    1. all-cash

    2. the opening bid was held to the last minute, I’m not sure if they had it prior to arriving, but if they did it was only the previous afternoon

    3. only saw the interior from walking around the perimeter, but it looked good enough on the first floor that they took a chance on the second floor

    4. no other bidders

    5. adrenaline was pumping, no doubt, but they are astute investors who were looking for a very specific product – and that’s why it worked, they waited until they found a property that met their criteria perfectly.

    The two specific things they were looking for:

    A) Vacant property – you can waste 2-4 months trying to evict people, instead, we were on the market the very next day.

    B) Good-looking property – don’t waste time and money on repairs, with time being the most critical.

    I think it is very repeatable, if you don’t mind the aggravation of having to do all your homework without knowing the opening bids.

    Jim the Realtor | August 1st, 2008 at 6:52 pm

  5. ACR,

    1) No 10% charge at trustee sales, those ripoff fees are at the warehouse auctions

    2) Did not get into the building, but scoped it from outside.

    3) Yes I mentioned that I have financing available, but it is expensive and picky – plus there needs to be enough time for more of us to investigate, and with the opening bids coming so late in the process, a lot of things have to go right.

    CPAGuy,

    That’s the first time I’ve heard that, but wouldn’t that only be adding the $50,000 to their regular income for taxation?
    Given the next property’s potential, that tax could be absorbed.

    Jim the Realtor | August 1st, 2008 at 6:58 pm

  6. $444000 looks like 36% below original purchase price.
    So does this mean that the original owner put more than 36% down (through a second loan).

    What was the value of the 1st lien? I am guessing it was less than 444000 if it did not go back to the lender.

    For some thing like this what’s your role…

    Peter | August 1st, 2008 at 7:56 pm

  7. One other question… did the original owner even try to sell …

    Peter | August 1st, 2008 at 7:57 pm

  8. Great blog, Jim.

    Regarding the 1031, CPAGuy is referring to the provision that properties "held for sale" do not qualify for 1031 treatment.

    Usually you will be advised to hold a property for 2 years and rent it out- this is usually more than sufficient to demonstrate that it is being held in the ordinary course of business and not for sale.

    IPX1031 has a PDF document on this topic here.

    JR | August 1st, 2008 at 10:10 pm

  9. It strikes me as a pretty heavy risk to take for just a $50k profit. Particularly, the inability to inspect the property beforehand. My father-in-law is an agent back east. He and I were just talking about this possibility of going into purchasing some trustee sales, and he was telling me some horror stories. One very recent example, was a house that sold new for over a mill that was purchased to flip. A pipe burst in the flip with no one around to check. The house gets foreclosed upon and looks great and new from the outside (and when viewed through the windows). It gets sold on the auction steps (around $700k), only for the buyer to later find out that their is a serious toxic mold problem inside the walls. Pursuant to my father-in-law and a neighbor to the house, the cost to repair is greater than the value of the structure, so the house will need to be essentially torn down. He also has stories of concrete being poured into the plumbing. But, the toxic mold stories seem to be where the buyers lose hundreds of thousands. He also has stories of people that broke into houses to inspect prior to the trustee sale and then getting arrested when a neighbor calls the cops to report the break-in.

    There is money to be made by purchasing on the auction steps, but there is also substantial risk; so it is not for the faint of heart.

    Chester | August 1st, 2008 at 10:22 pm

  10. gutsy move i agree

    but a few things going for it:

    1. building relatively new, chance of serious and major damage less likely

    2. within a price range that is still favorable, ie, no jumbo needed and within reasonable 20% down range.

    3. if you walk around and the kitchen looks good, generally the rest is good to go. most theft prior to foreclosure involves something in the kitchen.

    good job for Ms flipper here

    ocrenter | August 2nd, 2008 at 3:22 am

  11. What about the chance of some tax delinquencies or liens on the property? Do these get disclosed before the bidding begins at the trustee sale?

    simone | August 2nd, 2008 at 3:40 am

  12. JR’s got it right and I’m surprised you never ran into this. The $50K will be taxed as ordinary income so they can say goodbye to close to $20,000 of that gain. I wouldnt want to be that buyers tax advisor when he finds out.

    I don’t understand what you are referencing in regards to the potential of the next property or absorbing the gain. He is starting over and the proceeds cant be legally rolled into a new property.

    CPA Guy | August 2nd, 2008 at 6:02 am

  13. Taxes and liens become the responsibility of the high bidder at the trustee sale. I saw a house in Brentwood, CA that originally sold for $705k in 2005 be scooped up at trustee sale for $298k. It had $36k in back taxes due.

    IRE | August 2nd, 2008 at 6:42 am

  14. Jim the Realtor,
    Since you are very knowledgeable, let me ask you:
    I’m following a property that got foreclosed back in begining of May 08. It is not REO and belongs to the bank according to the records. The previous owners still live there and do not show a sign that they are about to leave. I’m very interested in that place. I contacted the bank and was told that they are in eviction process. You mentioned 2-4 months to evict, is it true? I want to get ready for the moment that the bank will list it, how long will it take worst case? I’m talking about California and a mother with two babies.
    Thanks much!

    Laker | August 2nd, 2008 at 7:08 am

  15. typo correction. It is NOW an REO.

    Laker | August 2nd, 2008 at 7:09 am

  16. This market is changing daily. I wonder if the buyers of the flip had seen the price reduction at the Bluffs to $509k for a BRAND NEW 1750′ townhome 3 blocks to the lagoon?
    Anyone buying anything these days in coastal SoCal IS buying risk, it’s as simple as that.
    But, let’s be honest folks. We wouldn’t be in this mess if most of us understood anything about risk assessment, would we?

    doug s. | August 2nd, 2008 at 7:19 am

  17. I’m surprised you never ran into this.

    Flips are not my cup of tea. I sell regular houses to regular people.

    Think of the flips from my perspective: people expect discounted commissions, yet the work isn’t any less and the risk is sky-high. If you hit a dry patch in the market, the flipper’s profit gets eaten up in a hurry, and it turns the commission into a slush fund.

    Laker – hard to say how long, but six months is realistic if the bank’s eviction attorney is swamped.

    CHL is using an eviction attorney out of Orange County to handle the North SD County evictions – think there are some inefficiencies in that model? I haven’t gotten a return call or email yet, and have the same thing you have – former owners living for free, months after the trustee sale. The banks have the right to boot them after three days too!

    Jim the Realtor | August 2nd, 2008 at 7:20 am

  18. Jim & Laker…

    Shouldn’t Laker call the bank and make an offer to them directly? Might not get the full discount that you can get at the courthouse steps but you are there first (in a sense).

    If the bank is willing to do the sale this way, then Laker could go to the current home occupiers and offer them cash for the keys. If they agree, he makes the purchase, and then shows up with the cash and watches them leave his new house.

    No?

    Keith Rettig | August 2nd, 2008 at 3:23 pm

  19. Keith, Jim
    The bank that foreclosed was Central Mortgage company and it was back in may 2008 about 3 months now…The foreclosed owners are not showing any signs of moving. I did talk to them back when it was a short sale, but they didn’t like my offer. Then, i talked to them when i found out they got NOD. They told me that they are "going to keep the house…" Either they lied to me or just were living in a dream.
    Any case, I don’t know if is a good idea to talk to them today, they might be very upset…
    I talked to the bank (central mortgage) couple of times, they would not accept an offer from me, as their investors would like to get it listed on MLS and "get the best deal…"
    Also, last week i talked to the bank, they told me it is still in the eviction process, but also told me that they sold the house in a pool (with other houses) to another bank…Saxon mortgage. I called Saxon, but they never got back to me.

    What do you guys think? Thanks for your help!

    Laker | August 3rd, 2008 at 7:55 pm

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