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Funding the Flips

Here is who is providing the floor to the residential real estate market:

Wall Street has made a mountain of money available to house flippers, and selling move-in-ready rehabs has rarely been easier. The challenge is finding beat-up and out-of-date properties that can be renovated and resold for a profit.

“Investors like me, we’re like ants on a sugar hill all fighting for the same projects,” said Ed Stock, who started fixing and flipping houses on New York’s Long Island after the 2008 mortgage meltdown. “It’s the greatest time to be in this market; it’s just hard to find the inventory.”

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iBuyer Update

The ibuyers are borrowing money like crazy to build their inventory of homes to flip.  Opendoor doesn’t have the brand-name awareness of Zillow, so they are advertising a lot and buying homes directly off the MLS.  Zillow has everyone’s email address so they are able to reach their users directly. Both have been fairly well-compensated during the 12-month frenzy – will it continue?  From this article:

Opendoor Technologies Inc., which buys homes from consumers and lists them for resale, is in talks with lenders for a new revolving credit facility of roughly $2 billion, according to people familiar with the effort.

The company, which is rapidly accelerating the number of homes it purchases, plans to use the proceeds to help increase acquisitions, said one of the people, who asked not to be named because the matter is private.

A representative for Opendoor declined to comment.

Opendoor, led by Chief Executive Officer Eric Wu, pioneered a data-driven spin on home-flipping known as iBuying. After the company buys a home, it makes light repairs and seeks to resell it, profiting by charging sellers a 5% fee for the convenience of an easy sale.

The company acquired 8,500 homes in the second quarter, more than double the number it bought in the first three months of the year, according to an statement Wednesday. It also had roughly 8,100 additional houses under contract at the end of June.

Opendoor uses debt to fund acquisitions, and had just under $4 billion in borrowing capacity under existing revolving credit facilities as of the end of June. The company had drawn $1.8 billion on those facilities, according to a filing.

Zillow Group Inc., Opendoor’s main competitor, has also moved to increase its firepower for home purchases. The company borrowed $450 million through a first-of-its-kind bond offering earlier this month.

Zillow’s recent activity has been more consistent than Opendoor’s, so let’s look at the Zillow numbers to see if the convenience they offer sellers is paying off. Zillow currently owns 138 homes in San Diego County, and of those, 72 are active listings and 38 are pending.  They have sold 48 homes this year – here are the 13 they have closed since July 1st:

Zip Code
Purchase Price
List Price on the Flip
Sales Price
92021
$549,000
$586,100
$585,000
92025
$542,000
$565,100
$542,000
92027
$819,000
$860,100
$930,000
92054
$927,500
$949,700
$961,900
92057
$369,500
$402,900
$425,000
92057
$763,500
$821,000
$890,000
92058
$451,500
$486,900
$500,000
92069
$831,500
$861,700
$836,600
92102
$446,000
$466,900
$475,000
92111
$430,000
$442,000
$437,600
92129
$463,000
$498,500
$500,000
92130
$605,500
$641,000
$641,000
92130
$699,500
$732,900
$727,000
Totals
$7,897,500
$8,314,600
$8,451,100

They have a consistent 2-month turnover between the day of purchase, and the day of sale, so it’s a quick $553,600 profit, or an average of $42,585 per sale – though they had to pay out close to half of that in buyer-agent commissions (all fix-ups are included in their purchase prices).  It’s a good thing that sellers aren’t in a hurry – Zillow is currently six weeks behind in responding to purchase requests.

Sellers are leaving some money on the table, but as long as Zillow is flipping every home, buyers will still have the same amount of inventory to consider – it’ll just be at a higher price.

Razor House Sold Again

Josh came down from Beverly Hills to round-trip the Razor house, which had sold for $14,097,000 in 2011. It closed yesterday for $20,800,000.

The previous sale did have some hair on it:

Public documents show what the new owner paid is lower than liens on the home, which totaled about $22.7 million. Burns, who expressed interest in the home about seven months ago, initially offered more than $16 million but in October dropped it to $13.9 million. He won out with his new bid after negotiations that resulted in concessions from some of the lienholders.

Here’s a sample of Burns’ negotiating skills in an Oct. 20 letter addressing Leslie Gladstone, the trustee in the Cooksey bankruptcy case:

“This new offer is lower than my first offer because the lack of other qualified buyer offers over the last months of heavy advertising proved that my past offer was above the Fair Market Value of the property,” he said.

Burns continued to say: “The First Mortgage Holder (Bank of America) will need to ultimately decide if it wishes to own this property, or if they would like to achieve their maximum recovery now and be free of the expense and liability of owning a property that has been the white elephant for four years.”

A court record dated Dec. 7 shows Gladstone agreed with Burns’ argument on the distressed home.

“This immediate relief is appropriate because Bank of America will foreclose on the Property if the sale does not close prior to December 31, 2011,” said Jeffry A. Davis, attorney for Gladstone.

The property, the work of renowned San Diego architectural designer Wallace E. Cunningham, is unfinished and has never been occupied. The new owner plans to work with Cunningham to complete the design.

The seller did install a kitchen, and staged it nicely – and included the photo above which helped disclose a possible annoyance with the property/location – you get the paragliders flying by:

Here is the Visa commercial that featured the home:

Brava Closed

Brava closed yesterday, after a whirlwind of activity – here are the MLS stats:

We received 13 cash offers, and went through five escrows to get one to stick.  Each time one would fall out, I went back to all of the other contenders to give them another chance to buy it.

Buyers would say that they had reviewed what’s needed (new kitchen, 3 bathrooms, windows, flooring, etc.), and were comfortable with the project.

Of the four that cancelled, three dropped out altogether once they did more extensive research.

Only one tied up the property, and then, after a few days, tried to work me down on price.  They are looking for the desperate sellers and agents, and hope to convince you to drop another $20,000+ just get it over with.

It was Mr. T who tried to get me to cave, and he had agreed to pay $665,000.  After further review, he wanted to drop the price down to $645,000.

But instead of just taking it, I went back around to all the other contenders and offered them another opportunity.

A different buyer agreed to pay $655,000, and Mr. T. held his ground, and backed out.  But then the $655,000 guy cancelled, and in the next round Mr. T wanted to drop again, this time down to $635,000.

I got another buyer to do better.

We closed at $650,000.

It’s more work to keep all the contenders engaged, and keep tempting them to buy the house during our five-week adventure.  But this is what I do for my sellers – I’m going to everything I can to get you that extra $15,000.

Brava Again

The buyers cancelled the second escrow on Brava yesterday.

We have had a dozen cash offers, so after the first cancellation I went back to the others and got them to bid it up to $690,000, which is a miracle when the highest offer was $675,000 in the first round.

Other agents since have said, ‘oh, you picked the wrong buyer’.  But I’m going to give the high bidder a chance to close every time – I think I have that obligation.  If they would have stuck, I would have been a hero.

There is more of a chance that end users will hang in there, but with flippers it tends to be cut-and-dry, and all about the money.  There has been some concern about the 2019 market being soft(er), but it’s not stopping them from wanting to buy.  They just want to fine-tune the price!

This is a neighborhood with zero lot lines, which you can see in this photo (in yellow).  Each home has the exclusive use of one side yard, instead of splitting both sides.  You can touch your neighbor’s house, but it does give you more usable space.

I don’t think there will be a noticeable discount needed for the flipper to resell a zero-lot-line house. There are several neighborhoods in Carlsbad, Encinitas, and Carmel Valley that have the zero lot lines, so it’s not that rare.

iBuyer Flipping in SD

There hasn’t been much concern around San Diego about the ibuyers because they have been cutting their teeth in the lower-priced and more homogenized housing markets, where valuations are easier.

Hat tip to the reader who sent this in though – Offerpad did purchase a Talmadge home in December.  They took title as Offerpad, and they used their regular Gilbert, AZ address too:

Link to Zillow listing

They paid $564,000, and tried all year to do better:

But the market didn’t come their way, and they ended up selling for less:

Even if they get a discounted commission (two different agents were involved, and the buyer’s agent got 2.5%), losing money on flips has to get old quickly!

A softer market should cause more of these guys to ‘self-sideline’.

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