Most homes in the United States, Arizona included, are bought from individuals. This can happen in a couple of different ways. You can buy a property directly from a home owner, or you can use a real estate agent with knowledge in the industry to negotiate a deal with the homeowner or the homeowner’s agent. These options are not necessarily ideal for someone looking at a home as an investment property. In the current housing market, it may be difficult to sell a home above the value you bought it for from an individual seller, even if you made a lot of repairs to the house. There are better options when it comes to house flipping; although, they also come with disadvantages.
One of the most popular ways for flippers to acquire property is through foreclosure listings. Foreclosures are properties owned by banks where the owner was no longer able to make the mortgage payments, so the bank or firm took over the property. In order to minimize losses within their portfolios, a bank will attempt to sell this property as soon as possible. What this typically translates to is lower prices, but also homes that are in questionable condition. Sometimes home owners who are being foreclosed on will inflict damage on the property. When purchasing a foreclosure property from the bank it is important to look for damage so that your repair costs don’t become insurmountable and your ROI is destroyed.
Flippers can also buy properties from individuals or businesses who specialize in property wholesaling. This type of business is where a company or person will purchase large amounts of property for a discount, let’s say for 60 cents on the dollar. They will then turn around and sell these homes at say, 80 cents on the dollar. This means a profit for them, but it also allows a house flipper to buy property at a discount. It’s still important to remember, however, that many of these homes sold buy property wholesalers can have the same issues as foreclosure properties. You should look out for any major damage so as to avoid reducing your ROI on repair costs.
There are many different ways that investors can sell their properties in Arizona to get a profit! Here are some main exit strategies that investors use to make some money:
1. Selling them to house flippers who will fix the properties and retail them to end buyers. Retailing is where the largest profit margins are, but requires money to buy the properties, pay for the rehab and all carrying costs until it is sold. Investors often borrow hard money or get partners who fund these deals.
2. Selling to Investors who want to be landlords and who keep the properties for cash flow. Buying these properties requires cash or borrowed funds to buy and hold but should return a higher net return than competitive investments such as certificates of deposit or the stock market.
3. Selling to other investors who flip the properties to either of the above buyers and take a relatively small profit. This method requires little or no money to do if done with an Assignment of Contract to the end-buyer and by using the end-buyer’s deposit as the down payment to the wholesale seller. This is truly one of the no money, no risk, no credit deals that are touted by real estate investors
House Flippers – 37%
Other Wholesalers (to re-sell the deals) - 40%
Landlords (multi-family units) – 22%
End Buyers (to live in the property) – 1%
Up until the housing bubble burst most of Arizona’s economy was based on the real estate market. It was these times of lax credit and high population growth that created the boom in the housing industry. This bubble created the need for more jobs in the industry and also became a profitable market for investors. This is what led to the burst housing bubble and paved the way for property wholesale companies!
With the increasing supply of distressed real estate, there have been a number of property wholesale companies entering the Arizona market. These property investment companies purchase property at a discount, then wholesale (or flip) the properties to an investor at a higher price. Typically, wholesale companies are purchasing short sales, bank-owned (REO) properties, or properties at trustee sales. Anywhere they can buy at the lowest possible price and resell for the highest possible profit. Generally, the properties being sold by wholesale companies are ‘as is’. This means that they will not be doing any improvements to the property, which could be a disadvantage for the buyer.
There can be advantages and disadvantages to working with a property wholesale company. Some of the advantages could include acquiring a property at a price below market value, since many companies try to purchase at 50 or 60 cents on the dollar and sell for 80 cents. Also, property wholesalers are typically dealing with properties under $150,000, so cash flow investors are investing a smaller amount of capital with the potential for higher returns. A disadvantage to working with a property wholesaler is not knowing exactly what you are getting, in terms a property’s condition. As mentioned earlier, the properties are generally sold ‘as is’. This could mean more capital is needed over and above the acquisition cost. Without having a quality estimate of that additional cost, it could definitely impact the cash flow investor’s return.