PROFESSIONAL INVESTORS FLIPPING HOUSES

I read in Los Angeles Times, 8/20/2010 about how professional investors now are flocking to the local courthouses in hope of getting a super deal at the public auctions.

"Hoping there are big profits to be made in the aftermath of California's housing collapse, the investors are looking for the business of buying foreclosed homes at distressed prices.

The investors, primarily private equity funds and groups of wealthy individuals, purchase the homes at public auctions, which are held daily on the steps of local courthouses. They refurbish the properties and try to sell them for quick profits.

Not long ago, the typical home flipper was an amateur tapping a home equity line or savings for an investment property. But professionals have rushed in, partly because of sparse investment opportunities elsewhere.

Now there is a swarm of new investors that is making a treacherous and labor-intensive business even tougher.

Investors must do their homework on dozens of homes for every one they buy. Legal and other impediments usually prevent them from going into homes prior to buying them, leaving no way to gauge repair costs. And despite being foreclosed on, the original owners often still live in the houses. That forces buyers to pay them to leave, a dynamic known as cash-for-keys.

The influx of new players is pushing up auction prices and squeezing profits. The average discount at auctions - the difference between a home's sale price and its actual value - is 21.6%, down from 28% in January 2009, according to Foreclosure Radar.

It is busy around the courthouse. A semicircle of people is crowded around the auctioneer. Most were clad in cargo shorts and flip-flops. A few sat in lawn chairs. But their laptops and cellphones, as well as the thousands of dollars' worth of cashier's checks they clutched, marked them as professional investors girding for battle.

Competition at the auctions is brutal. The daily auction ritual begins each morning when banks signal which homes they are likely to dispose of that day. That sets off an early-hours scramble as would-be buyers speed through suburban neighborhoods to investigate the homes.

There are many risks in the foreclosure business. People who have lost their house in foreclosure sometimes vent their anger by smashing walls, knocking over water heaters or ripping out toilets, some have even take the cabinetry out. A terrible crime like murders can also have happened in the house and such a one can be very difficult to sell for the investor."

And remember, mostly the investors have not had a possibility to see the houses inside!

(Partly taken from Los Angeles Times 8/20/2010 by Walter Hamilton/Alejandro Lazo)