John Helmick loves to buy homes reeking of cat urine and doesn’t mind if they’re infested with rats, bats or bees.
His seven-year-old Gorilla Capital seeks out some of the most distressed properties to avoid competition and get the best deals, then sells them 60 to 120 days later after major renovations for an average 13 percent return. After flipping 400 homes last year, he expects to sell 500 in 2013 in eight states across the country, making the Eugene, Oregon-based firm one of the largest companies of its type in the U.S.
“There are a lot of people in this industry who are looking to do nothing, or just buy paint and carpet, and those homes are much more competitive,” Helmick, 54, said. “The homes we’re buying, a lot of people won’t even touch them. They are not financeable.”
With prices rising at the fastest pace since the real estate peak in 2006, buying and selling houses within six months, or flipping, is back in vogue. Those types of deals are on track to hit a record this year after increasing 19 percent in the first half of 2013 from a year ago, and are up 74 percent from 2011, according to data from RealtyTrac. Profits are also climbing to the highest in seven years, with investors making an average $18,391 on each sale, more than triple returns in the first six months of 2012 and compared with losses of $13,206 two years ago.
Investors are selling into a market teeming with private-equity firms building large-scale rental companies and potential homeowners trying to take advantage of mortgage rates rising from record lows -- all while the number of homes for sale fell in January to the lowest level since 1999.
Home price appreciation is driving a surge in flipping, said David Lykken, managing partner of the Austin, Texas-based consulting firm Mortgage Banking Solutions. “If you have decent appreciation already built in and an increasing number of markets are still frothy, now’s the time to move on this.”
Real estate professionals and amateurs by the thousands jumped into flipping before the housing collapse, artificially inflating demand as U.S. home prices doubled as measured by the S&P/Case Shiller 20-city index between January 2000 and July 2006.
Buying and selling properties to try and turn a quick profit became an American obsession spawning two cable-television series -- “Flip This House” on A&E and “Flip That House” on TLC -- that debuted in 2005 as the market was surging. In 2004, the average profit was 18 percent, or $40,487, according to RealtyTrac data.
As the market peaked and then tumbled, the flippers were stuck with properties that were dropping in value and were among the first to walk away. About 7 million homeowners lost their properties through foreclosure or by selling for a loss since 2007, RealtyTrac data show, and mortgage availability became more restrictive after lax standards fueled the boom and bust.
When Helmick started Gorilla Capital in 2006 with Ben Bazer, 36, who grew up buying homes with his father, the industry comprised mom and pop investors with a local focus.
Helmick, a Yale Law School graduate, who’d previously started online course company Ecollege.com and taken it public in 1999, wanted to use his background in technology to develop a scalable approach to the business.
People competing for inventory at foreclosure auctions were “a bunch of monkeys,” said Helmick, who along with Bazer wanted to be “the gorilla” any buyer would have to outbid.
As amateurs were driven out of the market when prices plunged, Gorilla Capital kept buying. The company tripled in size by 2008 and has grown between 20 percent and 50 percent a year since 2009, using debt financing from private investors along with a line of credit from Bank of America Corp. (BAC) to fund acquisitions, Helmick said.
With home values increasing 12.1 percent in April from the prior year, competition is increasing.
Yanir Ram, chief financial officer of DRI Holdings LLC, flips and rents houses in California, where the median price of single-family homes rose 34 percent in June from a year earlier. He said his company has sold from 30 to 80 properties a year since 2010.
“We started doing flipping back in 1994,” Ram said. “We did 50 to 60 a year back then and in 2008 and 2009 we did zero.”
DRI Holdings buys houses that were built in the 1980s through the 2000s in Southern California and flips them for an average 15 percent return after a maximum of $15,000 in renovations, according to Ram. If they don’t sell quickly enough, properties can be converted to rentals.
Gorilla Capital, Ram’s DRI Holdings and others have benefitted in the past year as private-equity giants including Blackstone Group LP (BX), Colony Capital LLC and Apollo Global Management LLC (APO), emerged as large-scale landlords in the burgeoning industry for single-family homes to rent.
“It’s very targeted buying,” said Michelle Meyer, senior U.S. economist at Bank of America Corp. “Investors are targeting areas with a large presence of distressed properties where they can get deep discounts. And that’s very different from what we saw during the bubble period.”
Gorilla Capital has sold about 25 percent to 30 percent of its inventory to other investors this year.
“It’s the best pricing out there,” Helmick said. “We could easily get 15 to 20 percent on those types of sales. If we find a great house for $110,000 that Blackstone will buy for $130,000 we’ll clean it up and sell it to them for a rental in 20 days.”
That opportunity may be slowing as large rental investors scale back purchases, with flips being sold more often to individual buyers, said Ram.
Home values nationally are 26 percent below their peak and rising borrowing costs are pushing homebuyers to “scramble to get in before interest rates go up more,” Helmick said. The average rate for a 30-year fixed mortgage reached a two-year high of 4.51 percent last week, before falling to 4.37 percent.
Housing affordability in January also reached its highest level in records dating to 1989, according to the National Association of Realtors.
To help the recovery, the government has also supported house flipping, after previously discouraging it. The Federal Housing Administration has waived anti-flipping rules since 2010, so borrowers can get FHA financing to acquire homes from investors who have held title for less than 90 days.
Gorilla Capital sells at least half of its properties to first-time buyers, many of whom don’t have interest or the financial means to buy a distressed house and rehabilitate it. The firm purchases properties for an average price of $120,000 and spends $30,000 to $100,000 on renovations before selling them, Helmick said. About half the homes the company buys at foreclosure auctions have been abandoned.
“They’re zombie homes,” Helmick said. “We’re taking some of the ugliest, worst homes in a neighborhood and remodeling them and, in that, revitalizing the neighborhood.”
A house the company bought in Bend, Oregon, this year was infested with rats. An exterminator was sent in at night to evict them. Another property near Salt Lake City had a beehive inside one of its walls.
“We’ve had rats, bats and bees this year,” Helmick said. We prefer the bees. You call any beekeeper and they come and pay you to take those out because they want the bees.”
Jed Kolko, chief economist of online property listing service Trulia Inc. (TRLA), said “flipping only lasts as long as prices are rising fast.”
With mortgage rates climbing, more inventory available and foreclosures drying up, the opportunity is narrowing, he said.
Of the 100 markets RealtyTrac analyzed, 32 had declines in flipping, including Las Vegas, Phoenix, Southern California and Atlanta, some of the areas hardest hit by the U.S. housing crash and where prices are rebounding the fastest.
Foreclosure filings -- which include notices of default and bank seizures -- fell 35 percent in June from a year earlier to 127,790, the fewest since December 2006, according to RealtyTrac. The decline was led by a 45 percent plunge in foreclosure starts, reflecting decreasing mortgage delinquencies as home prices climb.
In some states, foreclosures are surging after years of judicial delays lengthened the process. Auctions last month were up 103 percent in New Jersey, 100 percent in Florida, 94 percent in Maryland and 66 percent in New York, according to the data.
“There was such a huge backlog, tens of thousands waiting to foreclose” in New York, said Emmett Laffey, a real estate broker covering New York City and Long Island. “What we are seeing now are properties that have been in pre-foreclosure for years finally coming to market.”
With prices rising faster in some locations than others and foreclosure volume varying, Gorilla Capital is seeking to use its competitive advantage over most flippers, which typically buy in only one area, Helmick said.
“In 2009 and 2010, Arizona was the most profitable,” he said. “Now Idaho and Utah are on fire. We can just deploy our capital where the market is most robust.”
To contact the reporter on this story: Heather Perlberg in New York at firstname.lastname@example.org
To contact the editor responsible for this story: Rob Urban at email@example.com