Short Sales

Flip and Hold Strategy for Bulk REOs

To the buy-and-hold versus fix-and-flip investment models, let’s add one more: flip-and-hold. Buy-and-hold typically referrers to owning rental property. The landlord has the responsibility of maintaining the property and receives rental income. In the fix-and-flip model, the “fix” is essential. An investor using this model typically invests in property repairs in order to gain top dollar at sales time.

In a flip-and-hold investment, the investor sells the property without performing repairs and holds the paper (that is, holds the deed while receiving installment payments). This is a seller-financed or land contract sale. When seller-financing ties up a large amount of cash on a single property, it may not be the best income producing strategy. However, let’s look at this strategy in the context of inexpensive bulk REO properties.

When purchasing these cheap properties (and by cheap, we mean $10,000 or less each-no that is not an error-ten thousand dollars or less each) why not fix and flip? For two reasons: financial and psychological.

The type of home purchased for $10,000, when fully renovated, might be valued at $30k to $45k. Still sounds like a deal, right? The problem is that no likely buyer will be able to purchase the property at that price. There are no mortgages available for under $60k-even for a working person with perfect credit. There just aren’t. So that means the house you spent working capital on painting, carpeting, and rehabbing cannot be sold. The best outcome in this scenario is that the house is rented, and you assume the inherent problems of rentals in low-income neighborhoods. This is the financial reason not to fix a bulk REO house.

The psychological reason not to fix a $10k house is based on the psychology of the buyer. A homeowner who invests money, labor, and love into their home is less likely to walk away from a seller-financed loan than one who has invested only money. Meanwhile, the investor’s out of pocket is limited to the purchase price of the property, selling expenses, and insurance. As for delinquent tax bills and other liens, those become the responsibility of the new homeowner and are negotiated as part of closing.

How do the actual homebuyers feel about purchasing a seller financed home? Velma Williams of Chicago, said to her seller “I never thought I could own a home. It just needed a little work. I feel so blessed I mentioned you in praise time at church.”

Even with monthly payments pegged to 70% of actual rent in an area, and the psychological incentives to make loan payments, some homebuyers fail. In that instance, since the seller holds the deed, a simple eviction is all that is required in most areas to recover the property. Because of homeowner repairs, the property is often resold in better condition than when it was originally purchased by the investor.

With the flip-and-hold strategy, the investor spreads his risk over a large number of properties and stands to realize 15-to-30 years of cash flow at 9% or more interest. Investors who prefer a more passive role, but like the strategy, can purchase seasoned land contracts at a discount. They simply hold the paper and receive the cash flow.

Article Source: Lori Greymont