Published: June 4, 2013
A small number of investors profit on the investment game despite dwindling opportunities
By ZACH KYLE — firstname.lastname@example.org
Every morning at 6 a.m., while his son and wife are still sleeping, Bob Barrow pours a cup of black coffee, fires up his laptop and gets to work.
Sweats and slippers make up the morning dress code at his Boise home office. Barrow, 51, checks out listings for new postings on the Intermountain Multiple Listing Service and websites tracking fresh foreclosure auctions taking place in Ada, Valley and Blaine counties.
He looks for homes to flip, meaning to buy, renovate and resell at a profit he hopes will be 15 percent or more. Promising listings lead to more work. Barrow looks at values of surrounding proper-ties and checks for liens, escrows and other complications.
He makes breakfast and eats at 8 with his fifth-grade son, Tommy. He showers, dresses and takes Tommy to school. Then he gets back to work, perhaps attending a trustee auction to buy a home, or heading to one of about a dozen homes he’s renovating to oversee its construction crew, or returning to the laptop.
“It’s a fast-paced, moving-target kind of business,” Barrow said. “I never know what I’m going to do when I get up in the morning.”
Flipping was rampant before the Great Recession and may have fueled the economic downturn.
Banks were happy to give credit and zero-down mortgages, enabling investors to buy dozens of properties and turn a profit on the rising property values.
The flipping game quickly dried up in Boise in 2009 and 2010, said Krysta Pape, an agent at John L. Scott Real Estate in Boise by day and a flipper for her own investment purposes by night.
No statistics measure flipping in Idaho counties, Pape said. But from what she can tell, flipping remained almost dead until 2011, the year she bought five homes in Boise’s North End. Now flipping occurs regularly, though not at pre-recession levels.
“I don’t see a ton of people flipping, which interests me, because I think more people should do it,” Pape said. “I think it’s a great way to make money, but fewer people can do it now because credit is so tight. These aren’t the days when you could put zero down and buy a house.”
Barrow started buying foreclosure homes at auctions in 2010. The same group of four or five flippers went to all the auctions and bid against each other. Today, sometimes 20 prospective investors attend some auctions, Barrow said. Potential buyers congregate at the offices of several title companies around town and place bids on foreclosed homes.
The newcomers don’t understand the market, he said. They overbid, driving up the prices in the distressed-homes market, which was already becoming more competitive in the past year because of the shrinking inventory, he said.
“In 2010, it was easy,” Barrow said. “There were a ton of houses, and not many people were flipping. There were in excess of 300 foreclosure listings every week. Now, there are 50 houses listed, maybe, and banks are more successful at putting together short sales, which takes more houses out of the market.”
The nondistressed market in Boise is also more competitive than in recent years, with more homes receiving multiple offers above asking price. Investment opportunities are harder to find.
That means flippers must pounce on new listings. Pape is able to do that because she’s an agent who trains her focus on the North End.
Barrow relies on agent Jill Potter of Atova Real Estate, who has been the agent on 20 of the 50 homes he’s purchased to flip. He also works with agents in Hailey and Ketchum.
Flippers like Barrow and Pape have inside tracks on fresh listings as well as buying power – cash from previous flips – to plop on the table and secure deals.
Barrow’s experience as a longtime custom homebuilder enables him to tackle broader renovations sometimes costing more than the price of the home.
A crew of six construction workers guts Barrow’s houses, though he hires subcontractors to handle some projects. His wife, Sue Barrow, is a licensed architect and redesigns floor plans. He employs Potter to plan interior design.
Barrow won’t say what his profit margin was last year, but he claims a nearly 60 percent annualized return on investment. Staying profitable requires expertise and maintaining an inventory of homes in various stages of renovation, he said.
“A whole bunch of things come into play,” he said. “I’m a contractor. I had a real estate license for 25 years. I understand title. I understand foreclosure. There are so many aspects of the business that if you don’t have a (solid) understanding, you aren’t going to do well.”
BIG FLIP, LITTLE FLIP
Different flippers operate on different scales.
Gorilla Capital operates at the high-volume end of the flipping spectrum. Based in Eugene, Ore., Gorilla buys and flips distressed properties in Oregon, Idaho and Arizona. The company flipped 78 properties in Idaho last year, including 62 in Ada and Canyon counties.
Pape works at the small-volume side of the industry. She tapped her individual retirement account to leverage sales of five North End homes. She has rented them to help cover the mortgage payments and generate cash flow. She intends to sink $10,000 or $20,000 into renovating each property to increase its value. Then, she’ll sell most of the homes after at least two years, hoping to take advantage of rebounding home values and to avoid the capital gains tax, which would take 20 percent of her profits.
She said she plans to sink her profits into other homes, making bigger down payments.
She bought one property for $100,000, invested another $10,000 in renovations and sold the house for a $20,000 profit, she said. Another property doubled in value to $200,000 when it sold, Pape said.
She decided to hold on to a property with two housing units because she’s clearing $1,000 a month profit after the mortgage payment from the rent she’s collecting.
Pape said she will continue flipping, but her recent investments paid off because she bought the properties before the market rebounded.
“I just happened to hit it right,” she said. “I wasn’t smart. I was lucky.”
Pape said her business model is based on paying cash down payments and depending on properties appreciating at 3 percent a year, which she called a conservative historic average.
Barrow not only flips more homes, he overhauls them.
He said he bought a home on 21st Street in Boise for $150,000. He invested $270,000 into gutting the house, laying new carpet and dry wood and refitting the electric circuitry, plumbing and buying new appliances. The home sold recently for more than $500,000 and a profit of more than his target of 15 percent.
Barrow has flipped a home in a few days, though he said he usually sells after three to four months. He doesn’t worry about waiting two years to avoid the capital gains tax, because his business is about bulk sales.
“That’s a small-timer strategy,” Barrow said. “People who have just a few houses usually rent them, so that tax money is important to them. For my business model, the annualized return is what is important. The taxes become inconsequential.”
Zach Kyle: 377-6464