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Flippers hogging REOs?

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The Wall Street Journal says investors are pouncing on distressed homes as foreclosures become cheap enough to profitably flip.

Are investors really dominating foreclosure sales ? Good data to answer that question is hard to find, notes the Journal piece: ‘While many real-estate trade groups don’t track investor purchasing on a monthly basis, real-estate agents in many markets say investor buying is high.’

The Journal story (subscription required) warns that ‘when the market improves, many of them could put their houses up for sale, reinflating supply.’

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Certainly something to watch for. But at least in Southern California, investors still account for less than a fifth of home purchases, though their share is growing. Last month, MDA DataQuick estimates 19% of homes purchased in six Southern California counties were bought by investors. Their estimate is based mainly on purchases in which property tax bills are sent to a different address.

The average share of homes bought by investors since 2000 is 15%, DataQuick says. April’s 19% investor share was up only slightly from 17% in April a year ago.

The increase isn’t surprising. In some Southern California neighborhoods, it’s now possible to buy homes at prices low enough to rent out the property with positive cash flow (rent from tenant exceeding the owner’s monthly payment).

But that equation could change as rents continue to fall in the region and low-end sales price declines slow. That could put a damper on investor purchases. If opportunities for positive cash flow continue, then the investors would likely hold on and take the rental income, which would also prevent ‘reinflating the supply’ down the line.

If you attend a foreclosure auction, it might look like most of the people bidding are investors. But the pool of homes for sale at those may be skewed. The properties being auctioned may be less desirable ones that the majority of individual home buyers wouldn’t want to touch.

As the Journal story notes, it’s still tough to make money flipping foreclosures -- resale prices are still falling. That’s probably why there still aren’t a lot of people doing it.

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Some flippers might actually be acting as kind of a lubricant to aid market efficiency. Few individual home purchasers are inclined to go through the hassle of buying a house at an auction on the courthouse steps. Then, if one ‘wins’ at the auction, there’s the often considerable task of getting a possibly trashed house into shape to actually live in.

If investors are buying distressed houses at auction, making quick repairs and reselling them on the open market for a modest markup, they may be providing a valuable service that helps to clear inventory.

As I reported last year, my own home purchase was from one of these low-margin flippers. I paid something like a 12% premium over what the flipper paid at the auction. That was a perfectly reasonable price for me to avoid all the work the investor put in.

That kind of flipping -- an investor buys a home at auction and quickly turns it around to a buyer who intends to live in the house -- isn’t likely to prompt another round of house-dumping.

-- Peter Y. Hong

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