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After the housing crisis, home flippers cash in on foreclosures

After the housing crisis, real estate wholesalers are finding investors who fix up foreclosures and distressed homes. But are low-income buyers shut out?

In a post-recession America rife with foreclosures and upside-down mortgages left over from the housing crisis, many cities and towns are stuck with houses so run-down they’re almost uninhabitable. In some neighborhoods, they blight entire blocks. Some cities have begun to bulldoze them, but here’s another option:

A friendly man answers the phone number listed on a Craigslist posting promising a fast sale. He explains that after just a 10- or 15-minute inspection, he’ll be able to get you cash for your house – no matter the condition – in only a few days.

No, he’s not a broker. He’s a real estate wholesaler who quickly flips homes to a new buyer, usually an investor, for a profit ranging from a couple of thousand dollars to $10,000.

Real estate wholesaling is a relatively obscure practice that offers mixed benefits to communities. On the one hand, it quickly puts distressed or dilapidated properties into the hands of people who fix them up to sell or rent. On the other hand, wholesalers’ markup can make it harder for lower-income families and affordable-housing groups to buy homes.

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While no one tracks the extent of wholesaling, one thing is clear: Where once wholesalers had to post ads on telephone poles and billboards to find willing sellers, the housing market is now glutted with distressed homes. March alone saw nearly 370,000 foreclosure notices on properties, the highest monthly total since online foreclosure marketplace RealtyTrac began tracking them in January 2005. That backlog has spawned a surge in buying activity in some real estate markets.

“It’s a feeding frenzy right now,” says Shawn Jardine, a real estate agent in Colorado Springs, Colo., who lists properties for a major bank in addition to renovating and flipping homes herself. “On one property listed for $65,000, I had 15 offers. The best offer won at $20,000 over asking price.”

In short, investors are returning to the real estate market: Seventeen percent of those looking to purchase a home will buy an investment property, according to a survey by Move Inc., a real estate website that lists rentals and new homes. That’s more than three times the share of home buyers who were looking to buy an investment property a year ago.

And they’re snapping up distressed properties, many times with all-cash offers, because foreclosed homes sell at a discount — typically about 15 percent less than comparable homes not in foreclosure, the National Association of Realtors reports. That discount, which can be even larger if the wholesaler buys directly from a cash-strapped homeowner, is one reason that wholesalers can turn a profit and still sell homes that attract other investors.

Wholesalers work fast
The process is straightforward: The wholesaler flips homes so quickly that he doesn’t actually take possession of the title. Instead, he enters into a contract with the home’s owner and then signs it over to a new buyer within days for an “assigning fee” — his profit.

“Wholesaling is finding a bargain for a bargain hunter,” says Michael Jake, a Colorado-based real estate investor who used proceeds from wholesaling to begin renovating and flipping properties himself.

But that markup can also mean the difference between lower-income families buying a home or continuing to rent.

“Even a few thousand dollars, especially in a particularly distressed area, has a distorting effect on prices,” says Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a Washington, D.C., think tank. One way home buyers and agents establish the appropriate price for a home is by looking at comparable sales in the area. Wholesaling can muddy the picture.

“It makes the bottom [of the market] very frothy and hard to figure out where real value is,” says Mr. Jakabovics.

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Increased competition for distressed properties also complicates matters for community groups seeking to turn around troubled areas. The groups “need to buy the right properties that are of strategic importance to a neighborhood,” says Craig Nickerson, head of the National Community Stabilization Trust, a Washington-based nonprofit created to put recently foreclosed property in the hands of new owners and renters. “When investors come in who don’t have interest in the community, who want to buy low and sell higher, they wind up taking important chess pieces off the board.”

Profiteer or problem solver?
How big a role wholesalers play is not clear. “It’s hard to say how much [wholesaling] is going on or how much effect it has on markets,” says Jakabovics. But he sees little value to the practice.

Mr. Nickerson agrees: “Someone who went through the licensing process and is accredited is a better person to deal with than someone who puts a telephone number on a telephone poll.”

Wholesalers provide a valuable service, counters Mr. Jake, often taking on properties in such ill repair that owners can’t find an agent to represent them, let alone a buyer in the traditional marketplace.

“I’m not going to go into a nice neighborhood and offer them some ridiculous price for their house,” he says. “There’s a good real estate agent for that.” Instead, he puts neglected homes into the hands of someone who will “make it into the prettiest house on the block.”

“The one word that makes this all work is motivation,” says Ty Taylor, a wholesaler based in Birmingham, Ala. “Whether [the home owner’s] getting divorced, they’re tired of rental business, or need money for one of their kids … the property’s not an asset to them anymore. They consider me a problem solver.”