According to Auction.com, a real estate auction company, house flipping slightly outpaced rentals as the preferred investment strategy over the past year. However, in a sellers' market, it's difficult finding investment priced houses whether you are flipping or renting.
Investors are shying away from the MLS as a source of houses to flip. Instead, some are scouring other real estate databases such as property tax lists. They are then making direct mail offers to small time landlords. In particular, they target landlords that live a significant distance from the rental property. These landlords are often disgruntled with their property management responsibilities from hundreds or thousands of miles away.
Another source of potential houses to rehab and flip are houses that people have lived in for many years. Investors find these on the tax rolls or by using a computer app. These are not houses listed on the MLS. Again, investors make direct mailings to these people inquiring if they have an interest in selling.
What investors are looking for are older houses that haven't been remodeled or upgraded. These tend to be less expensive houses. More importantly, these tend to be houses that flippers can add significant value to by upgrading to increase the value and profit margin from a flip.
These investors aren't just making random direct mailings. They do filter the list to the most likely prospects. They find it to be a waste of effort and money to mail to people that have only been in the house for two, three, or even five years. Owner occupied houses that haven't been remodeled in ten years or more make the best prospects.
What can be enticing to these potential sellers is the opportunity to sell without paying a real estate broker's commission. They also avoid the trouble and cost of fixing it up to meet the high standards of the retail market. Additionally, they don't have to go through the arduous, mortgage-dependent sales process that most sellers do. Of course, when they sell to investors, these people are not getting full retail price. However, because they have owned the houses for many years, they have built up equity and appreciation that enables them to walk away from the closing table with a substantial check.
The tight inventory of houses for sale in many markets makes finding houses in this manner an almost ideal environment. Once the house is remodeled to bring it up to today's standards, it will sell for full retail. In tight markets, there are often multiple offers for these houses.
According to Reality Trac, in the third quarter of this year, the average gross return on investment (before accounting for rehab costs) was 33.8 percent. That's up from 32.7 percent a year ago. The most profitable markets are Baltimore, Tampa, and Chicago. The most active markets are Nevada, Florida, and Alabama.
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.