Many real estate investors have switched to "buy and hold." As I noted, some always preferred that approach, but, yes, some rehabbers are now doing "buy and hold."

Some have diversified into other areas. For example, I know several investors who did quite well in residential property but now have shifted their focus to commercial. And in fact I know one--fairly active in the Washington D.C. area who got burned when residential turned down far faster than he anticipated--who's gotten into, of all things, laudromats. (His brother runs a construction company, and part of their work is still for investors.)

Some other rehabbers have moved into peripheral areas. Some who became adept at raising money for their rehabs have become hard money lenders.

Some of them still have full-time (or at least part-time) day jobs. I know a person who made quite a bit of money a few years ago rehabbing. He's a full-time police officer...14 years on the force and planning to work to 20 years when he earns a pension. There's another real estate investor who runs a martial arts studio. In fact, he's a big name in martial arts circles, but it isn't as well know that he's a big-time investor, as well.

And while I agree you want to be ahead of the curve, you don't want to be too far ahead. Back before the bubble burst, I was trying--unsuccessfully--to do sandwich lease options. That is, I'd lease-option a property from an owner, mark up the sales price and rental price a bit, then find a person who wanted to buy it using a lease-option.

It appeared to me to be a good way for someone with weak credit to control a property without the exposure of owning it. Worst-case scenario from the tenant-buyer's standpoint would be that they wouldn't exercise the lease-option, they'd lose whatever option fee they'd provided up front, and they'd still be renters. But money was so easy to get back in 2006 that no one's credit was so weak they couldn't buy. And with the mortgage teaser rates, they could buy (for the first six months, at least) or less than rent. And you can guess the rest: In this one condo complex I was working, virtually everyone who bought within a year of the peak is now in foreclosure. Had they lease-optioned, they'd simply have lost their option fee, and they'd still be comfortably renting.

Regarding amateurs, most investors aren't concerned about amateurs. A lot of us try to help them out; we were there once, ourselves. But there are always plenty of properties. People are always getting married. Or they're outgrowing their houses. Or they're retiring and downsizing. Some people always have financial problems. Some people are always being transferred or relocated. There are always opportunities. The trick is refocusing strategies, as appropriate. As now, where much of the focus has shifted from rehabbing to buy-and-hold.

As far as it taking money to make money....not entirely. Among real estate investors, we see it more as a see-saw with time and money. If you've got a lot of time, you don't need much money. If you don't have much time (to invest), then, yes, you do need money. For instance, if someone has the time to look for deals--to drive around looking for abandoned houses...has time to network...has time to research at the courthouse...it doesn't take a lot of money. On the other hand, if you don't have the time to uncover the deals, you pay others to do so. And, as far as the big dollar investments, the money is there if the deal is good.

And that's one of the interesting disconnects between Realtors and investors. A Realtor hopes that every deal succeeds. And it's a real disappointment when one doesn't. On the other hand, an investor expects most opportunities not to pan out. The owner won't accept the offer. Or the house's after-repair value isn't what the investor had hoped it'd be. Or maybe the holder of a second won't discount the mortgage enough to yield the equity the investor needs.

Example of the difference: If a Realtor is representing a buyer and the buyer makes an offer that's accepted, the Realtor is very pleased. "We got the house!" If an investor makes an offer that's accepted (not countered, not rejected, but accepted), the investor's disappointed: "I paid too much." Because he knows he could have gotten it for less.

The point is: There are deals out there. It doesn't necessarily take money to find them or to profit from them. But the whole mindset is very, very different from that of a Realtor.

Hope that addresses some of your points.

Tue May 27 2008, 17:49

Thanks, good clarifications as well. But since things are slowing for the rehabbers and the market is slow for them being hired to do home improvement jobs, are they getting jobs at McDonalds (especially with the greater loss exposure) or changing their philosophy and buying and holding?

Personally, I grew up with a high risk land developer father. I married a conservative pension sort of guy. Unfortunately, when pensions died he found "religion" in real estate. I've changed my philosophy too because "their not making anymore land" isn't true anymore (Dubai) and there are too many amateurs getting into real estate. I've always been an entrepreneur but the real money is in getting ahead of the curve. I have that ability outside of real estate but it "takes money to make money".

Any thoughts?
Ruth

Thu May 15 2008, 11:23

Good question.

Yes, there have always been the two different classes of investors you refer to, although even there, there are some distinctions.

"Flippers" can refer to both rehabbers and wholesalers. And those are two very different animals. Rehabbing typically offers the most profit (or most exposure to loss). You buy, fix a place up ($30,000-$60,000 or more), then put it back on the market as quickly as possible. On the other hand, wholesalers tie up a property, usually with a purchase contract, then assign the contract ("flip" the contract) to someone else--it might be a rehabber, a retail consumer, or another investor. Wholesaling tends to offer far less profit (or exposure) in any single transaction. Exposure is minimal if done properly, and profits might be $5,000-$15,000 per transaction. (Yes, for all you wholesalers out there, it absolutely can be more. But even the top wholesalers I know in the DC area are averaging around $20,000 per transaction.)

So, Ruthless, with that as an attempt to better refine the terms:

Wholesalers: Still in business. Still active. But, in order to sell the property to another investor, a rehabber, or retail buyer, they're making lower offers. Generally no more than 65% of after-repair value minus any rehab costs. So, business is a bit slower because somewhat fewer properties meet their criteria.

Rehabbers: Still around, but much less so, especially in some (slower moving) markets. For instance, in the Northern Virginia market, rehabbers are still active in the close-in areas where values haven't dropped much and stuff is still selling--Arlington, closer-in Fairfax County, some areas of Alexandria. However, rehabbers aren't bothering with the areas saturated by short sales and foreclosures--Manassas, Woodbridge, etc. When everything on the market is a short sale or foreclosure, rehabbers can't compete.

Landlords (term in investor circles is "buy and hold): Active, especially in areas of short sales and foreclosures. Take a townhouse that in 2006 sold for $375,000. You can buy it today for $125,000. At that price, it'll cash flow. Move a tenant in who's paying $1,000, and just let the property ride for 5-10 years. The mortgage will be paid down, there will be a positive cash flow, and the area will eventually recover. Investors who can swing those deals are snapping up those properties.

Hope that answers your question.

Thu May 15 2008, 10:28