Borrowing Wholesale to Buy Retail

The world wants to know why most do it, including me.

This came to my attention as I sat through another humbling installment of Flip This House, where a real estate investment company armed with chuckleheads from the south go out and procure houses at auction for flipping. It occurred to me that they may be going to auction, but they aren’t getting bargains for those houses they fix up and flip. Neither are the first-time flip artists of the show Fix It and Flip It.

The reason? They’re buying at retail prices (or near it), even though they’ve learned to borrow wholesale.

There are absolute scads of homes for sale across the country in HUD, REO, and foreclosure listings, and are at least 20% off the market retail price (some as high as 70% off), yet they sit in someone’s inventory because they aren’t perfect turnkey properties. Isn’t the whole reason for flipping to refurbish and resell?

Yet people continue to buy from classified ads and for sale signs posted in yards.

Last year, I included the concept of “borrowing wholesale” in a large treatise on passing up nickels and dimes for bigger savings. I know my little speel alone didn’t set off a wave of refis, but something did—probably mounting credit card debt. Let’s just go ahead and trade one debt for another, shall we?

The ones who got a whole new mortgage to buy a whole new house didn’t bother to take the PRICE of that house into consideration—they were led by the real estate frenzy. No time to think, no time to investigate, no time to weigh consequences pro and con—got to rush out there and buy something before it’s too late. Too late for WHAT, I ask?

As fast as people on either coast are driving up prices with demand, others are going into default because of their lack of planning, mainly for cost carriage. These houses in default are just as good as ones who have signs in the yards—just a little cheaper, thanks to some inept planning or an unforeseen change in circumstances. Yet nobody, it seems, is interested in buying WISELY these days while desperately attempting to finance their way into the Ownership Society.

When I wrote my message about how to best use interest rates and finance options to your best advantage (borrow with an ARM when rates are high and falling, consistently adding extra principal payments), it was assumed that people would do their level best to seek out the lowest priced real estate possible, or at least rent it out for a second source of income, but no. Thank God there’s still time to rectify this.

When interested in buying real estate for yourself or for investment (rental), get on the computer and look up listings for REO (foreclosed real estate owned by banks), HUD (a government agency called Housing and Urban Development), VA Repo (Veteran’s Administration repossessions), regular foreclosure (the process hasn’t been completed yet), and tax liens in your state (if it has them). These properties can range from a mere 20% off to as much as 70% off, depending on how much is left on the original mortgage. These properties need some work more often than not, and it’s wise to learn what sort of work would mean big out-of-pocket costs to you.

Government agencies and banks have lists of house inventory that they must dispose of, because they need the money to finance other projects, and these properties are cheapest when sitting in inventory before they go to auction (and we all know what happens at an auction). Once they go to auction, the bidding war begins—higher and higher the prices go, until the highest one wins, and the bank or agency pockets the difference between the auction price and what they would’ve taken for it back at the office. At some auctions, the bidding gets so high that it ends up exceeding regular market value for a property!

Why borrow wholesale only to buy retail? You buy clothes, knick-knacks, and kitchenware wholesale at thrift stores and yard sales, you buy food in bulk for a better price, you buy used cars for a better bargain, so why buy your (used) house for more than you have to? Maximize that real estate purchase with your maximized loan dollars, and let the TV flippers show you what NOT to do—that’s their real purpose anyway.

By buying from an agency or a bank, you get some benefits, including: no commissions, possible vendor financing, low competition, and current homeowner bypass (dealing with a distressed owner can be a pain) to go with your reduced price.

While rates are still headed up, now would be a good time to look into this and start forming a plan, assuming you’re still in a position to do something in the way of buying real estate. By the time rates are headed back down, you’ll hopefully know what you want to buy from whom, and what it will take to fix it up and rent it (or move in). When rates bottom once again, it’ll be time to sell at market value, and this will be your reward for time and brainpower spent. Who knows—you may even clear enough to go through this little drama again…and again…and it may even become a new income stream for you, so you don’t have to work so hard for someone else.

Real estate bubble talk be damned! That’s another misnomer from the sock-drawer wizards on high. As long as there is demand at any price, there will be supply—end of economic story for real estate, except for the poor fools who willingly pay enormous sums for ho-hum houses, then try to fix-and-flip their way out of the carry charges in a rising rate environment. Every market has it’s cycles, including real estate, and you just have to learn how to make them work in your favor.