John Helmick loves to buy homes reeking of cat urine and doesn't mind if they're infested with rats, bats or bees.
His 7-year-old Gorilla Capital seeks out some of the most distressed properties in Idaho and seven other states to avoid competition and get the best deals, then sells them 60 to 120 days later after major renovations for an average 13 percent return. After flipping 400 homes last year, he expects to sell 500 in 2013, making the Eugene, Ore.-based firm one of the largest companies of its type in the U.S.
"There are a lot of people in this industry who are looking to do nothing, or just buy paint and carpet, and those homes are much more competitive," Helmick, 54, says. "The homes we're buying, a lot of people won't even touch them. They are not financeable."
With prices rising at the fastest pace since the real estate peak in 2006, buying and selling houses within six months - or flipping - is back in vogue. Those types of deals are on track to hit a record this year, after increasing 19 percent in the first half of 2013 from a year ago, and are up 74 percent from 2011, according to data from RealtyTrac. Profits are also climbing to the highest in seven years, with investors making an average $18,391 on each sale, more than triple returns in the first six months of 2012 and compared with losses of $13,206 two years ago.
Investors are selling into a market teeming with private-equity firms building large-scale rental companies and potential homeowners trying to take advantage of mortgage rates rising from record lows - all while the number of homes for sale fell in January to the lowest level since 1999.
VALLEY HOME PRICES, SALES SOAR
Home price appreciation is driving a surge in flipping, says David Lykken, managing partner of the Austin, Texas-based consulting firm Mortgage Banking Solutions. "If you have decent appreciation already built in and an increasing number of markets are still frothy, now's the time to move on this."
Home prices in the Treasure Valley, where Gorilla concentrates its Idaho sales, have been rising fast. The median price in Ada County was $207,047 in July, up 20 percent in a year, according to the Intermountain Multiple Listing Service. The median in Canyon County is $128,200, up 22 percent. Sales volumes have climbed even faster - 39 percent in Ada County and 43 percent in Canyon.
Real estate professionals and amateurs by the thousands jumped into flipping before the housing collapse, artificially inflating demand as U.S. home prices doubled, as measured by the S&P/Case Shiller 20-city index between January 2000 and July 2006.
Buying and selling properties to try and turn a quick profit became an American obsession spawning two cable-television series - "Flip This House" on A&E and "Flip That House" on TLC - that debuted in 2005 as the market was surging. In 2004, the average profit was 18 percent, or $40,487, according to RealtyTrac data.
As the market peaked and then tumbled, the flippers were stuck with properties that were dropping in value and were among the first to walk away. About 7 million homeowners have lost their properties through foreclosure or by selling for a loss since 2007, RealtyTrac data show, and mortgage availability became more restrictive after lax standards fueled the boom and bust.
SMALL INVESTORS TO BIGGER FIRMS
When Helmick started Gorilla Capital in 2006 with Ben Bazer, 36, who grew up buying homes with his father, the industry comprised mom-and-pop investors with a local focus.
Helmick, a Yale Law School graduate, had started online course company Ecollege.com and taken it public in 1999. He wanted to use his background in technology to develop a scalable approach to the business.
People competing for inventory at foreclosure auctions were "a bunch of monkeys," says Helmick. Along with Bazer, Helmick wanted to be "the gorilla" any buyer would have to outbid.
Amateurs were driven out of the market when prices plunged. Gorilla Capital kept buying. The company tripled in size by 2008 and has grown between 20 percent and 50 percent a year since 2009, using debt financing from private investors along with a line of credit from Bank of America Corp. to fund acquisitions, Helmick says.
Operating in Arizona, Florida, Colorado, California, Oregon, Washington, Idaho and Utah, Gorilla Capital expects to reach $70 million in sales this year, he says.
Gorilla bought 115 homes in Idaho in 2012 and sold 78, with an average hold time of 78 days. Sixty-two of the sold homes were in Ada and Canyon counties, and the remaining 16 were in Kootenai County. This year, the company has expanded to Elmore and Twin Falls counties. In Ada County, it has bought 26 homes and sold 15 so far in 2013, holding them an average 135 days.
GORILLA SELLS TO OTHER INVESTORS, TOO
With home values increasing 12.1 percent in April from the prior year, competition is increasing.
Gorilla and others have benefitted in the past year as private-equity giants, including Blackstone Group, Colony Capital and Apollo Global Management, emerged as large-scale landlords in the burgeoning industry for single-family homes to rent. Gorilla Capital has sold about 25 percent to 30 percent of its inventory to other investors this year.
"It's the best pricing out there," Helmick says. "We could easily get 15 to 20 percent on those types of sales. If we find a great house for $110,000 that Blackstone will buy for $130,000, we'll clean it up and sell it to them for a rental in 20 days."
That opportunity may be slowing as large rental investors scale back buying, with flips being sold more often to individual buyers, according toYanir Ram, a chief financial officer for a California firm.
Home values nationally are 26 percent below their peak, and rising borrowing costs are pushing homebuyers to "scramble to get in before interest rates go up more," Helmick says. The average rate for a 30-year fixed mortgage was 4.4 percent the week of Aug. 12.
Housing affordability in January also reached its highest level in records dating to 1989, according to the National Association of Realtors.
GOVERNMENT FINANCING HELPS
To help the recovery, the government has also supported house flipping, after previously discouraging it. The Federal Housing Administration has waived anti-flipping rules since 2010, so borrowers can get FHA financing to acquire homes from investors who have held title for less than 90 days.
Gorilla Capital sells at least half of its properties to first-time buyers, many of whom lack the financial means or aren't interested in buying a distressed house and rehabilitating it.
The firm purchases properties for an average price of $120,000 and spends $30,000 to $100,000 on renovations before selling them, Helmick says. About half the homes the company buys at foreclosure auctions have been abandoned.
"They're zombie homes," Helmick says. "We're taking some of the ugliest, worst homes in a neighborhood and remodeling them and, in that, revitalizing the neighborhood."
A house the company bought in Bend, Ore., this year was infested with rats. An exterminator was sent in at night to evict them.
"We've had rats, bats and bees this year," Helmick says. "We prefer the bees. You call any beekeeper and they come and pay you to take those out, because they want the bees."
SURGE MAY SLOW
Jed Kolko, chief economist of online property listing service Trulia Inc., says "flipping only lasts as long as prices are rising fast."
With mortgage rates climbing, more inventory available and foreclosures drying up, the opportunity is narrowing, he says.
Of the 100 markets RealtyTrac analyzed, 32 had declines in flipping, including Las Vegas, Phoenix, Southern California and Atlanta, some of the areas hardest hit by the U.S. housing crash and where prices are rebounding the fastest.
Foreclosure filings - which include notices of default and bank seizures - fell 35 percent in June from a year earlier to 127,790, the fewest since December 2006, according to RealtyTrac. The decline was led by a 45 percent plunge in foreclosure starts, reflecting declining mortgage delinquencies as home prices climb. But in some states, they're surging after years of judicial delays lengthened the process.
With prices rising faster in some locations than others and foreclosure volume varying, Gorilla Capital seeks to use its competitive advantage over most flippers, who typically buy in only one area, Helmick says.
"In 2009 and 2010, Arizona was the most profitable," he says. "Now Idaho and Utah are on fire. We can just deploy our capital where the market is most robust."
Bloomberg's Elizabeth Dexheimer contributed.