Hey John-
Its funny that you ask about my foreclosure flipping business because we dissolved the business about one or two months ago. I'll give the story from the beginning for learning purposes.
It all started in 2008 when I was looking for a house to buy to live in, since I had a job with a decent salary right out of school. I contacted a real estate agent, Steve, in my target area and he was a really hard worker and a good salesman. After a short while at my "stable" job, I quit in pursuit of my online business full time. I told him that I no longer qualified to buy a house and he understood, however we stayed in touch.
2 years later, my business had become more successful, and I saved up a bit of cash I was looking to invest. As if it were perfect timing, I got an email from Steve stating that he's getting into the business of flipping foreclosures and was looking for passive equity investors. This sounded like a great opportunity, so I jumped in.
The business ran for 2 years and it was definitely a bumpy road. Here's how it operated:
- Steve had been an agent for 10+ years. He knew the market well. He would use ForeclosureRadar to find the auctions, and he'd go to the courthouse steps to bid on these properties. He knew a hard money guy that we'd sometimes use. He had a bidder go into the auctions for him and bid certain properties up to a maximum price if he couldn't make it.
- Steve would then figure out all the repairs necessary to maximize resell value. He was friends with a contractor that did great work and would not bill us until we closed the sale.
- He listed the house for sale, and we'd split any proceeds between us after he took a 5-10k finders fee for doing all the leg work. Myself and the other equity partners didn't do any work. Steve did, in fact, have a lot of his own personal capital invested in the business.
Again, it was a bumpy road. Other equity partners came and went, we went through dry spells without a property, we ended up actually losing money on one of the deals, etc. One of the biggest problems was that other bidders were really jacking up the prices of the foreclosures, making it harder to find profitable deals. After 2 years, Steve (without dispute from the rest of us) decided that it was too much work for too little reward. We closed the sale of our final flip and everyone was cut a check.
After running the numbers, I made exactly a 7.73% APY on the money that I invested. While that's definitely better than a 1% savings account, there was a considerable amount of risk, I had to pay taxes on the earnings each year even though I didn't receive a single distribution, and my money was very illiquid.
So in summation, unless you've got some really good connections with the banks, and know exactly what you're doing, and have a team of trusted contractors, inspectors, agents, estimators, etc, I wouldn't try to join the gold rush.
With the money I got out of the LLC, I've invested in Prosper and Lending Club and I'm already seeing better rates of return there. My money is more liquid, less risky, and much easier to manage. I was helping with the books for the LLC.
