Competing Against the Big Players-How?

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Competing Against the Big Players-How?

Kenneth Goldman
Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes

I was just talking to a local real estate agent in the Chicago market and she informed me that the houses I am interested in are being bought up at prices over asking price by a hedge fund and other bigger players that are seasoned and well established. I am trying to just get started and am discouraged that I am trying to buy in the same market using the 70 percent rule whereas the hedge fund is buying 400 houses a month, paying above asking prices, and mostly sight unseen. The only difference is that they are holding them for rentals rather than flipping them back to market. Nevertheless, they have the quick funds, relationships to do the work at a cheaper cost since their contractors are doing volume, as well as obtaining materials from China at a discounted price. One of these types of players alone is enough to be overwhelmed and yet there are others that are also knocking on the same market door. Moreover, the market is only picking up which means things will get even tighter. Help! How do I compete and not get quickly discouraged?

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Anson YoungBusiness Member
Flipper/Rehabber · Denver, CO · Member since 2009 · 1k+ posts · 726 votes
12y

You really cant compete against a hedge fund with unlimited money with stupid buying criteria (90% in many places) head to head. What you CAN do is go around them. They arent as nimble as you are, so if you can catch deals before they can, or grab deals when they fall out of contract. Hedge funds arent marketing for off market deals, they arent door knocking, they arent at the courthouse looking up probates, they arent calling tired landlords.... They are just grabbing everything they can off the MLS, so if you cant compete directly on the MLS, dont.

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    To play with the big boys you need to drop the 70% rule and offer cash with no contingency.

    Joe Gore

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  • Anson YoungBusiness Member
    Flipper/Rehabber · Denver, CO · Member since 2009 · 1k+ posts · 726 votes
    12y

    You really cant compete against a hedge fund with unlimited money with stupid buying criteria (90% in many places) head to head. What you CAN do is go around them. They arent as nimble as you are, so if you can catch deals before they can, or grab deals when they fall out of contract. Hedge funds arent marketing for off market deals, they arent door knocking, they arent at the courthouse looking up probates, they arent calling tired landlords.... They are just grabbing everything they can off the MLS, so if you cant compete directly on the MLS, dont.

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  • Kenneth Goldman
    OP
    Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes
    12y
    Originally posted by Joe Gore:
    To play with the big boys you need to drop the 70% rule and offer cash with no contingency.
    Joe Gore @Account Closed joe if i drop the 70 percent rule then how do i evaluate a good deal?
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  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    12y

    You evaluate the exact same way, you just have to accept slimmer margins.

    Work backwards starting with the minimum profit you would accept to get to the maximum price you will pay. Then try to pay less.

    But you aren't going to know if you can do it or how to do it until you actually do a couple.

    Don't worry about competing just because of stories from one realtor. Put some offers in and after 50, if you don't get one then you have to rethink. Then put 50 more in and repeat until you get one or get none and look for a different strategy.

    1Reply
  • Matt Devincenzo
    Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
    12y

    Do a search on here for some past threads in other markets that had the same issue, there's also a Blog post by Sharon Vornholt I think.

    Basically if you can't compete with them, play along or play in an area they don't. I know J. Scott said in his market they were buying for what his ARV would normally be, so instead of rehabbing and trying to flip he would wholesale the off MLS deals to the hedgefunds. Also the hedge funds have certain criteria that they buy in, so (I think) he also had some homes that didn't work for the funds but with some specific repairs would. So instead of going for a retail rehab he did what was necessary for the fund and sold to them.

    Also since they're not selling off that means that you can still flip you just need to buy homes that the funds aren't looking at. Again direct mail or maybe major repairs that the funds won't do.

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    Let a realtor evaluate the deal for you. Are you trying to flip, or buy and hold?

    Joe Gore

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  • Kenneth Goldman
    OP
    Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes
    12y
    Originally posted by Anson Young:
    You really cant compete against a hedge fund with unlimited money with stupid buying criteria (90% in many places) head to head. What you CAN do is go around them. They arent as nimble as you are, so if you can catch deals before they can, or grab deals when they fall out of contract. Hedge funds arent marketing for off market deals, they arent door knocking, they arent at the courthouse looking up probates, they arent calling tired landlords.... They are just grabbing everything they can off the MLS, so if you cant compete directly on the MLS, dont.

    @Anson Young Anson if i understand your correctly the mls is just one means of finding properties that probably is not the most effective resource for small fix and flippers anyway? So in effect, the hedge fund was never really a major competitor for my part of the market. is that correct? Also what do you think of the seventy percent rule?

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y
    Kenneth,

    If you are fixing and flipping what kind of spread are you looking forward to making on each deal?

    Joe Gore

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  • Travis Daggett
    Real Estate Consultant · Eugene, OR · Member since 2013 · 178 posts · 39 votes
    12y

    @Kenneth Goldman -

    I agree w/ @Anson Young . The big boys usually won't be as nimble as you (at least when you're starting). Also, working directly w/ sellers/borrowers is normally outside of their core competency.

    I would start w/ the NOD or Notice of Lis Pendens list (specific term depends on your state). You'll find that most large buyers wait until the courthouse sale or after to buy houses. You can buy them earlier in the process.

    Hope that helps!

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  • Blair Halver
    Real Estate Entrepreneur · Winston-Salem, NC · Member since 2008 · 101 posts · 40 votes
    12y

    @Kenneth Goldman - you just need to look at it differently. With hedge funds moving into your market, what you really have on your hands are big, giant, gorilla-sized buyers who don't mind paying near retail (or higher) for houses, and they're buying a LOT of them.

    All you gotta do to profit is find out what they're looking for, go get it, and when they show up to buy what you have, bill 'em appropriately!

    It's all about perspective and attitude isn't it??

    1Reply
  • Shaun Reilly
    Landlord and Rehabber · Newton, MA · Member since 2010 · 2k+ posts · 877 votes
    12y

    From most of the stories I have heard about the Hedge Fund portfolios they don't really have any of the attributes you gave them @Kenneth Goldman other than a lot of money to overpay for a lot of properties in a short period of time.

    I hear stories about places being left unfixed for long periods of time and super high vacancy rates on those places. They also nickel and dime whatever they have for PM so they get crappy service which perpetuates the issues.

    Your best bet might be to lay low and build up you ability to buy so when they flood the market with their junk properties you can buy a bunch. :)

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  • Ellis San Jose
    Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
    12y

    @Kenneth Goldman

    To compete with the big boys you need to "not compete". It's the equivalent of starting a soda company to compete directly with Coca-Cola. You are asking for a world of hurt to even try. They can & will squeeze margins.

    The smarter game to play for a small business, is not of who can fix up a house for less, or outbid the competitor, but to play a game that they don't even know exists or even if they know about it, it is way to small to support their behemoth overhead.

    There are many niches & micro-niches that are not profitable for the large buyers to go after. Your mission is to find those niches & make a ton of money.

    0Reply
  • Kenneth Goldman
    OP
    Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes
    12y
    Originally posted by Joe Gore:
    Kenneth,

    If you are fixing and flipping what kind of spread are you looking forward to making on each deal?


    Joe Gore

    @Account Closed

    Joe- to answer your questions, I am trying to flip properties. As a novice, I have been more or less relying on what I have read on here and general investor principles such as the 70 percent rule. On average, I would say the 70 percent rule is a safe bet for my investors but if there are other ways to play this, then please educate me. Thanks-Ken

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  • Matthew Paul
    Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes
    12y

    Ok instead of flipping properties , why not become a contractor and work for "the big guys" and make money without risking your own . There is more than 1 way to play the game . If I cant win ........I dont play

    0Reply
  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    @Kenneth Goldman

    Kenneth where have you been seeing these guys come in? I'm just south of you in Minooka and I haven't seen them here. I know for sure they're in Joliet and Plainfield though. One house in Plainfield was listed for 70k, we bid second highest at 94k and they ended up buying for 115k. ARV was 135k tops and it needed 20k worth of work. I don't know how they did it.

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  • Kenneth Goldman
    OP
    Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes
    12y
    Originally posted by Sean Kuhn:
    @Kenneth Goldman
    Kenneth where have you been seeing these guys come in? I'm just south of you in Minooka and I haven't seen them here. I know for sure they're in Joliet and Plainfield though. One house in Plainfield was listed for 70k, we bid second highest at 94k and they ended up buying for 115k. ARV was 135k tops and it needed 20k worth of work. I don't know how they did it.

    @Sean Kuhn

    Sean-According to the realtor, the hedge fund is buying at a clip of 400 houses a month and Skokie is one of their targets.

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  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    @Kenneth Goldman

    Oh yeah I heard about that. Up north they are buying like crazy.

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    12y

    The best way to compete initially is to set yourself up to supply those funds then you not only get paid on flipping you may establish good relationships with them that can help you hugely. That was my experience. You can buy faster than they can so get in front of them and flip to them. Even if you only make $500 on some you can do multiple deals every week!

    0Reply
  • Kenneth Goldman
    OP
    Investor · Chicago, IL · Member since 2013 · 57 posts · 3 votes
    12y
    Originally posted by Kenneth Goldman:
    Originally posted by Sean Kuhn:
    @Kenneth Goldman
    Kenneth where have you been seeing these guys come in? I'm just south of you in Minooka and I haven't seen them here. I know for sure they're in Joliet and Plainfield though. One house in Plainfield was listed for 70k, we bid second highest at 94k and they ended up buying for 115k. ARV was 135k tops and it needed 20k worth of work. I don't know how they did it.

    @Sean Kuhn

    Sean-According to the realtor, the hedge fund is buying at a clip of 400 houses a month and Skokie is one of their targets. Just out of curiosity, how do the numbers make sense on the Plainfield house because even at 94k plus 20k in work, you are all in for $114,000.00 Now if the house sells for 135k tops, then you are walking away with $21k. Rough estimate after subtracting hard costs is that you are walking away with $12k? I only ask because I am trying to understand as a new guy in this business when is a deal worth it especially with respect to using other peoples money. Thanks-Ken

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    Big time buyers don't let greed get to them, they will walk away with $12K on each deal and smile all the way to the bank. Most new investors think they can make a fortune on each deal, and most listen to snake-oil salesmen telling them that they can.


    Joe Gore
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  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    @Kenneth Goldman

    For me I honestly base it on case to case. I figured it would take me two months to flip that property and it was worth making 15k(estimated) for. I know what my times worth and that's what I bid it for.

    0Reply
  • Sean Kuhn
    Minooka, IL · Member since 2013 · 353 posts · 85 votes
    12y

    For me its as simple as figuring out my profit margin and determining if I can make more money elsewhere or if this will be my money maker for the moment. I guess its all about where I can make the most money the fastest and the easiest. Sometimes its real estate, sometimes its other ventures. Sometimes its flipping, sometimes its buy and hold.

    0Reply
  • Chris Adams
    Contractor · Valparaiso , IN · Member since 2013 · 604 posts · 327 votes
    12y

    @Kenneth Goldman The 70% rule is not a rule, its a guideline to use in evaluating a deal. I believe its meant to work out a 20% profit in the end. Ultimately its your decision how much your willing to work for.

    If the 70% rule isn't working in your area, bend it, and just understand you need to lower your expectations of profit. 15% profit on 2 deals is much better than 20% of no deals.

    I just closed a property on friday that im flipping for 18% if it goes perfect, Im willing to do 15% because my market has been so dry. Im not willing to make $0 so I bent my normal expectation.

    There is also a 1% rule, bid on 100 properties and expect to get 1 ! I'm exaggerating of course, but not by much.

    0Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    12y

    @Kenneth Goldman

    To beat the hedgies, give them a wedgie...

    Go where the hedge funds aren't going or sources that they are not using. Over many years we tracked the source of our deals and the MLS was only 25% of our deals. 75% came from other sources and in some cases we had no competition.

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  • Suzanne A.
    Streetsboro, OH · Member since 2013 · 2 posts · 0 votes
    12y

    Interesting I didn't realize they were buying so much. I just sold my family's estate home in Skokie and the hedge fund bought it. We had 2 offers within the first few days and asked for best - hedgefund made an offer 20,000 below asking sight unseen and the family that put in an offer backed out.

    Really did not want to sell to them but their offer was "as is" so we didn't have to worry about something coming up on inspection and the house is unoccupied and we live out of state.

    My realtor did not want to do business with the hedgefund folks because she has had deals fall through with them asking for things after the the initial offer and seeing the property. But we went for it and it closed fine.

    So now I'm on here getting an education on how to use my inheritance on a flip.

    If I was in the area still I would look up at the Kenosha area. I know many people that are high tech workers in the northern suburbs that have purchased homes up there and commute.

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