Arbitrage Model For RE

[Mike Klarman]

I've been using this for the last 6 months in the Pitt market. We buy undervalued properties at auction there. The two riskiest elements of a standard Flip or BRRRR are the mortgage and the contracting. The Arbitrage method eliminates both. You also eliminate the affects of mortgage rates. The deal cycles are 2 - 3x faster as well.

There is a barrier to entry.  You need someone who knows the market street by street.  Where the good schools are, where there's parking and no parking, what full gut houses go for in the area, what they go for fixed up.  You need to know this all on the fly or be sitting with someone who knows.  But no mortgage.  No contractor.  Faster Deal cycle.  Higher % of return.

Between myself and one client I have involved this is what we have done:

BOUGHT ------SOLD ---------- DEAL LENGTH

38k                  55k              4months

27k                  45k             3.5 months

52k                  85k             3 months

24,500            43k              Closing Feb 6th 

53k                  80k              under contract (4 months)

20k                 ------              Waiting on Deed (expected sale 40k)

No mortgages. No holding costs All of the above since June. 133k in gross profit generated off of 214k in purchases. 62.14% gross return in 7.5 months. That's 105% APR. Safer. Faster. More profitable.

[Greg Scott]

Sounds like you found a way to make a really nice profit while mitigating some of the risks of flipping.  Congrats on your success so far.

I would caution newbies, that is not a risk-free strategy.

One big risk that I have seen played out several times over the years is a sudden shift in the market.  I saw this in CA in the 90s, the dot com bust, and the GFC where a good chunk of flippers went bust.  If you are holding a lot of inventory when the music stops, the losses can be substantial.  Yes, you have reduced this risk if you don't have a mortgage, but there are still holding costs of insurance and taxes.  Even if there is not a price crash, if you are forced to hold for 12 or 24 months, that can hurt.  Don't count on living on returns like that until you have a big pile of cash.