Funny you should ask…. her house is for rent again, and I copied her Phoenix phone number off the For Rent sign.

She is high as a kite in Phoenix. Despite the soaring inventory and dropping prices, she is doing very well flipping properties. I was going to make a thread about this, because I am so amazed, and don’t see how this can last.

First, her Poway rental is attracting 3 calls/week, for $2500/month, well in excess of her mortgage and HELOC. So she is going to be cash flow positive on that one.

Second, they bought a foreclosure which they flipped at a $30K profit, and her husband just bought another one. He will spend $40K and sell it at a $60K profit in a few months. I wonder if they will chase the market down, or if they are really savvy and have figured out how to make money in a declining market, just like Chris J makes money on some days when the stock market is up, even though the general trend is down. Perhaps this friend finds a few gems that are a bargain.

I asked her how the housing market is, and she said “very good”. Her cousin sells high end homes, and the market is hot, she said. Now I know that the high end market is still holding up well.

I am flabbergasted by her experience, and I have no clue how they pulled this off so far. My guess is the house they are fixing up might be worth $380K in today’s market, but by the time he is done fixing it up and lists it, it will be worth only $330K, and his profit is gone. I will check back with her later this year. She said we should keep in touch.

She asked me, “Have you bought another house yet”? She doesn’t get it… but her perspective is so different from mine.

On a related note, my neighbor made 3x her money in Yuma, AZ investment property, and is putting money into another deal: a commercial plot, which should increase in value after the oil company deal in Yuma goes through. I will check this out further and start a thread. Do any of you know about the potential for this?

They bet their entire net worth on buying distressed property in Phoenix and flipping it. So she is in denial.

Before they moved, she avoided me for a while, after I sent her the piggington links and economic data, told her we were selling and renting. After a while, she talked to me again, and she asked me surprised why we would sell. She never once asked me, as a rational investor would, what might be the downside of her plan.

She was real excited about her husband’s prospects, and this is something he’s always wanted to do. So she is definitely emotional about this.

I still wonder how they are able to make money flipping, and how long it will take for her to realize that the gig is up.

Their one foreclosure sale gained a profit, and they think this second purchase was a low enough price to gather a profit. It remains to be seen if they are really chasing the market down. The only person she knows in the Phoenix market is her cousin, who builds high end homes, and as we discussed, that market is still hot. So she has a very limited and rosy colored view. My guess is by December, their most recent purchase will be a loss, after improvements, because prices are dropping so fast. They are Rich Dad Poor Dad followers, but I think they stopped reading him after he got sour on RE.

By the way, I have very good friends in Phoenix who were just visiting. He is a RE lawyer, and he is involved in big transactions. His view is that residential sales have really slowed, will plateau throughout 2006, and will pick up again in 2007. Meanwhile, his commercial and retail projects are going strong. So he is a little bit worried, but he is so busy with this big client who keeps developing, that he doesn’t have any major worries. Since they are on vacation, I didn’t want to upset him by telling him that retail development lags the economic slowdown by up to 9 months. My belief is that by next summer, we will no longer have any retail or commercial projects starting, sicne the recession will be in full swing.

I told his wife that he should diversify. Get in foreclosure and REO deals, or defend builders who will get sued, lenders, etc. It’s time to diversify so he can keep supporting his family.

That’s how they make their living. So they have a rental in Poway, and one in Palm Springs. Both are cash flow positive, and a little cash left over.

They make $70K/year flipping properties, maybe hoping to eventually hire a crew and increase that? It’s a lot cheaper to live in Phoenix, and they can live for that. Plus he is doing what he loves, so he is happy.

But I think this is not a sustainable business. I don’t think they will keep finding properties undervalued by $60K each. Even if they did, by the time they fixed it up, the market is down more, and it is undervalued by only $20K or $30K.

They are in denial, as is my friend the RE lawyer. So here wer have people actually in the business, as is murray, who are in denial!!! It boggles the mind. The masses are completely unaware of what is about to happen, if the investors and RE lawyer don’t even know.

That is the fascinating part of the story, the denial among investors.