I’ve been a real estate investor since 2003, when I flipped my first townhome in Woodbridge, VA (Washington DC suburb) and made $27,000 on the deal.

Since then I’ve successfully invested and done real estate deals in VA, DC, MD, PA, OK, CA, WA and AZ, plus in Canada and Panama.

I’ve invested in big cities and small towns, on the east coast and the west coast, and I’ve invested during hot markets (’03-’06) and declining/cold markets (’07-’09).

I tell you this not to brag, but to let you know that I have plenty of real world experience when it comes to what is going on with real estate investing.  Because my partner and I are actually active investors with our feet on the ground, nose to the grindstone, and paying attention to what is happening in the marketplace, we see in real time what is going on.

Now what I’m about to share with you is important, but I also want you to understand that what I’m about to share with you is information based on just 2 markets: Southern California (specifically San Diego) and Phoenix, Arizona.

If you don’t live in those areas, or you’re not investing in those areas, I still want you to read every single word of this blog post, because eventually (maybe not today, tomorrow, next week or next month) this will pertain to you.  So if you can be ahead of the curve, I’m going to save you a lot of pain, agony & frustration.

So What Exactly Is Going On & What Is “Changing”?

Personally, I’ve never really lived or invested in a market where it was “easy” to find “deals” on the MLS.  That’s not to say that I didn’t, or that it couldn’t be done, it was just never “easy”.  I’m sure you’ve heard of these markets where you can just comb the MLS, find a great a deal, and flip it, right?

Sadly (and I say this with some envy) it was never this easy for me.  I had to go to alternate places to find the deals.  In other words, I had to rely on networking and most importantly, direct response marketing (direct mail, the internet, bandit signs, my websites, etc) to get deals directly from sellers.

In 2011 I was in San Diego investing, and deals were becoming harder and harder to come by.  There were “investors” overpaying for properties, and overpaying using “ALL CASH.”  We would actually see these investors putting these deals back on the market.  Many times we’d “work backwards” and find out how much they had paid for a particular property.  We were FLOORED when we saw how much they paid for the property!  “How can anyone make any money buying at those prices levels?” we said to ourselves.

We chalked it up to it being a bunch of “investors” who didn’t know what they were doing…and decided that with San Diego becoming so competitive, and having a bunch of private lenders with cash ready to invest being stuck on the sidelines (I know, great problem to have), we would look somewhere else outside of San Diego to try and do more deals.

My partner and I decided that we were going to look to expand to another market, and selected Phoenix based on its good job market, rock bottom prices, and inventory of alleged “deals” on the MLS.

We Were In For A Rude Awakening!

But boy were we shocked when we started writing offers on houses in Phoenix: we found that every single property on the MLS were getting multiple offers and bid up to levels where either there was no way to make a profit, or at least to levels where only a “buy and hold” investor (and not a flipper) could make any money.

After spending the 2nd half of 2011 banging our heads against the wall (and doing 1 single flip deals where we NETTED about $7k, $3500 each), we decided to look at the foreclosure auctions.  The realtor we were working with (who shall remain nameless because he sucks) suggested that we look into the auctions, because “that’s where all of the deals were.”

So we got hooked up with Posted Properties in Phoenix, a foreclosure bidding service.  (SIDE NOTE: Posted Properties is an awesome service!  They are super tech friendly, and “on the ball” when it comes to the daily auctions in Maricopa County, AZ).

But after spending 2.5 months of looking at the DAILY auction lists, researching the comps, looking at photos, making educated bids, we still hadn’t purchased a SINGLE property.

Not one!

Eventually we started tracking what the winning bids were going for…

You see we knew that Phoenix was more competitive, and we couldn’t buy at our targeted 70% of ARV minus cost of repairs.  Heck, we couldn’t even buy at 80% of ARV minus cost of repairs.  But what was really scary is that we found out what the winning bids were going for.

Not 90 or even 95 cents on the dollar, but houses at the auction (many of which the buyers hadn’t even been inside of done an inspection on) were selling for 97, 98 and even 99 cents on the dollar!

This was insanity!

Who would pay so much for a single property?

I had no clue, and was scratching my head trying to figure it out, so I started asking around.  I asked property managers, my contact at Posted Properties, other realtors, title insurance reps and escrow officers.

The word soon began leaking out:

  • “It’s the hedge funds”
  • “Hedge funds have come into town and are gobbling up properties like Pac Man”
  • “Hedge funds are loving the housing prices and yields that they generate”

But none of this made sense to me.  Why on earth would a hedge fund pay top dollar for a single unit of residential real estate?  I know that hedge funds had been active in the past, buying up bulk REOs and packages of 200+ houses, and were flipping those for a profit.

But why would a hedge fund buy a single family home?  And even if they were going to buy a sole, individual property, why on earth would they pay full market value for it?

It didn’t add up, so I started doing some digging myself, and asking some of my friends and colleagues in the investment community about this.  I got some really good information, and so can you, by watching this.

And while hedge funds coming into your city (don’t worry, they’ll arrive sooner rather than later if they’re not already there) might sound scary, I want to share with you a strategy for how you can work with them, instead of against them.  It’s a classic case of “if you can’t beat ’em, join ’em.”

This blog post has already run too long, so what I’m going to do is share with you this strategy of how you can work with them in part 2 of this post.  While you’re waiting for part 2 to be published, I suggest that you watch this video.

In the meantime, I’d love to hear your comments below.  Are you seeing the same thing in your local market, or has it not arrived yet?  Any questions or comments can be posted below.


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