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House Flipping 2.0

She's back.

After a five-year hiatus, Phyllis Rockower is back buying up houses on the cheap, then fixing and flipping them. "I love ugly houses," she says. "They make money."

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AP

I caught up with Rockower in her old stomping grounds of Compton, where prices are up 26 percent from a year ago.

"This place is hot!" she says. But competition is tough from "novices" who overbid.

Rockower took me to one house, a probate case, on the market for about $100,000. It's a three bedroom two bath home which has not been treated well. A code enforcement officer told her one of the bedrooms and one bath are illegal and will have to come down. She's offered about $85,000 for the house, says it'll cost about $50,000 to fix up if she gets it. How much can she sell it for? "I don't think I could get $200,000." She might just rent it out and have positive cash flow in an area where rents can be higher than mortgage payments.

That's if she gets the house. Times have changed.

Banks are tougher, appraisers are tougher, even the "hard money" people who lend short term cash to flippers are more cautious. "The mortgage broker runs you through the ringer," she complains.

"The mortgage broker runs you through the ringer."" -California Real Estate Investor, Phyllis Rockower

Well, no kidding.

The housing boom went bust and no one wants to repeat the mistakes of the past. But Rockower, who runs the Real Estate Investors Club Los Angeles, says investors like herself are being unfairly punished. "In the last downturn in the '90s, it was the investors who pulled us out," she says. Now, however, banks want investors to put down 30 percent and not flip the contract during escrow.

Rockower says she's found a way around that.

She says nothing in the contract she signs (in California it's the CAR form) prohibits her from "assigning" the contract to someone else during the escrow, no matter what the banks say. So she is a fan of "transactional funding", which works like this: she signs a contract and puts down a deposit on a home. Then she finds a cash buyer who will buy the house from her at a profit. The cash buyer sets up a second escrow, which lends her the money for about 24 hours to close her escrow. It's called "dough for a day". Once closed, Rockower immediately closes the second escrow, turns over the property, and pockets the difference.

It's legal.

It also sounds crazy. Isn't this sort of fast money transaction exactly what the industry is now trying to avoid? "Everybody's cautious today," Rockower says. Even transactional funders. "They weren't cautious when they should've been, and now the market's at the bottom, now they're cautious."

Web Extras:

How difficult is it for an investor/flipper to get financing? Rockower explains here.

Here's Rockower explaining how much prices in Compton have gone up, and one mistake she's made since selling everything in 2005—she bought a condo in Cabo.

Finally, here is a fuller explanation of the "new breed in lending"—transactional funding.

Questions? Comments? Funny Stories? Email funnybusiness@cnbc.com