Getting Priced out of the Fix and Flip Market

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His call yesterday caught me a little off guard.  After all, Ron, along with his partner Keith, helped me get back into fix and flipping in 2009.  I worked for them as a project manager and Realtor for 18 months.  They taught me about acquisition, rehabbing, sales and raising capital and have flipped over 400 houses in the last two years.

What could I possibly know that they didn’t?

Ron wanted to find out if I was having the same difficulty he was getting good fix and flip deals here in Phoenix.  I explained to him that I hadn’t bought a house at the auction since last November.  I’m regularly outbid by $20,000 – $70,000.

With an almost complete absence of REO properties on the Arizona Regional Multiple Listing Service I’ve found the best deals are short sales.  The last 5 of 6 houses I’ve bought were short sales found on the MLS.  Sure, they take 4-6 months to get done.  But with enough of them in the pipeline there’s money to be made right?

Wrong.

Lately, there’s a shortage of short sales too.  It seems as though the entire inventory of distressed homes in the greater-Phoenix housing market has dried up faster than a grape on a sidewalk in summertime.  So why is it that fix and flippers in Phoenix and other hot real estate markets around the country are being priced out of the market?

Blame those pesky buy and holders that care more about cash flow and cap rates than profit margins.  They can afford to pay more than I can, mostly because they don’t have to account for closing costs and commissions.

If you attended the BiggerPockets REI Summit in Denver last month then you know what I’m talking about.  Sponsors from Phoenix to Indianapolis to Atlanta were there offering turn-key investment properties for sale with excellent returns.  Just yesterday, the New York Times published an article about large investors buying homes by the thousands and renting them out because the returns are higher than treasury securities or stock dividends.

How can a fix and flipper compete with these buy and hold investors?  I don’t know. But I have a few ideas.

First of all, I suggest some good old-fashioned guerilla marketing – letters, phone calls, door knocking (but no bandit signs, yuck).  Few investors are willing to go this far to find good deals.  Next, get out of your comfort zone.  Perhaps a different price point and/or market where there’s less investor demand.

I plan to do both in the coming weeks/months.  I’ll let you know how it goes.

Of course, there’s one other strategy.  You could always just wait until the buy and holders in your market run out of money.  Unfortunately, since I rely on fix and f lipping to pay the bills I could starve to death before this happens.

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About Author

Marty (G+) is the Chief Financial Officer for Rising Sun Capital Group, LLC, a real estate investment firm based in Gilbert, AZ. His firm purchases homes at the courthouse steps and public REO auctions. They have two exit strategies, either fix and flip or seller financing.

7 Comments

  1. Flipping makes you rich, holding makes you wealthy.
    Maybe time to change your strategy!
    Wealthy give us the ability to buy and hold and gives tremendous tax benefits flipping ignores.
    At the very least, do both!
    Good luck to you as you figure out your new “best” strategy!

    • Karen, couldn’t agree with you more. I’ve written here in BP several times about the importance of creating long-term wealth through buying and holding. However, this requires working capital. You can obtain working capital with a job or a business. My preferred method is the business of fixing and flipping houses. It sure beats punching a time clock. I use the revenue generated from my fix and flip business invest in long-term real estate assets.

  2. Great article, same critiera I’ve been watching in Houston over the past 6 months. Rehabbers can’t compete with buy and hold investors. While we’re looking for deals at 40-50% ARV, buy and hold investors are happy with 70-80% before repairs. I like you idea about hitting the ground running with marketing. Thats my next step.

  3. Chris Clothier

    Marty –

    Great article and really, really good style of telling the story. Luckily we are not dealing with some of these same issues as you in our market. However, I loved your advice and I can tell you that no matter if you are in an up or down market, your advice is fantastic. Always be stretching outside your comfort zone and there is never a bad time to do more guerrilla marketing!

    Great stuff – we’ll keep an eye out for your update.

    Chris

  4. Marty,

    I recently posted on the forum (http://www.biggerpockets.com/forums/67/topics/72304-flipping-future) about the future of flipping in those markets that were heavily distressed. I understand your amount of deals has decreased; however is the issue just not being able to find the number of deals you have in the past few years? So in other words are the days of turning 20-30+ houses gone, but how about doing 10-20 per year? Are those lower numbers still possible?
    My cost of living is low so realistically speaking I could turn 3 deals a year and be fine, but of course that’s not the plan. The plan is to average roughly 9.5 deals per year over the next 5 years. In your opinion is that plausible with minimal marketing? We are in the same investment areas; however your price point is higher than mine, and my price point has heavy competition.

  5. I completely agree with your solution. I believe when something you are doing isn’t working anymore, it’s time to think of something different. I love how you mentioned going out of your comfort zone. It’s not until we all do this that we will finally find something we never thought we would. Thanks for your great post!

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