Getting Priced out of the Fix and Flip Market
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.
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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?
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.