On March 18, a couple days after the U.S. lockdown over COVID-19 began, my phone rang. It was an investor out of Nebraska who wanted to partner with me on a flip. She is an experienced flipper, and she has her numbers, team, criteria, and entire system down.
“I have got a deal,” she said.
I was to act as a private lending partner. These deals are common. A flipper finds a property, and a partner comes in with the funds.
“Are you kidding?” I said. “We are amid a global pandemic! How can you even consider a flip at this time?”
“The numbers are there, and the deal is good. I can make $50,000 on this one,” she replied.
I passed, and so did she.
The home went under contract with another buyer in two days. She found another deal a few days later and used a local lender to fund it. That property went under contract within three days of hitting the market and sold for full price on June 25. She is currently waiting on her final profit numbers but expects to make between $41,000 and $45,000.
Since my Nebraska partner contacted me, I have loaned money on a house flip in Kansas City and am considering deals in Los Angeles and Sacramento. And based on this story, you could be reaching out to wholesalers as we speak. But before you start calling your hard money lenders, there are still several variables to consider.
My point is the coronavirus did not kill house-flipping—not even close. However, COVID-19 did alter the criteria to enter a deal. It will ultimately result in a whole new surge of newbie house-flippers who enter the market to earn significant returns.
Take Advantage of Experience
Now more than ever, you need to pay extra attention to mitigate risk. For example, my partner in Nebraska has flipped 15 homes in the same area of her hometown for around the same price point. She has a team in place and lives there, thus can observe the area’s climate.
The private money I loaned in Kansas City went to a seasoned flipper, who has the same formula and has done over 150 flips. Both house-flippers have exit strategies. They can refinance and rent out the homes or afford to sell at a loss if the deal does not go as planned.
When you know an area very well, have a team in place, and have an exit strategy for the downside, doing deals successfully is a lot easier. Flippers who work this way often work on more than one project at a time. If one deal goes south, they can make up the difference on the next one.
If you are new to flipping, this is an excellent time to partner with a seasoned pro. You will get the advantage of learning and support in an unprecedented marketplace.
In fact, any knowledge you can absorb from experienced investors is invaluable. On the BiggerPockets Podcast in episode 311, J. Scott shared “6 Rules for Investing in Real Estate in the Coming Economic Shift.” He also discussed fix and flip basics on a very early episode (No. 10!) titled “Flipping Houses 101” and wrote extensively about it in a book called, fittingly, The Book on Flipping Houses.
House Flipping Report: What Happened in Q1?
ATTOM Data Solutions recently released a report indicating that flipping rates were at a 14-year high for the first quarter of 2020, while returns were at a nine-year low.
According to the “Home Flipping Report,” 53,705 single-family homes and condominiums in the United States were flipped in the first quarter:
“The number represented 7.5% of all home sales in the nation during the quarter, up from 6.3% in the fourth quarter of 2019 and from 7.3% in the first quarter of last year, to the highest level since the second quarter of 2006.”
The numbers make sense: Q1 2020 started with a bang. Many flippers were on a roll. However, returns were lower due to the real estate market coming to a halt through April 2020. As a result of the “Great Lockdown,” there was a window where most deals stalled or fizzled—but that only lasted for a brief period.
While first-quarter returns were at a nine-year low, I believe it was temporary. Additionally, even with a reported all-time low return at the end of the quarter, homes were still selling. The returns were just not as strong as they had been in the past.
The decrease in returns should not be ignored, although it would not be enough to keep me from house-flipping. There are so many indicators for solid returns that outweigh this analysis.
Variables to Consider Going Forward
Everything in real estate relies on timing.
As long as there are buyers, there will be a need for house-flippers. If you understand the law of supply and demand, you can see how there are still opportunities for numerous deals. Plus, price growth has been slowing but not yet dropping, according to Realtor.com.
Housing Inventory Is Low
There is a drastically lower supply of homes on the market at the moment. Many sellers pulled their listings during the coronavirus shutdown. While millions are out of work, there are still more people wanting to buy homes than there are homes available to purchase.
Interest Rates Are Down
Even though it is harder than ever to qualify for a loan, you will be locking in at a low rate if you can get one. The rates keep buyers motivated to buy a new home sooner than later.
On the flippers’ side, I know investors who maxed out HELOCs to have cash on hand. In the crisis of 2008, it was challenging to access loans; these pro-active flippers want to have reserves.
Unemployment Is Up
There is no way the world economy can shut down entirely for months and not have some impact on the house-flipping market. According to a New York Times article published on June 11, the overall number of workers collecting state benefits fell slightly in the most recent seasonally adjusted tally to 20.9 million in the week ending May 30—a fall from 21.3 million the previous week.
The unemployment rate means some people will no longer be able to afford their homes or portfolios and will search for a speedy exit strategy. The stress of COVID-19 will help house-flippers take advantage of new homes available for sale with eager buyers in the market.
Construction Is Alive and Well
While many industries shut down, construction was considered an essential business. As such, almost without a break, contractors continued to work on flips through March. Perhaps some workers who lost their jobs and need to transition into new professions may even decide to start working in construction, as there is employment available.
The trickle-down pro for house flippers? If there are more contractors available, it is easier to turn around a flip quickly.
Knowing Your Market Is Imperative
At this time, it is more important than ever to know the neighborhood you are rehabbing in. For instance, let’s say you’ve identified an area where you know there is still an ample supply of houses. You can use that knowledge to negotiate, purchase the property for less than its value, and will likely be in a decent position to make some money.
Another flipper partner in Knoxville stopped looking for deals through mid-April, saying that he wanted to see where the knife fell before he tried to catch it. He is now actively looking but says he needs a more considerable margin to pull the trigger these days. Whereas he once would offer up to 70% of the projected after-repair value (ARV) of a property, minus the cost of necessary repairs and improvements, he is now only willing to offer up to 60%.
Extra Padding in the Deal Is Essential
If I can leave you with one of the most important ideas that will make or break you as you forge ahead with flipping in COVID-19 times, it is to expand your spread on a deal. Many flippers I know are taking the number adjustment seriously.
No one knows precisely how the market will recover from this pandemic, but if you buy with a low enough margin, it will generally protect any major downside coming in times ahead.
The Bottom Line
In any economic crisis, opportunities will emerge. House-flipping is not an exception to the rule. Many are jumping in and taking full advantage once they find a deal that meets their criteria.
Finding balance in terms of when to flip and when to pass involves a multitude of variables. If you come into a deal prepared, you will always be in a better position. The bottom line is that coronavirus did not kill house-flipping—but the world is certainly still experiencing turbulent times.
Keep your eyes and ears open as a real estate investor. It is more critical now than ever.
Are you buying potential flips right now? Why or why not?
Tell us your thoughts in the comments.