The "Recession" is Supposedly Here. Why Aren't You Buying?

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The "Recession" is Supposedly Here. Why Aren't You Buying?

Ryan D.
Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes

Hi BP,

This is a long overdue intro post. I'm Ryan and I'm a victim of recency bias. See the thing is we all either got slaughtered personally or had friends/family get slaughtered in 2009 when that once in every ~70-year storm hit. Call it a Panic like we did the 1870s, or a Depression in the 1930s or a 'Great Recession' as we do in the 21st century - the end result is still the same. A global reset that comes with massive losses in asset values. This leads us as investors to being terrified that another downturn is awaiting us just around the corner - recency bias.

If you're like me, you've been telling yourself the past few years you're going to wait to for the market drop again before buying. I get that. I like to buy when things are on sale too. But what if this little dip we've experienced the past 6 months (market depending) is the sale? Who says where the bottom actually is?

It seems every day I log in to BP there's some new doomsday post about the market downturn or recession and how it's supposedly here. Sure, things have softened a little bit but this is by no means (in my market) a downturn. This recent dip in prices was more than enough for me to kick my deal analysis paralysis and pull the trigger. Here are the details of our first deal:

  • Took 8 months to find
  • Saw over 100 houses in person
  • Made 20 offers on MLS properties
  • Bid on 15 houses via Sheriff Foreclosure Auctions
  • Wrote 5 direct mails (3 responses but no deals…yet)
  • Saw 3 homerun deals. Got outbid on the first 2 but landed the last one with an all-cash offer, no contingencies w/ a 10-day close. Here are the details of the deal:

4 bed/1 bath Fishtown, Philadelphia, PA

Purchase: 205k

Rehab Estimate: 65k

Conservative ARV: 400k

Traditional Rent: $2,400/m

This is mostly an appreciation play if we rent it via traditional yearly leases but we are more than likely going to Airbnb the property once we are done living in it while rehabbing. We've operated a couple of Airbnb's on master leases that cash-flowed beautifully for a couple of years and helped us pay off all of our debt while testing our short-term rental strategy. We plan to refi once we complete the rehab, then BRRRR our way through this "downturn", and go find our next property. Hopefully a multi in a grittier part of Philly.

This is my first rehab so I'd love to meet local investors who have experience doing live-in flips or bigger rehabs (pop tops, rooftop decks, additions etc.) in the Philly/Riverwards area. Thanks!

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Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7y
Originally posted by @Matt Mason:
Originally posted by @Caleb Heimsoth:

@Ryan D. I wish all the recession stuff nonsense talk would stop. People have have been crying wolf for 5 plus years now. None of them know anything about economic policy or how this stuff works. They’re just guessing or saying the same thing some other guru is saying.

And @Russell Brazil had my favorite quote on this topic recently (paraphrasing) “if you don’t buy in the good times, how do you think you’ll buy in the bad times?” Answer is you likely won’t because that same fear of a recession now will be a lot worse when we’re actually in one. (Nothing I see indicates we’re currently in one).

This is true.  A lot of people in 2010 and 2011 thought things were going to get worse and never pulled the trigger.  When a downturn does come, it won't be crystal clear as to when things bottom out.

 Yup...I started buying in 2009...and you know what happened prices kept going down, kept buying in 2010, prices kept going down. I wasnt any smarter than the people who wernt buying, I just had more cajones at the time.  A right mixture of being young enough to take the risk, brave enough to take the risk, having a secure job, a large enough disposable income, and had paid off all my student loans near the height of the market. Little luck, but mostly just had the cajones to say screw it, either the world economy collapses and we are all screwed and if I lose everything we are all screwed anyways, or maybe I get lucky here.

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  • Kevin O'Brien
    - · Member since 2018 · 48 posts · 62 votes
    7y

    I am hearing similarly that the recession is happening. I would agree that we are due one but when it is... who knows. Hopefully not before the end of the summer. But my strategy is to just buy properties that I would be happy being stuck with. If it makes sense as a rental then if the flip fails I can always wait out a recession. There are always deals to be had if you look hard enough, I buy for what the property is now instead of what it could be. Appreciation is my version of gravy on top. I will never understand the investors who use it as their entire profit. 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y

    I know this authority is coming from the West coast however I was at an event and Bruce Norris was the keynote well regarded west coast investors and HML.

    His position is until we have a significant rise in foreclosures at the courthouse ( right now at about an all time low) and when fully 1/3 of MLS listings are then short sales.. ( that ship sailed on the west coast about 4 to 5 years ago)

    that until these things happen we are not in a REAL estate created recession downturn what ever you want to call it.

    what I see is stablization IE run away appreciation has calmed.. but I still see investors who need to make highest and best and look at your situation 8 months to find  ( Granted a Better than average buy).. we are still some time away from anything resembling a full blown real estate recession etc.. As long as credit is still there IE if you got a loan on your place.. were the market got so bad in the GFC is investor loans stopped being made.. froze the market. 

    Also i was musing on another thread that this go around is not like 08 09 were many/ to most of us myself included were blindsided by how bad it was.. there where only a few Michael Burreys out there. 

    so in my mind investors will pull the switch sooner on perceived  values than just sit for a few years to let it tumble low it will not get that low again unless credit freezes again then all bets are off.   what do you think ?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    No recession here. I have commercial clients buying properties left and right. Busiest I have been in 15 years.

    I think some investors are WISHING it was 2009 again for purchases but it is not.

    The Trump tax plan pushed the national economy passed it's natural full 10 year average cycle. We are about 11 years in now. Most experts and economists feel there is some more juicing of the economy to be squeezed before it runs out.

    Just remember when it does go down some prices might get cheaper but lenders also start tightening LTV's and amount down. You typically do not get the great rate and terms of today on the down stroke. Pluses and minuses to everything.

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  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Ryan D. I wish all the recession stuff nonsense talk would stop. People have have been crying wolf for 5 plus years now. None of them know anything about economic policy or how this stuff works. They’re just guessing or saying the same thing some other guru is saying.

    And @Russell Brazil had my favorite quote on this topic recently (paraphrasing) “if you don’t buy in the good times, how do you think you’ll buy in the bad times?” Answer is you likely won’t because that same fear of a recession now will be a lot worse when we’re actually in one. (Nothing I see indicates we’re currently in one).

    3Reply
  • Matt Mason
    Investor · Los Angeles, CA · Member since 2013 · 231 posts · 260 votes
    7y
    Originally posted by @Caleb Heimsoth:

    @Ryan D. I wish all the recession stuff nonsense talk would stop. People have have been crying wolf for 5 plus years now. None of them know anything about economic policy or how this stuff works. They’re just guessing or saying the same thing some other guru is saying.

    And @Russell Brazil had my favorite quote on this topic recently (paraphrasing) “if you don’t buy in the good times, how do you think you’ll buy in the bad times?” Answer is you likely won’t because that same fear of a recession now will be a lot worse when we’re actually in one. (Nothing I see indicates we’re currently in one).

    This is true.  A lot of people in 2010 and 2011 thought things were going to get worse and never pulled the trigger.  When a downturn does come, it won't be crystal clear as to when things bottom out.

    0Reply
  • Russell BrazilBusiness Member
    Moderator
    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
    7y
    Originally posted by @Matt Mason:
    Originally posted by @Caleb Heimsoth:

    @Ryan D. I wish all the recession stuff nonsense talk would stop. People have have been crying wolf for 5 plus years now. None of them know anything about economic policy or how this stuff works. They’re just guessing or saying the same thing some other guru is saying.

    And @Russell Brazil had my favorite quote on this topic recently (paraphrasing) “if you don’t buy in the good times, how do you think you’ll buy in the bad times?” Answer is you likely won’t because that same fear of a recession now will be a lot worse when we’re actually in one. (Nothing I see indicates we’re currently in one).

    This is true.  A lot of people in 2010 and 2011 thought things were going to get worse and never pulled the trigger.  When a downturn does come, it won't be crystal clear as to when things bottom out.

     Yup...I started buying in 2009...and you know what happened prices kept going down, kept buying in 2010, prices kept going down. I wasnt any smarter than the people who wernt buying, I just had more cajones at the time.  A right mixture of being young enough to take the risk, brave enough to take the risk, having a secure job, a large enough disposable income, and had paid off all my student loans near the height of the market. Little luck, but mostly just had the cajones to say screw it, either the world economy collapses and we are all screwed and if I lose everything we are all screwed anyways, or maybe I get lucky here.

    [email protected]301-893-4635Podcast Guest on Show #192
    District Invest Group546 Reviews
    WebsiteView Page
    5Reply
  • Ryan D.
    OP
    Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes
    7y

    @Matt Mason Exactly my point. No one ever knows where the bottom is. This notion that a recession happens THEN the investor on the sidelines somehow musters up the courage to finally do their first deal is laughable. The only people who buy in recessions are the people who have been buying in every stage of the cycle.

    1Reply
  • Dan W.
    Flipper/Rehabber · Columbia MD · Member since 2019 · 26 posts · 7 votes
    7y

    I know I have no right to talk but I remember reading @Russell Brazil post once that you only lose if you sell in the down. It lines up with Tony Robbins teaching too. You can wait... or join the people who are making money while everyone else waits for the crash. 

    1Reply
  • Gregory H.
    Real Estate Agent · Philadelphia, PA · Member since 2013 · 451 posts · 369 votes
    7y

    @Ryan D. Out of curiosity, as a first time flipper, how did you figure out your budget with a 10 day close and no contingencies? Were you able to walk through the property with a GC to get a good estimate before you made your offer, or is your agent particularly knowledgeable about flipping costs in Fishtown as that is a rather popular neighborhood to flip in?

    0Reply
  • Ryan D.
    OP
    Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes
    7y

    @Gregory Hiban We have done at least a dozen walkthroughs with GCs to get estimates on other properties and to better my own ability to estimate rehab costs. After 5 or 6 properties of me estimating and a family friend who is a GC estimating, my guesses we’re pretty much spot on with his. My original estimate was 80k rehab but after having our GC walkthrough when it was under contract he said 65k is much more realistic and plenty conservative.

    We have no intention of flipping the property. This is a long-term play. As you’re local to the area this property is in the Adaire catchment of Fishtown so supply is very slim in this area.

    0Reply
  • Lee Bell
    Real Estate Appraiser · Isabella lake, CA · Member since 2018 · 628 posts · 491 votes
    7y

    Recession? RE is local, they are building like mad here. Supply is limited in most sub areas. At this time.

    0Reply
  • Joseph ODonovanPro Member
    Property Manager · Ridley, PA · Member since 2017 · 427 posts · 449 votes
    7y

    @Ryan D. For what it's worth, jobs number continue to stay positive.

    https://www.nytimes.com/2019/04/05/business/jobs-report-unemployment-march.html

    0Reply
  • Nick Rutkowski
    Rental Property Investor · Ithaca, NY · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    @Ryan D.

    I just did a post on this yesterday and it blew up. Seriously though, market correction or not - people shouldn’t panic about this and invest wisely.

    1Reply
  • Justin Miles
    Flipper/Rehabber · Alpharetta, GA · Member since 2018 · 70 posts · 10 votes
    7y

    @Ryan D. I do see a recession coming for sure in stocks which I believe will lead to a solid 15-20 real estate pullback. They way I plan to combat this is to focus more on quick flips at a lower price point. Rely more on turn key buyer profits than appreciation.

    0Reply
  • Justin Miles
    Flipper/Rehabber · Alpharetta, GA · Member since 2018 · 70 posts · 10 votes
    7y

    @Ryan D. I have considered hedging my investment with a short vehicle real estate etf. Does anyone already do this? Example buy etf REK or SRS and hold during Reno and sale of flip. You be giving up some decay over the turn around time. But hedging against the proverbially crash people talk about. I’m considering these products for my portfolio anyway at this point because I think the risk of RE going a lot higher is very minimal.

    0Reply
  • Wes Johnson
    Developer · Dallas, TX · Member since 2015 · 84 posts · 79 votes
    7y

    @Ryan D. Hey man I grew up dirt poor. In the 90's when the economy was great (before the dot Com bubble) everyday felt like a recession to me. So I'll take my chances and buy good deals no matter what the market is doing I'd rather take whatever chances the market may bring than live in poverty everyday 🤷🏾‍♂️

    1Reply
  • Syed H.
    Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y

    Since you are a first time flipper, your perspective is different than many of us who have been doing this for 5+ years. People who have flipped millions in property. 

    Have you been through a cycle? There are many ways to get burned in a down cycle. What happens when liquidity dries up? Your flips can go belly up, your buy and holds can’t be refi’d; etc etc.

    There is nothing wrong with being somewhat conservative. Many people in our industry got absolutely creamed in 07/08. Many on here. 

    People that need to shoot for the moon on their deals, will eventually get burned. People who use extremely high leverage, will eventually get burned. It’s not a matter of if, but when. I’ve seen it many times unfortunately. 

    Mitigating risk is one of the most important things once you are past the preliminary phase of building your capital. It is a careful balance on taking risks in a market like this. 

    I'm still buying, but I make sure I only do projects with short term timelines and ones that don't need to hit a very high ARV. My buy and holds are only homerun deals.

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    7y

    @Ryan D. Congratulations on overcoming your analysis paralysis and pulling the trigger. I don't really understand all of this talk about another crash. The factors like loose lending standards, high money supply in the market and over construction don't exist today. That's not to say that we won't see a cooling or even a dip in some markets but it will be on a local level rather than national. A lot of people fear that because we've seen a hefty run up in prices in most markets over the last several years that it means a crash is coming. What they neglect to realize is that most of the run up was just recovery from 2008 and that some markets are only now reaching their 2006 peaks. 

    0Reply
  • Ryan D.
    OP
    Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes
    7y

    @Mike D'Arrigo thanks! Can’t agree with you more. It’s funny when people say in both the stock market and real estate market how this is the 10th year of the bull market. What people never seem to remember is that you don’t measure a bull market from the bottom of a bear market, you measure it once it passes the previous bull market highs. So by that measure we’re in year 6 for stocks and real estate is local but I use $REZ (Real Estate ETF for National Price Data) and that recently just surpassed 2005/2006 highs. Bull markets always climb the wall of worry and I truly believe the real estate market in general is undervalued compared to equities. The best time to buy was yesterday 🙂

    0Reply
  • Mike D'ArrigoPro Member
    Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
    7y

    @Ryan D. you make a good point. What a lot of people don't realize is that some markets (Las Vegas, Atlanta, Phoenix) lost as much as 50& of their values from their 2006 peak. That means that to return to their peak, prices have to rise 100% from their low, not 50%. That's why in spite of significant appreciation in many markets, some are only now reaching their 2006 levels. 

    1Reply
  • Brian K.
    Member since 2015 · 11 posts · 0 votes
    7y

    Your resolve in waiting 8 months is impressive, @Ryan D.. Why did it sell for so little, compared to the ARV?

    0Reply
  • Ryan D.
    OP
    Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes
    7y
    Originally posted by @Brian K.:

    Your resolve in waiting 8 months is impressive, @Ryan D.. Why did it sell for so little, compared to the ARV?

    Thanks, Brian. I believe the list price was intended to induce a bidding war and we offered 24k off list because that was all the cash we had. Over the 8 months of searching, we never bothered looking in this area as it was way too expensive for us and we were at least 5 years too late. We had a letter prepared for the seller before we even saw the property in person, knew we'd have to go w/ no contingencies to even be close to buying it and ultimately lucked out on landing it. My partner and I were fully prepared to hear another no, especially with this property. All of this happened on Friday night into the weekend so I think timing really helped plus Philly is seasonal so winters are always less competitive here. We had it under contract in 24 hours and a day later they had a cash offer for full list w/ no contingencies. 

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