Are these Flippers smoking "Hopium"?

23 Replies

I've been browsing the local MLS just to see which areas are trending, etc. More and more I'm finding rehabbed homes listed for WAYYYY beyond what the average sale price for the area is. Example, there is a run down house, a 4 bed 1 bath, 1500 sq. ft. that could definitely use some TLC (new floors, paint, granite counters, etc..) they are asking $65k for it, as is. Well rehabbed homes in that same area have been selling in the $120k's (ie. officially "SOLD)". But less than a block away in either direction, there are some rehabs (one 3 bed 3 bath around 1400 sq. ft.) they are asking $223k and another 4 bed 2 bath 1800 sq. ft. for $275k. So either the house they are asking $65k for is the deal of the year... OR 2 house flippers are REALLY overestimating for the area and stand to lose a ton of money. Are they OK having to reduce their asking price every few weeks given holding costs? Are they just shooting for the moon and being way too optimistic? Are they trying to spearhead creating the next "Up-and-coming" neighborhood? Or did they just make a rookie mistake and overbuild for the area?

Same here in Ca. Running on razor thin margins. A few unexpected repairs during rehab or extended holding costs and they’re losing money. The home directly behind me was just flipped.... from 560k down to 515k in a matter of weeks. Still on the market and doesn’t seem to be much interest in it. Mediocre job on the flip and 0 curb appeal. And it’s happening all the time.

I've been watching a couple nearby priced in the same 'over priced atmosphere' & these have been sitting for at least a year & I bet it took 18 months from buy to finish before that. At auctions we see some absolute junk go to insane bidding & I often wonder who in their right mind would want to lose that much money on a potential flip.  In March 2019 we called the contractor on one half finished & he told us we could get it cheap 'as is' because he was still owed $15k & the owners were tapped out. It's still sitting as a 'zombie' home.

You cant compare a rehabbed home to a non rehabbed home. One is an apple, the other is an orange. Compare apples to apples and oranges to oranges. Compared non rehabbed homes to non rehabbed homes. Compared rehabs to rehabs.

@Ralph Stowe I saw one house rehabbed with converted garage to make total living space about 1100 sqft go for a jaw dropping 180k...with no garage!, but come to find out it sold owner finance. 1-2 years ago, maybe. prices up maybe 4-8%. Four doors down someone picked up a just slightly larger house for 160k and did a very nice rehab with new roof and converted garage. Asking 230k. But you can buy a new 3-2-2 for 240k...garden home, further out but nicer neighborhood, same school district (But Hoa or mud taxes for sure). I don’t know what they are thinking, but the first week on market they put something like, “all offers in by Sunday the 6th” but two weeks later it is still available. And this was not a couple of young guys knocking it out, they hired contractors. I would love to see what they sketched out on a napkin. Did they go off the owner financed sale as a comp? House would rent for $1400, which is what I assumed they’d do as 160k/$1400 month more or less works in this area.

@Ralph Stowe I think watching them and seeing what they sell for is the only way to test your theory. If they can get one under contract and get lucky with a hard working appraiser, perhaps they can set a new tone for rehabs in the area.

@Ralph Stowe

It seems to me the market is starting to adjust with these highly inflatable asking prices.  Buyers are being selective and especially the higher end homes are not moving very well.  When comparing value, I agree with @Russell Brazil you must compare rehabbed to rehabbed properties and non-rehabbed to non-rehabbed. On the non-rehabbed you have to project what the ARV will be when rehabbed. Otherwise the numbers are pointless. Asking price is irrelevant until you have a buyer and closed. The value is only based on facts, past solds not what people are asking for.

Gotta look at the comps and go with the worst case scenario. And, don't forget to put a vase of dried flowers, some stacked books on the shelves, and dried bread loaves in a bowl. That will usually start a bidding war and you can get a 120% offer within 24 hours. The dream home for a nice couple with 1.5 perfect children. Dad is a part time soda bottle collector and mom loves to help out at the humane shelter - buying budget $820,000.

The worst thing you can do is overprice a property. A good rule of thumb is that if the property is priced fairly, you will know within the first 3 days that it is listed on the market. Realtors will be calling. If the realtor receives no calls in the first week, you know the property is overpriced. As you reduce the price, it raises the question, what is wrong with this property, which will just invite low ball offers. If it sits on the market long enough, it will only sell at way below asking price. The best solution is to take the property off the market for a few months and then relist it at a fair market price. 

Thanks for the input everyone. Yeah, its better to keep the ARV in the $120's as that's what the rehabs have actually sold for in that area. I'll keep an eye on the $200k's and up. I won't hold my breath on a sale.

@Greg Parker LOL I love House Hunters Intl. "I'm a part time substitute kindergarten teacher and my husband sells sawdust out of the garage so we have a strict budget of $920,000 for the house." 

@Theresa Harris   LOL "Ok I went WAYYY over budget.. So who is gonna bail me out?...anyone??...anyone??... Bueller??..." 

Also, the "rare opportunity to own" marketing never works. A house in my area with a mediocre renovation was listed with instructions that all offers be submitted between 1-4 PM on a certain day. It was overpriced by 50K and there were no offers on the highly anticipated bid day. It made the agent look foolish. I believe it is still for sale. Any serious buyers have moved on. Also, the drug dealers next door had a pit bulldog that tried to eat through the fence and murder anyone that pulled into the driveway. That didn't help persuade potential buyers to stop.

@Ralph Stowe I have seen countless properties that appeared grossly overpriced to me. I asked myself, who would pay that much in this neighborhood? They all sold, many with a price drop but still much higher than I would have expected. This has lead me to conclude that I don't know everything. People see value or opportunity where I do not. 

This is the hardest skill as an investor is to understand what creates value and where the demand is.

That all being said, some flippers are enticed by watching a Fixer Upper marathon one weekend and figure how hard can it be? There are people who over spend on a rehab and end up losing money. I am just saying keep an open mind and be aware that you may be the one missing something.

@Joe Splitrock   That was precisely the reason for my post. Should I be purchasing $65k properties and listing them for $200k+ or would I just be following greedy fools over a debt cliff?   I'm sure there is a reason they are asking such high prices. The million dollar question is: Will they sell for more than what they put in?  I'll keep an eye on them. Even if they sell for $150k-175k, there is still huge potential in this neighborhood. 

Originally posted by @Ralph Stowe :

@Joe Splitrock  That was precisely the reason for my post. Should I be purchasing $65k properties and listing them for $200k+ or would I just be following greedy fools over a debt cliff?   I'm sure there is a reason they are asking such high prices. The million dollar question is: Will they sell for more than what they put in?  I'll keep an eye on them. Even if they sell for $150k-175k, there is still huge potential in this neighborhood. 

 Not only will these sell, but will they continue to sell? The market could change. If you are spending $65K, you could probably do a nice rehab for $30-40K. So even if you had to sell for $125K, is there that much risk? I don't know your market or risk tolerance so that is what you need to consider.

Originally posted by @Joe Splitrock :

@Ralph Stowe I have seen countless properties that appeared grossly overpriced to me. I asked myself, who would pay that much in this neighborhood? They all sold, many with a price drop but still much higher than I would have expected. This has lead me to conclude that I don't know everything. People see value or opportunity where I do not. 

This is the hardest skill as an investor is to understand what creates value and where the demand is.

That all being said, some flippers are enticed by watching a Fixer Upper marathon one weekend and figure how hard can it be? There are people who over spend on a rehab and end up losing money. I am just saying keep an open mind and be aware that you may be the one missing something.

keep in mind that most of us on BP are looking at these deals with investor glass's on..  and the buyers are looking through owner occ and many times in these price points first time home buyer glass's.. huge difference..  Market is not as brisk for sure pretty much in most markets.  Of all places I had a South side Chicago duplex go pending in 3 days for an owner occ  house hack.. its great to see folks in those areas understanding the house hack is the way to go.. at those prices the owner will live about mortgage free.. and of course this is totally dialed in with a 100k rehab.. but like I said owner occ  3 to 5 years ago it was all investor.. and this owner occ paid almost 100k more for this than what we were selling them to investors for same streets same condition.. different buyers needs. 

 

Just like the last market run up, this one comes with more and more reality shows of house flipping with all the drama and all the bs numbers. In my opinion, it generates an entire flock of newbie flippers who think they know what they are doing because they watched it on tv and think it is that easy. Well, it is NOT.

As someone above mentioned, over pricing a home is a real bad idea and in a competitive market, you can't underprice a home as buyers will bid it up to what they believe is the market value.

Someone should create a show of catastrophe flips by rookies who watched too much HGTV!! 

@Joe Splitrock And I don’t believe a lot of newbies figure in holding costs. It’s funny how on the shows they ‘bought for 100, spent 50 on renovations and sold for 200 making 50!’ Never mind all the holding costs, buy and sell expenses

List price and their investment can be two very different numbers.  If the seller is willing to wait for a price its a matter of how patient and at what cost/risk.

The bigger issue might be can they comp it out when they sell.

Why not put a low ball offer on the 65k house?

Originally posted by @Will Barnard :

Just like the last market run up, this one comes with more and more reality shows of house flipping with all the drama and all the bs numbers. In my opinion, it generates an entire flock of newbie flippers who think they know what they are doing because they watched it on tv and think it is that easy. Well, it is NOT.

As someone above mentioned, over pricing a home is a real bad idea and in a competitive market, you can't underprice a home as buyers will bid it up to what they believe is the market value.

Someone should create a show of catastrophe flips by rookies who watched too much HGTV!! 


Agree. If your not plugged in to market you'll get smoked when the market turns.  I'm a big fan of velocity. 

Its not "real estate sexy", I pay more in taxes, cant BRRR, I have to move fast, leave money in the table... That being said I believe it prevents from big losses specifically from market adjustments - IMO

 

@Joe Splitrock

I have been going through this for last few years as the market was climbing at a rapid rate.

Constantly coming across properties that thought were overpriced "they will never get that price! "Sold a few weeks later. Trying to figure out the ARV lately is like trying to hit a moving target.

Keep telling myself "I have no idea what I'm doing"