Moving away from SS Flips - where to next?

Question

I've noticed a decrease in the number of people doing ss flips in my town. I spoke with another company out of Austin who negotiates a ton of short sales and they said the same thing. More and more are moving to simply working with end buyers to get the ss's approved.

That being said:
1. Is anyone else seeing the same decline in flips? If not, I'd like to speak with you about the types of loans that are easiest to flip and lenders you've found to be easier to work with. We currently have 30 or so short sales and almost all are going A-C so we're just negotiating it and taking a small fee.
2. I'm looking for ideas or investing avenues ss flippers are moving into. our business is set up to service short sale negotiations but we'd like to get back into investing our money and not our time sitting on the phone with the banks.

Just looking for ideas from any of you who have seen this trend or disagree with my assessment. Thansk

Scott Hubbard · Answer

Most strategies are negatively affected by slowing demand and falling prices, however, some strategies are less impacted than others.

Buy and hold strategies are going to be somewhat insulated from short-term price fluctuations.  In fact, I believe falling prices help rental investors because they can take advantage of the distressed property owners as they are flushed out of their homes by the latest price declines.

I like short sales because they help me fill my rental properties or help me fill other investor's properties because they need a place to go.  Lease options and seller financing deals are really hot right now. So, I am never out of short sales completely.

The problem with buy and hold strategies is you need capital (yours or someone elses) and earnings are usually deferred.  So when things are slow, I also look to build partnerships and raise capital.  These are investment strategies of another sort where returns are realized at some future point.  This helps me create cash flow and build equity.

I am sure this is not news to you and I wholeheartedly wish there was an easy answer, but I believe that you need to wait out the ebbs and flows of the RE market.  By combining both long term and short term strategies you'll be in a much better position to do so.

Randal McLeaird · Answer

Thanks Hubbard. Always have good info. But, was looking for a different type answer. The overall economic outlook is understood. The fact that we borrowered buyers from the future is being felt in my rehab/flip biz.

However, what I'm really interested in is the type of investment(s) others are finding useful since there is a decline in the ss FLIPS.

Since we recognize the trend there must be a way to capitalize on it and I'm just wondering if others are...and how.

Scott Hubbard · Answer

Many markets right now are under the effects of a perfect storm of factors which is fustrating investors.  This is not specific to short sales.  Here are some of the general reasons:

1.  Buyer's are cautious right now.  You can blame it on uncertainty, fear, or ignorance, but the fact of the matter is that there has been a large declining trend in the number of closed transactions since April or May in most markets.

2. The IRS tax incentives has robbed buyers from future periods to purchase earlier than expected.

3.  As a byproduct of the tax credit expiration and the recent declines in demand, comparable sales hasn't had a chance to readjust to recent pricing levels.  If your lender or seller are using May's sales as a comparsion for today's value, then chances are that the BPO or appraisal will come in too high which affects your chances for success.

4.  Inventroy levels are rising.  With the theft of buyers from future periods and the fact distressed properties continue to be a problem, your left with a higher supply which means prices will fall.

So when you factor in all the above, the results are that pricing from the previous periods have to catch up with the supply-demand curve which it eventually will.  With rates still low and with the economy stabilizing, I believe we the retail buyer will again return to the market.  Investors will also return once pricing begins to flatten since most of us do not want to try and catch a falling knife.

So, to answer your question more directly, this is temporary and short sales will again be a more viable once again.  However, no strategy is safe since pricing and demand levels affects all investment strategies.

Randal McLeaird · Answer

Guys, thanks for the comments. Scott knows our ss business first hand since he's been helping us with a lot of questions we've had. And smitnlit, Scott has been preaching the exact same thing - qualify them before taking them as a flip. We've been changing our focus and we're moving more in line with that mentality - not fast enough but we're getting there.

Part of my focus has been long term investments. I'm buying little dinker houses with the idea of doing little to no work on them and seller financing them. Like you said Scott, this is a very hot area right now. I happened to buy in the wrong area but bought at the right price so I'm ok with the two most recent purchases. From here on, I'm looking to add a couple rentals/seller finance houses every quarter.

Will, what types of flips are you doing with the REO's? Are you fix and flip or just buying and seller financing or renting? Thats how I bought the two most recent houses and I'm flipping them as RTO and seller financing one. Is there a different approach you're taking?

I've seen some around town that are decent FF properties but I'm not inclined to do any rehabs and tie up more money until more qualified financed buyers hit the market. I could see this being a market if I'm able to get the properties at 50% or less ARV including repairs. There is still a lot of demand for wholesale deals in SA so those are few and far between. When they come up I'm all over them but we're being very selective now.

With the short sales, we're still in the market for them and not going away any time soon. One reason we might have a more difficult time flipping is because most/all our leads are coming from listed properties. Are most of your flips self generated leads?

Terry - A-C is a non flip short sale. Meaning there is no investor in the middle making a profit.

Terry Royce · Answer

What is A-C?

Maryann L. · Answer

Randall,  I would look at that as an opportunity.  If the number of people doing short sale flips is declining, there is a lot more for you.  One of the states I purchase in is difficult because of the laws, but when you take time to work through the issues, it's nice to see that others didn't.

I would ask the people why they have stopped?  I agree things are more and more difficult, but find out the reasons why.

Right now I'm TRYING to qualify short sales like crazy.  I try to find out who the lender is before we say yes, who the investor is, how far behind on payments, how close to an auction, what have they tried so far, i.e., loan mod, forbearance, how many payments behind they are, is the property located in an area I can resell in...etc., there is so much we look at before we even agree to a flip.

I have one short sale right now that I'm SHOCKED at the price we are selling it for.  I can't tell you WHY it's going for the price it is, but we still have a bit of room to make a profit.  It should have sold for $30,000 more and we DID the prep work.  We are extremely conservative with our numbers.

In my area there are a ton of lease options for people and that's great for those investors, but my thought is if everyone is doing it, it's likely harder to find property.  There is a TON of distressed property and for me that's a good thing because there aren't a ton of flip investors in my market.

Take a good look at the short sales that were successful for you and compare them to the ones you're having to go A-C on.  What is the big difference?  Is the loan conventional, FHA, VA etc?  They all discount differently.

You can jump ship....there will be more for someone else if you do.

Will Barnard · Answer

To add to Scotts replies, SS flips have also been heavily affected by new regulations, both from laws and lender rules. Often, you get down to the wire with an approbved short sale, only to have the bank decline because they don't want to sell to investors. We all know we are not the bad guys in this senario, but common sense has appeared to elude banks.

That said, I have found that sticking to REO flips has been the best strategy for making money for me. If SS flips was your game, moving into REO flips is something that can be accomplished with some specific efforts. While it is a different strategy requiring different techniques, I believe it to be the best for our current market conditions.

And yes, even this biz has beeen affected by many of the issues posted by Scott, but at least I know if I get the property or not right on the spot and I know my numbers from my DD.

Moving away from SS Flips - where to next?

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