Viability of Flipping in Expensive Neighborhoods

23 Replies

This was a question posed to me via PM that I wanted to share for the entire community and welcome feedback and questions from everybody interested in the topic.

"Hi, Will

Thanks for sharing your valuable experience at the forum-- I have been learning a lot from you. I am a newbie in the flipping business and I have a basic question about the viability of this strategy in more expensive neighborhood: I live in the south bay area and the medium price here is somewhere between $500k~$1M depending on the exact area, and the market is very competitive and price appreciation has been a norm on for a while and a lot of areas are already way above the pre-crash highs.

You are in a market that's similar to mine. So I am wondering, how you find deals in your area for flips? How can I know flipping is even a viable strategy in my market?

I would appreciate any advice that helps a newbie to explore this direction. Thank you!"

The only market I would consider not viable for flipping is during a downturn. With that said, highly competitive markets make it more difficult to find acquisitions that make sense. So you must find a niche target, strategy, marketing plan, or even all of the above to succeed. While that is not very specific, it is difficult to do so being that every area, every market, and every investor is so different so there are a million answers.

Direct marketing over the MLS is key, having or building great relationships with top agents and brokers is helpful, and building a strong performance record is also very helpful. Making your offers stronger through limited to no contingencies, all cash, and quick closings help tremendously as does performing on those promises.

Access to capital is another key point you should focus on. Having your own cash combined with that of private lenders and a couple strong hard money lenders in your pocket will increase your chances as well. This is part of the relationship building process.

Having both my relationships, my track record, and my access to capital has allowed me to gain my acquisitions in million dollar plus neighborhoods directly off the MLS. Some of that has to do with systems I have built and some with great timing and even some luck (which I believe a lot of luck is created by hard work and putting yourself out there, ultimately it places you in the right place at the right time!)

I hope I have answered your question and welcome any follow up questions. In fact, your question was so good, I am going to post it in a thread and send you a link where you can post follow up questions and get other feedback besides mine.

Will Barnard

Will 

Thanks for sharing this persons question and your follow. I don't have a direct contribution but more of a question....in terms of finding a niche, what factors should one consider to determine if they're going after a worthwhile niche? for example, for you what were the deciding factors for pursuing top tier properties over middle and lower tier properties?

When you first started out, how did you gain access to lots of capital? I presume that came after you established a track record of successful flips.

Originally posted by @Jason Fraser:

Will 

Thanks for sharing this persons question and your follow. I don't have a direct contribution but more of a question....in terms of finding a niche, what factors should one consider to determine if they're going after a worthwhile niche? for example, for you what were the deciding factors for pursuing top tier properties over middle and lower tier properties?

Fantastic question Jason. Examples would be going after deals in higher priced neighborhoods that are in loan default, that are on the MLS for over 180 days that are NOT short sales, deals with code violations, homes with fire damage (most fire departments have records of these), homes that have an unusually lower amount of beds/baths/sq footage for the area leaving room to add on, and the list goes on. Each of these strategies are viable within the niche of flipping higher end homes as well as regular ones. More of what sets you apart from others are the systems in which you use to market or go after any of these types of deals. Being first to the list agent is sometimes useful (more so a few years ago than today, but first never hurts) being first immediately after a price reduction or a change in list status from pending to active is yet another.

For me, pursuing million dollar plus properties was two fold, one, it was a natural progression for me and the next step in the ladder for my business and two, I saw the market was starting to change in late 2011 in that properties we're becoming more difficult to find (good deals), competition was increasing as more all cash transactions were taking place, and I knew that my strategy of using my relationships with top REO brokers and asset managers who were giving me deals BEFORE they ever hitter MLS would not last much longer, thus, I had to play the numbers game on the MLS like everybody else (or direct market). So, in recognizing this, I built a system which allows me to identify potential deals on the MLS, calculate the e it values, calculate the rehabs, and make offers efficiently on hundreds of deals. I also realized that the luxury market had less competition as not every investor could take down a million while most could take down the $300k deals near me.

Originally posted by @Anil Samuel:

When you first started out, how did you gain access to lots of capital? I presume that came after you established a track record of successful flips.

 Another great follow up question. Correct, I did not have as much capital to work with when I started, but I did start with people I knew. My first investors were family, then some friends, then some business associates. As I did a few deals and created a track record, I let everybody know about it and those that did invest with me told people they knew. I also started letting others in the public know what I do,meat I have done, and what I had coming up, via my website, via Biggerpockets, via linkedin, and other so ail media avenues. Also, I had already developed a RE investing track record for a few years before I did my first rehab flip. My start was in buy and hold, then land development, then spec building before I ever did a flip.

I just wanted to say "Thank you" to @Will Barnard  for again taking the time to enlighten the BP nation with your wealth of knowledge and experience.

I wish I could do one of these expensive flips in Washington D.C.!!!  I'd be set.

@Anil Samuel 

If you find a house with good numbers let me know maybe we can partner

good luck

As always, I appreciate Will's knowledge, expertise and willingness to be forthcoming with the ways he gets and views his deals. 

I watched a friend of mine do this in Memphis. HIs target areas were blue chip residential but more established older suburbs. Those areas all had a shortage of new and newly rehabbed homes. He started buying  in those areas and did premium quality rehabs making his house the best in the area. Last time I counted he had about 25 completed. Average profit over 100K. Usually the first person through the open homes would make an offer.

Was something I would never even have thought about doing.

@Will Barnard  - What are the few things which you have learned that you would recommend while finding flips in expensive markets? 

Originally posted by @Nilesh Makhija:

@Will Barnard - What are the few things which you have learned that you would recommend while finding flips in expensive markets? 

 Look out for major negatives such as long staircases to front door, no garages (at least in CA and TX) locations on major streets (or backing up to major streets with traffic noise, proximity to train tracks or under airport flight paths, no yards on hillsides can be a big negative, proximity to flood zones, proximity to commercial or industrial, lack of similar size homes in the area or having what will be a great home but surrounded or in the proximity of  crap (shacks, run down homes, small homes with just your big one, etc.). You also want to make sure the home is equipped with the amenities to fit the area. For example, if all the other luxury homes have tennis courts and yours does not, well, you can bet you will have a more difficult time selling it. Same with pools, equestrian facilities, and of course, proximity to great schools, shopping, restaurants, etc.

After the physical items comes the paperwork stuff like watching out for very long DOMs ( days on market) and sudden rise in supply or drop in demand. Many of these factors are relevant in the regular house market, but they are compounded in the luxury market so you really have to pay attention and know your stuff.

Aside from finding comes your ability to complete the rehab. In the standard house market, design is easy, Home Depot and Lowes suffice. In million dollar plus, you need to put much more thought into everything from paint choices to lighting fixtures, to plumbing fixtures, countertops, and appliances. Not to mention flooring choices and amenities.

@Will Barnard timely post by you as we put our first higher-end house under contract on Monday! The ARVs on our first 3 houses were 400k, 450k and 475k. This one we are pegging the ARV at just under $900k. The biggest downside, as you mentioned above, is the fact its on a pretty steep hill with no yard, but hopefully since roughly 1/3 of the homes in the neighborhood are facing the same issue it won't be too much of a discount.

As for your luxury properties, do you had anything that, for lack of better terminology, is a "Will Barnard" staple/standard that tries to set yours apart from the competition. Now that sentence may have not made much sense so let me try some examples. For instance, I know one flipper who adds wine fridges to $450k houses to make them seem more high-end (personally, I'm not a fan). Maybe something like a water feature? Unique focal point in the house? Chandeliers? Amazing landscaping? Etc. Just wondering if there is something you do that when an agent walks in, he/she goes, "Oh, this is Will's work...".

Also, what are your thoughts on staging higher-end houses? We've staged every room on our previous houses, but were discussing not staging beds & baths anymore. Do you normally stage your houses, if so, to what extent?? Appreciate the help in advance!

Another great question @Brandon Foken  

I hear it a lot from others, "this is a Will Barnard house" when they walk through. I can't explain exactly how I do it, but I can tell you that staging is a must as is presentation, both landscaping and interior fixtures. I believe another main key is the overall design. Here in so cal, Spanish Med is very popular and brings top prices typically, so if you have something that has that start or can be changed, designing with that look and features is the way to go.

Interior flow is also important, open floor plans (sometimes you have to have the vision to create this out of a poor or non open floor plan) are key in high end homes as are modern finishes.

Will,

You mentioned above that you have developed a system  for filtering properties and making many offers, is this system something that you would be willing to explain a little more in depth.

Thank you for all you have already shared.  I have really enjoyed your podcast and some of the threads if followed. 

I think the higher end market is the place to be right now for the home flipper.  

Find other active flippers in the area and look at their deals.

If it's an established neighborhood he'll probably have some luck hitting the probate records.  If grandma bought the home in 1970 for $50,000 and it's now worth $1,000,000 then jr. might be real happy to get a quick $500-600k for the home.

@Justin Pierce  

Sounds like my situation, helped Mom buy a house in 76, we lived in for 2 years and rented for 29, she passed in 2006, rented for two more years and sold it for about 10X what we paid for it...but sold for market value at peak, all about timing!

On the buying side, bought estate house here for 60% of value with contents included and should pull about 1.7% rent.  Hoping to sell contents and it pay for all repairs!

Darron, sound like you have a couple good deals there.

Folks, @Will Barnard  did a podcast with BP last year. If you are liking what he's saying here, you will love that podcast, I know I did! :)

http://www.biggerpockets.com/renewsblog/2013/08/22/luxury-house-flipping-podcast-will-barnard/

Originally posted by @Dustin Hamel:

Will,

You mentioned above that you have developed a system  for filtering properties and making many offers, is this system something that you would be willing to explain a little more in depth.

Thank you for all you have already shared.  I have really enjoyed your podcast and some of the threads if followed. 

I originally developed a system for myself and a partner to use knowing the market was changing. Taking MLS access, it identifies properties, runs comps, calculates offer prices and submits offers directly to the list agent. After doing so, it was so good, we decided to take it public and offer it to others. That said, I cant discuss it beyond that here as that would be a solicitation and it is off this topic. Perhaps I will make a post in the marketplace on it in the upcoming months.

Thanks for listening to my podcast and for the kind words. Hopefully Josh & Brandon will have me back soon for round two!

One thing not mentioned enough is buying right. The only rehabbers we know who are taking a beating are doing million dollar homes. This is not for the faint of heart. One couple we know borrowed $900k in hard money and then sunk another $150k into the rehab. Comps for the house were around $1.25m. That is, their project cost was a whopping 84% of ARV (900+150)/1250=84% and they knew this, but their rationale was that they'd pocket a fast $100k. What could possibly go wrong?

The property came out beyond spectacular. They are experienced and very successful rehabbers on smaller homes and are also brokers. The problem is that relatively small hiccups in the price of a million dollar home can kill you.

While no credible buyer would offer $100k less on a $500k home, this might be reasonable on a $1.25m house. The difference is all their profit (plus a $9000/month payment!!!) and this is what happened.

You can't spend any amount of money on a project and simply look at the dollar amount you might make. As deals get thinner and thinner we see this more and more. Rehabbers are getting desperate and only looking at the profit in dollars. Lenders, as well, are taking chances they shouldn't.

While we substitute 75% in southern California, the 70% rule still applies. So does a good knowledge of leverage, and a source of cheaper money, which is clearly killing our friends. Argue all you want that you should do a proper P&L to back out what you should pay, but if the ratios don't work, neither does the project.

Jeff S Na Buying right goes without saying for most of us, but pointing it out is also crucial as so many seem to miss this very simple idea. On a million dollar plus exit, just be cause you have $150k spread, does not mean you should expect an easy profit. Buying all-in at 84% regardless if it is  a $300k exit or a $3M exit, that just does not leave enough room for error, unforeseen occurrences, or worthwhile profits for the risks and efforts.

People also need to realize, and I have stated this hundreds of times, the rules (65%, 70%, 75%) all need to be adjusted according to market conditions, locations, investor, and other factors. For me, doing multi-million dollar homes, I can have a $1M spread, but I'm not doing the deal if my all-in is at 77% let alone 84%! The main reason why I am successful at what I do is because I BUY RIGHT!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.