Why Seattle Flipping Is Now Risky

35 Replies

Real estate is all about timing. Between 2009 and 2014, it was quite easy to flip here in Seattle. In those years, you could find REOs and short sales to buy or buy at the auction. Construction labor and contractors were readily available. 

As of writing this on November 1, 2016, flipping is ultra risky in Seattle.   Construction prices have gone up 40% to 50% in the last twelve months. Contractors complain that flippers underbudget their rehab by 50%. The commercial construction companies come around in buses to "steal" your crews. Hiring supervisors is very expensive. Permits are taking forever. Subcontractors delay for months. 

You know it's bad when you have friends saying they can't find a single contractor to install one window. Or it takes a month to get an reputable electrician to show up to fix four outlets.

It is nearly impossible to find 70% of ARV minus construction costs. Construction costs per multiple experienced rehabbers are going for $75 per sq ft to $100 per sq ft on a "gut out" REHAB.

Some could point to this experienced flipper or that one and say it works. When I look at the risk they are taking on their flips, these experienced flippers all have one thing in common. None of them was doing this prior to 2008. In other words, they have no idea how much risk they are taking.

Yes there are some that really know what they are doing and are still making it work. But I virtually guarantee that all of them are also hard money lenders as well. They are making more money doing hard money lending than their flips. 

The only areas that I would flip in now are Seattle and the Eastside. That's because I seen prices fall like crazy in every other area. In 2010, the houses in Bonney Lake, Summer and Puyallup went from $350,000 to $100,000. Kent, Lynnwood, and Lake Stevens dropped from $350,000 to $180,000. The Newcastle China Creek area and Reserve dropped from $2 million to zero buyers. Oh how people forget.

With all the construction delays going on, it is risky to use a hard money loan at 1% a month interest, 3 points and 2-point extension fees after the 180-day and 270-day mark. Hard money will eat up 8% of ARV every 6-months. If the market crashes and the days on market drop to 24-months, be prepared to pay 32% of ARV if you use hard money.

Hard money lenders make a lot of money but what they are doing is ultra risky too. Here is how it works. You raise $20 million on a reg D rule 506(c) exemption. You get a $20 million warehouse line from Columbia bank. You make a fortune on the velocity of other flippers while THEY take all the risk. The market crashes and you lose your warehouse line. You lose your warehouse lines and your top 3 investors freak out and exit. You hard money fund is down to $10 million, you have huge overhead and now your borrowers give back the keys to the property. If you loan hard money and keep your notes, you are subject to the same market price drops mentioned above. In my opinion, this hard money model is ultra risky. I have seen many hard money lenders go bankrupt during the 2008 crash and it will happen again in the next crash.

So I hear others argue that they put 100% cash on their flip. This is crazy as well if their IRR is less than 60%. Why take all the risk for such a low return. I see people happy to get a 6% IRR with 100% cash. How does that make sense?

If you can't win the game, it is better to sit on the sidelines and wait. My business now is pretty much all hard money lending but we sell the paper through our FINRA broker/dealer in 60-90 days. We loan at a 50% LTV on cash flow turnkey properties in the Midwest. I think hard money lending in Seattle is ultra risky.

I like flipping notes and flipping development projects. Flipping properties in Seattle is virtually crazy. I love flipping though and if you can do it in 90-days with the right numbers, it can be extremely profitable. I am moving to Florida halftime to flip and do BRRRR.

There are still BRRRR deals in Pierce and Thurston county... And urban townhouses deals in Seattle (only). I also avoid West Seattle like the plague. Other than these niches, I am getting out of this Seattle market. I cannot invest money other people's money with the risks being so crazy high.

@Ryland Taniguchi This was great insight thank you. 

Why do you think outlier areas dropped in value in 2010? Just more volatile and more greatly affected post 08 crash or? 

I'm in Snohomish county and looking to live a 2 year live in fix/flip. I feel like we're pretty tapped out in terms of pricing right now and I do worry about it not continuing to rise as aggressively. Although I feel with Seattle remaining to rise it will continue to drive buyers further out for affordable housing. 

I have noticed that even lately Lake Stevens is holding behind Everett even for housing prices. I'd even go to Marysville before Lake Stevens at this point (based on current selling prices). I'm just not sure why the difference in appreciation there versus other nooks in the county. 

Any thoughts on Snohomish County in General? 

Originally posted by @Natalie Kolodij :

@Ryland Taniguchi This was great insight thank you. 

Why do you think outlier areas dropped in value in 2010? Just more volatile and more greatly affected post 08 crash or? 

I'm in Snohomish county and looking to live a 2 year live in fix/flip. I feel like we're pretty tapped out in terms of pricing right now and I do worry about it not continuing to rise as aggressively. Although I feel with Seattle remaining to rise it will continue to drive buyers further out for affordable housing. 

I have noticed that even lately Lake Stevens is holding behind Everett even for housing prices. I'd even go to Marysville before Lake Stevens at this point (based on current selling prices). I'm just not sure why the difference in appreciation there versus other nooks in the county. 

Any thoughts on Snohomish County in General? 

The trend is now is migration from out-of-state Amazon, Google and Microsoft workers to North Seattle. They come to Seattle and love the urban "hippie" vibe. A lot of newly married young professionals have the "romantic" idea that they are going to catch the bus. They move to 1-bedroom apartments around Ballard, Queen Anne, Magnolia and Fremont. 

Then they have kids. Their friend lives in Wallingford and so they all want to live in Ballard or Queen Anne. But it is so dang NOT affordable that they settle for a Ballard condo or townhouse or find a house in Lake Stevens, Shoreline, Greenwood or Columbia City.

They are not moving to Lake Stevens, Marysville or Bonney Lake. 

Another migration is occurring now as well. With all the urban development going on in Columbia City, First Hill, Beacon Hill and Rainier. The minority populations that have lived in the Central District are being priced out of this area and moving reluctantly to Tacoma. Gentrification. It's the Tacoma rental market to keep going up. They are all complaining very loudly about affordable housing. 

Affordable housing is an interesting topic. As housing prices increase, socialism will increase rapidly. Demand for minimum wage laws and wage theft laws will increase. There will be calls for rent control and housing subsidies. Expect more liberal landlord tenant laws. Expect Airbnb to go away because it takes away the supply of housing.

The socialists that run Seattle have one thing right on the Airbnb. When you reduce housing supply, the price of housing goes up. Here is where they defy common sense. Rent control and stricter landlord tenant law reduce the supply of housing. It is a mathematical certainty that socialism will double the price of Seattle real estate. And then rents will become more affordable right? 

Sure -- in your utopian socialistic dreams!!!! 

Higher housing prices will drive rents even further up. So the end result is that the socialists make the poor poorer and they subsidize the rich capitalists through inflation.

And whose fault is this? Well the government of course. What do you think quantitative easing accomplishes? This exact market dynamic.

There are some practical solutions to make housing more affordable. Build higher density. But wait, that would be highly opposed by the environmentalists. The other solution is deregulation. A recent article in business week explained how government overregulation like Labor and Industries accounts for 25% of construction costs. 

So we have a dilemma. The very socialists in favor of affordable housing are making housing much more expensive through overregulation and environmentalism. 

So if you trust the socialists to fix the problem they created, I must remind you of the definition of insanity. Doing the same thing over and over expecting a different result.

Updated over 1 year ago

Oops I said they settle for a house in Lake Stevens.... I meant Lake City LOL. They don't buy in Lake Stevens.

Updated over 1 year ago

POLITICAL DISCLAIMER: I hate the Republicans, the Democrats and the Libertarians. Read at your own Risk.

This is very informative. Thanks for all the information.

Originally posted by @Natalie Kolodij :

@Ryland Taniguchi This was great insight thank you. 

Why do you think outlier areas dropped in value in 2010? Just more volatile and more greatly affected post 08 crash or? 

I'm in Snohomish county and looking to live a 2 year live in fix/flip. I feel like we're pretty tapped out in terms of pricing right now and I do worry about it not continuing to rise as aggressively. Although I feel with Seattle remaining to rise it will continue to drive buyers further out for affordable housing. 

I have noticed that even lately Lake Stevens is holding behind Everett even for housing prices. I'd even go to Marysville before Lake Stevens at this point (based on current selling prices). I'm just not sure why the difference in appreciation there versus other nooks in the county. 

Any thoughts on Snohomish County in General? 

Seattle is highly dependent on the tech industry where entry level software engineers straight out of school from out-of-state make a $100k starting salary.  Many of those 22 year olds don't own homes yet.  Assuming they keep their jobs, they can easily afford a starter home or condo in Seattle.  As prices continue to go up in Seattle due to increasing land prices and construction costs, people move away from the city.  In an appreciating market, people move away from the city and into further away areas because the city is getting too expensive. 

In a downturn market, the reverse effect happens, so the outlying areas will drop first (last in first out).  

However, if the tech industry continues to stay strong, I don't imagine a market crash anytime soon.  Long live Amazon, I guess?

To answer your question, live-in fix and flip is a good option.  You get to build some equity and since you are living there, regardless, you are saving money from not having to pay rent.  Best of luck!

@Adrian Chu Thank you for the input! 

Ya I thought a CPA was a pretty good job/salary but boy...sure doesn't compete with those damn tech kids around here. 

I don't really for see any thing dropping Seattle/Bellevue markets any time soon. So I'm anticipating Snohomish county to be fairly safe. 

That was kind of my thinking. Another nice aspect I'm coming across recently in the Snohomish market is small homes selling for a premium $/sq foot. People love adorable 100 year old houses....even if they are 800sq feet. I figure costs for flooring, paint, cabinets ect. will be better than in a 2,500 sq foot renovation. You'll find me living in the smallest, crappiest FHA compliant home I can find this summer.

Originally posted by @Adrian Chu :
Originally posted by @Natalie Kolodij:

@Ryland Taniguchi This was great insight thank you. 

Why do you think outlier areas dropped in value in 2010? Just more volatile and more greatly affected post 08 crash or? 

I'm in Snohomish county and looking to live a 2 year live in fix/flip. I feel like we're pretty tapped out in terms of pricing right now and I do worry about it not continuing to rise as aggressively. Although I feel with Seattle remaining to rise it will continue to drive buyers further out for affordable housing. 

I have noticed that even lately Lake Stevens is holding behind Everett even for housing prices. I'd even go to Marysville before Lake Stevens at this point (based on current selling prices). I'm just not sure why the difference in appreciation there versus other nooks in the county. 

Any thoughts on Snohomish County in General? 

Seattle is highly dependent on the tech industry where entry level software engineers straight out of school from out-of-state make a $100k starting salary.  Many of those 22 year olds don't own homes yet.  Assuming they keep their jobs, they can easily afford a starter home or condo in Seattle.  As prices continue to go up in Seattle due to increasing land prices and construction costs, people move away from the city.  In an appreciating market, people move away from the city and into further away areas because the city is getting too expensive. 

In a downturn market, the reverse effect happens, so the outlying areas will drop first (last in first out).  

However, if the tech industry continues to stay strong, I don't imagine a market crash anytime soon.  Long live Amazon, I guess?

To answer your question, live-in fix and flip is a good option.  You get to build some equity and since you are living there, regardless, you are saving money from not having to pay rent.  Best of luck!

I think the tech bubble prior to 2000 was based on pure speculation. The tech companies are now more mature. I agree it won't be hit as hard as 2000 from a tech bubble crash. Bruce Norris said he didn't see a tech crash coming and so I will take his word for it.

I completely disagree about the market not going to crash. There will be dangerous ripple effects from Brexit.

The stock market has no crashed in 8 years. In what historical time period has the stock market not crashed in 8 years? There are not many and when it did go over 8 years the magnitude of the crash was even greater. The one guarantee we have in real estate is that the markets will crash.

Originally posted by @Natalie Kolodij :

@Adrian Chu Thank you for the input! 

Ya I thought a CPA was a pretty good job/salary but boy...sure doesn't compete with those damn tech kids around here. 

I don't really for see any thing dropping Seattle/Bellevue markets any time soon. So I'm anticipating Snohomish county to be fairly safe. 

That was kind of my thinking. Another nice aspect I'm coming across recently in the Snohomish market is small homes selling for a premium $/sq foot. People love adorable 100 year old houses....even if they are 800sq feet. I figure costs for flooring, paint, cabinets ect. will be better than in a 2,500 sq foot renovation. You'll find me living in the smallest, crappiest FHA compliant home I can find this summer.

 For snohomish, I think the only safety will be in cash flow. If you have a property that is a 1% rule to 2% rule, that is decently safe. Betting on appreciation in snohomish is pretty risky.

@Ryland Taniguchi Nothing here hits those numbers. 

I just don't see a correlated reason for a "crash" the way we had in 2008 within the next 2-3 years. 

Originally posted by @Natalie Kolodij :

@Ryland Taniguchi Nothing here hits those numbers. 

I just don't see a correlated reason for a "crash" the way we had in 2008 within the next 2-3 years. 

 The crash I don't think will be like 2008. It would probably be more like 2000 with a 2-3 year sideways market. I would be more worried if it didn't crash in the next two years and took another upward swing. The housing market is being pumped up artificially by quantitative easing and low interest rates. How long can you pump air into a balloon before it pops?

All of the investors who have been around a long time are saying also that they expect a 2000-like crash. 

Ryland this reminds me of when I first came to Oregon from CA.

I was building a subdivision in Beaverton... and my land planner engineer was lamenting he just could not get any engineers and his work flow was suffering.

I told him put an add in the LA times.. you will get flooded with people that would love to work and live here but did not know there were good paying jobs.

I think that could be the case now for skilled labour   bus them in.

lol telling investors who weren't around a long time to expect a 2000-like crash has no quantitative value. If we weren't around for it we don't know what it means to expect now.  

I've always considered this a terrible cash-flow market and much better for flipping. Rarely do people get the 1-2% here...so what would you advise investors to be acting on right now if you feel there is an impeding leveling/downturn?

PS that was Pre monster .com  craigslist or any other one line way to hire emloyees you did it in the news paper I know a lot of our newer investors probably never read the want adds  LOL

I disagree with the initial premise and first sentence at the top of this thread.  Real estate is not all about timing. Speculation is all about timing.

Real estate is all about value.  Buy right. Fix right. Create value. Sell at a profit or rent.  That works any time and all the time.  Regardless of the timing.

Originally posted by @Jay Hines :

I disagree with the initial premise and first sentence at the top of this thread.  Real estate is not all about timing. Speculation is all about timing.

Real estate is all about value.  Buy right. Fix right. Create value. Sell at a profit or rent.  That works any time and all the time.  Regardless of the timing.

 I completely agree that your statement is true in your market. But you are not in the Seattle market or San Jose market where it is completely about timing at this phase of the cycle. The fundamentals have completely disappeared as of two years ago. It is now purely speculation to flip in the Seattle and California markets.

You cannot "buy right" in the Seattle market right now on flips. So as a result, you cannot create value on flips. But there are still opportunities to "buy right" on BRRRR and urban development.

I am getting out of the seattle market for flipping because the fundamentals are not here any longer. 

Originally posted by @Jay Hinrichs :

Ryland this reminds me of when I first came to Oregon from CA.

I was building a subdivision in Beaverton... and my land planner engineer was lamenting he just could not get any engineers and his work flow was suffering.

I told him put an add in the LA times.. you will get flooded with people that would love to work and live here but did not know there were good paying jobs.

I think that could be the case now for skilled labour   bus them in.

 Bring a bus of skilled labor up to Seattle please. LOL

I ran an awesome crew four years ago. I hired my guys at $18/HR. They were like 8 to 10 "regular guys." Super fast and super high quality. Now they want $75/hour plus benefits and I have to go union to get them.

So I asked them if I paid them that if they would come over. They said no. LOL But they will call me when works gets slow in the next crash.

Originally posted by @Natalie Kolodij :

lol telling investors who weren't around a long time to expect a 2000-like crash has no quantitative value. If we weren't around for it we don't know what it means to expect now.  

I've always considered this a terrible cash-flow market and much better for flipping. Rarely do people get the 1-2% here...so what would you advise investors to be acting on right now if you feel there is an impeding leveling/downturn?

I tell everyone to diversify. 1/3 wealth preservation like Performing Notes and Tax Liens with a min 6% IRR. 1/3 cash flow like BRRRR or turnkey with a min 18% IRR. 1/3 accelerated wealth like flips and development with a minimum 60% IRR.

@Ryland Taniguchi - Thank you Ryland for your insight! I have enjoyed reading your posts and I appreciate your expertise in the Seattle housing market. I've got a few rentals (BRRRR strategy) in South King County. I've been reading various articles about the real estate cycle and want to make sure I'm prepared. With that said, in your experience, with the last downturn, did rent prices decrease in South King (I'm referring specifically to Fed Way and Maple Valley). From what I hear, as long as tech stays strong, Seattle is a safe market and also if you can buy low enough (1% to 2% rule), that would be the avenue for continuing to acquire real estate. Would you have any other advice or would you simply wait and see where things go after the election and into winter/spring?

As an aside, I've definitely been a stock market guy and have taken significant portion of my portfolio into cash as the market seems to be a bit toppy and I think will react poorly to whoever wins the election (tons of problems with each candidate) and to the eventual increase in rates by the Fed. I may try to shift these funds to other vehicles such as notes. 

Originally posted by @Natalie Kolodij :

@Ryland Taniguchi This was great insight thank you. 

Why do you think outlier areas dropped in value in 2010? Just more volatile and more greatly affected post 08 crash or? 

I'm in Snohomish county and looking to live a 2 year live in fix/flip. I feel like we're pretty tapped out in terms of pricing right now and I do worry about it not continuing to rise as aggressively. Although I feel with Seattle remaining to rise it will continue to drive buyers further out for affordable housing. 

I have noticed that even lately Lake Stevens is holding behind Everett even for housing prices. I'd even go to Marysville before Lake Stevens at this point (based on current selling prices). I'm just not sure why the difference in appreciation there versus other nooks in the county. 

Any thoughts on Snohomish County in General? 

The live in Flip is a good idea and its not  with out its risks. I do agree with Ryland that you could greatly reduce your risk if your live in flip met 1-2% rule with respect to the price you bought it at + rehab if applicable. 

A lot of agents will push about the tax free IRC 121 homeowner exemption after 2 years for live in flips, but it only works if there is still  net profit or equity after the 8-10% closing costs it takes to sell in WA (5-6 commissions, 1.78% excise tax, and 1-2% escrow/title/escrow/concessions). 

In a down market equity is at the top of the capital stack behind the lenders mortgage and equity is the first to get extinguished. With sufficient cash flow relative to your monthly out go, you can have a higher chance of making it through. 

Another way you can reduce your risk to combine a couple principles such as buying below replacement value and the 1-2% rule mentioned above which adds more layers of risk mitigation. Its certainly easier to find a 1% deal in snohomish and pierce counties than it is in King County.

Originally posted by @Ryland Taniguchi :
Originally posted by @Natalie Kolodij:

lol telling investors who weren't around a long time to expect a 2000-like crash has no quantitative value. If we weren't around for it we don't know what it means to expect now.  

I've always considered this a terrible cash-flow market and much better for flipping. Rarely do people get the 1-2% here...so what would you advise investors to be acting on right now if you feel there is an impeding leveling/downturn?

I tell everyone to diversify. 1/3 wealth preservation like Performing Notes and Tax Liens with a min 6% IRR. 1/3 cash flow like BRRRR or turnkey with a min 18% IRR. 1/3 accelerated wealth like flips and development with a minimum 60% IRR.

 Thank you for the information. We've now surpassed some of the concepts I've dove into. I'm going to have to attend one of your events in the future haha 

Some very interesting insight into the state of Washington economic scene . Is there anyone out there that knows specifically about values on Whidbey Island in Washington? I have a single-family lot just outside of Coupeville in BonAir. (Not waterfront, but a corner lot). Has public water in the street and I forget what the sewer situation is. I've owned it for prox 10 years. Should I continue to hold or sell it? Don't really need the money and would prefer to do a 1031 exchange. Ideas are welcome I live in Alaska so have no clue about the reality of what's happening with values.

I think it's pretty obvious the crazy market in Seattle. My rent was skyrocketing, I realized I could never afford to buy a primary dwelling in the area of Seattle I desired, none of the investor numbers made sense, and my 12 minute commute into downtown was quadrupling. So when my work had a project in Skagit County, I jumped on the opportunity for a better and more affordable quality of life. You don't need to convince me that Seattle is just crazy.

I like life up here. We get some of the good effects of the Seattle market, can raise rents the same 10-15%, find good deals, have an influx of workers looking for affordable housing (not the tech workers, but the blue collars), but still able to find good contractors, and get along with the local municipalities and inspectors. My rentals are doing well, and we are about to get started on a BRRRR. It's not perfect either, but I'll invite investors to look up here.

@Julie Marquez I'm in Snohomish but have started looking into Skagit county. 

I've seen 4 houses in Everett go under contract for just under $300k this week that were all under 900 sq feet. In EVERETT. I work here. It's hobo central. I do appreciate it's improving...but I will pass on that deal. 

@Natalie Kolodij I grew up in North Everett, I know exactly what you are talking about between the hobos and prostitution, but that seems crazy! It's all trickling up north along I-5, just look at the growth of Marysville and Smokey Point, and then up to Skagit - where I'm comfortably positioned and ready for the positives of the influx on my properties.

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