I'm having essentially zero luck the past few months finding decent rehab deals at numbers that make sense. Probably averaging twenty cash offers per week and batting a cool 0.00% so far. 250 offers without a single deal seems pretty unlikely so either the market is that tight or i'm simply being too cheap?
I know this topic comes up regularly but figured i'd start the new year version. What's working for you? MLS, direct mail, networking, probate, etc?
My deals are still coming from my direct marketing. The main issue in my markets is equity. My markets have so many properties with no equity. Unless I create equity (short sales, sub-2 holds, etc) the pool of sellers is too small.
You're probably being too cheap, but only compared to what others will pay. It may not make sense for you to change your buying criteria if the margins get too thin and risky. The main rehabbers in my farms are working volume and on incredibly thin margins by my standards. A house I need to buy for $85K, they are paying $110K for at trustee's sale. They are doing 5-10 houses a month. The smaller players aim for $15K-20K, even on the $200K+ houses. Just one major repair issue and additional hold time and the deal is toast. I don't get it.
Last year an agent brought me an investor buyer on an almost finished rehab. He paid $95K and gave the agent $1500 for finding the deal. He had the flooring done, for probably $2500 plus some landscaping. He listed it with the agent for $5% at $134K. They got lots of offers in the $125K range, but in the end they couldn't get the appraisal higher than $117K and finally sold at that price, after six months. That's not a deal I'd want. But the investor was using his IRA funds and even a few K is more than he had the month before. Those guys are everywhere right now. Someone with cash, building their retirement fund, not needing to make a killing (or a living), is the the real competition. Add to that the new buy-and-hold investors who think cash flow is rent - PITI. Their purchase prices really skew things too.
I'm at a crossroad about changing my buying criteria. My husband always accuses me of being too cautious and needing overly wide margins. My thinking is that I don't get burned by deals I don't do. But I don't make any money on the deal I don't do either. His point is someone with skills, experience and capital (me) should be able to adjust to the current market. Still chewing on that.
Here’s another option. We’re getting more and more calls from some experienced rehabbers who want to pay close to full market price for relatively expensive, yet run down homes in really nice areas. One criterion is they have to sit on lots large enough to build out and expand the footprint. They are typically older properties and can’t command the rent that would result in a positive cash-flow, so they’d be of little current interest to a hedge fund.
One deal recently presented to us involved buying a $375k FMV run-down property for $350k and spending $100k to $150k to add several bedrooms and a bath, as well as a kitchen upgrade and polishing the rest of the place up. The resulting property in this neighborhood would be worth around $800k or so. Obviously the rehab costs would have to be scrubbed, but at first blush it looked like there was plenty of meat on the bones. We passed, but only because we have plenty of other deals that we're more comfortable with. The rehabber bought the place and I'm interested to see what happens.
It’s a bigger risk but a bigger profit and presumably less competition for the purchase. There still seem to be enough “normal” flips around to keep us busy and we haven’t done any of these (yet?) -- just reading some handwriting on the wall.
What do you guys think of this strategy? Anyone do any of these? Thanks.
Jeff
Jeff S Did the neighborhood have existing home sales of comparable properties in the $800k range? Or was the new ARV derived from avg sq ft.
I ask because I have thought about that exact strategy but decided against it because of my fear of neighborhood price ceilings. I don't want to be a 3,000 sq ft mcmansion in a nice neighborhood with avg sq ft of 1,800.
I do know of one BP'er who has had success breaking previously established neighborhood price ceilings. Check out Tom Tarrant. He lays out his deals on his blog and he's done that exact strategy in his market. One key takeaway that I got from his blog is that that particular strategy best works in gentrifying areas. Also, once he has broke the ceiling in a neighborhood he continually targets it since he created his own comps per se.
Glenn
Sounds like everyone is in the same boat these days. Lower margins, less deals. I can still buy and hold here at decent returns however those opportunities are quickly evaporating as well. I'm starting an overdue direct mail campaign of 1000 letters on Monday so hoping that over the next few months that will net a deal or two.
The plus side to all of this is that prices have risen to the point where new construction is feasible again in the upper middle class areas and above.
Has anyone seen any solid stats that show what the % of owner occupants vs investors is on the current buying frenzy? Agents around town all have very conflicting comments.
Jeff S
What do you guys think of this strategy? Anyone do any of these? Thanks.
Jeff
Jeff: Did the rehabber in this scenario actually have less competition when buying this property? I feel like there is no lack of rehabbers with backing looking for deals like this in the better areas. There are few to no "normal" flips in some markets. Here in Santa Barbara, the rehabbers are always looking at adding value by building out, even in marginal neighborhoods. While they aren't competing with many owner occupants buyers, they all want these deals and are competing with each other. The main issue is the permitting time. You have to be in for the long haul on adding square footage here. OK in an upswing. But declining value during rehab was not on most rehabbers radar in 2007.
Karen: I'm getting worried for you. I suggest not even saying the words or thinking the thought "there's no deals to be had". You don't want that to become self-fulfilling. The OC is huge market and I'm thinking there is at least one deal with your name on it. It's probably not going to pop on the MLS though. But it might! It would be easy to miss if you are sure there are no deals there. :)
K. Marie Poe You're right I shouldn't say there are NO deals. The fact is, we don't KNOW all the areas of OC, having just relocated here a few years ago, and have our areas where we are comfortable. The areas that we do look in are pretty healthy, and sellers list for market value. Not many fixers or REOs around, and when there is a fixer, they know the cost of repairs and just back their price down that much, with no room for any profits. What I look for are the ones that are in good areas, where there's potential to add value through increasing square footage, or on large lots with potential to split.
For buy and hold investors, there's more opportunity, as properties are appreciating.
Our focus mainly is more on new construction, and hopefully getting a commercial deal that we are working put together. It's a great project if it all comes together, but takes some time.
Sounds like you're doing good in your niche! Keep it up. Glad to see you back on here posting more.
Secondly, for several years now, the cost to build new is much greater than the cost to buy existing and repair, thus, adding on did not make much sense, especially when you add in permit costs along with longer holding times.
As prices continue to climb, costs to build will finally catch back up and the time to spec build will be back. Right now, i believe we are in the middle, so if you can get a small property where all other homes are larger, you may have a deal there.
I would also be curious to know if this rehabber makes out on that deal, please keep us informed Jeff.
K. Marie Poe, Will Barnard, and Glenn Espinosa
I'll certainly let you guys know what happens. This would not be the largest nicest property in the area. On the contrary, compared to the surrounding homes, it screams "rehab me." ARV is based on numerous actual comps, not square footage. I'm half sorry we didn't participate but it looks like we'll be doing some other deals with this rehabber and I know I'll be hearing all the stories.
I didn’t ask how much competition he had but he didn’t suggest there was any kind of fight. My guess is little. Paying full price on a relatively expensive dumpy property, that couldn’t be sold easily unless it was improved, is not likely to appeal to many flippers or lenders, at least at this point. Unless he had a hoard of cash or a sucker like me, it would have been difficult to put this together. In fact, he did have cash and wanted us to fund the purchase so he could fund the rehab.
Good point on the permitting, Kristine. We never worked in this particular city (way too high class for us) so I have no idea how long this could take. Remodels and additions are typically faster than new construction, but you never know. This was somewhat of a transitional project; somewhere between new construction and a standard flip. The twist was paying full price for it.
This thread is a great illustration of the current split I see in our industry. Those with lots of experience have to work at least twice as hard to find great deals, but are still successful and busy finding new niches. Others, who are just getting their feet wet or new to the area, haven’t developed the resources or relationships and are having a really hard time. We’d all be naïve to think the gravy train will last forever, so it’s important to think ahead strategically.
Keep your chin up Karen M.
Jeff
Great speaking with you Jeff, thanks for the call and PM.
I'm creating my own deals by finding land or lots and building smarter and less expensive than my competition. I've been very happy with the recently constructed homes. I have another one here in southern Utah that I just listed yesterday and will finish by February 1. I wanted it done in time for the giant parade of homes that occurs mid February and I will be surprised if it isn't sold by the end of February. I'm also working on another small lot subdivision here that I hope to be able to turn into a gated community just like my subdivision in South Texas. Rich
P.S. building in South Texas and southern Utah, I just can't relate to some of the prices and rehab costs being discussed in this thread!
I like the twist of paying full price. That can sometimes be the smartest move. Even experienced investor buyers can lose out when they get hell bent on getting a deal/discount instead of looking at their own bottom line.
We've done 2 of those. One in OC and one in Inland Empire. Both of them were profitable and we learned some things.
1. You will own it longer than 6 months.
2. City Fees vary greatly. We added 800 sq ft in both cities. One was 2k in fees one was 18k.
I think Will makes a great point that the resulting property must be conforming and that was a big qualifying factor for us.
We have not found the magic City that allows us to buy these with ease and when we do I probably won't be talking about it.
We bid on rehab deals several times a week and almost always lose. Folks willing to make a lot less than us generally pay more. I set our minimum profit margin for these deals at $40k given that we make at least $60k on new construction deals. The velocity of money on rehab deals is much quicker though if we don't need permits. I still like building new stuff because it is easier to sell.
Deals are primarily found from a few selective brokers and agents we work with, but a couple of wholesalers are worth dealing with too. We're considering ramping up a new yellow letter campaign in selective zip codes for some subject-to purchases with thinner equity to add to our portfolio properties later this year. Risking the marketing dollars is something I'd prefer for other rehabbers strapped for cash or wholesalers to do though so that I can pick from their lists ;-).
We also see REO lists from a few lenders and deals from our fund's submission engine. The best deals I find are from our network though.
Jeff S K. Marie Poe We actually just finished construction on a new 2350 sq. ft. house in Lake Forest. (I will post pics later) We built it on a lot that was a REO. The house had burned down and we picked the lot up. From start to finish it took about 6 months to buy it, do plans, get permits and final. Closed a few days ago. One of the neighbors asked us to try to split his lot so he can build a new home, so we're working on that too.
Will Barnard, you're right in that the cost of purchasing older properties and rehabbing reaches the point to where new construction makes sense, and that's where we are. I'd love to do some more of those, but lots are a rarity, as are "deals" on houses.
We have a pretty good market here in many parts of Orange County.
Rich Weese I wish we could find some of those lots!! I don't know how you guys build for as cheap as you do!
Helpful hint to builders: regarding permits, if you buy a lot and there's ever been a home on it, talk to the building department about giving you credit towards new permits. We do it all the time!
This is a great point...
We were a one-trick pony (REOs that needed $20-30K in rehab) for the first several years in this business. Once the market started to change, we were forced to as well. We have more deals in the pipeline right now than anytime in the past few years.
But to get there, we've had to change the types of deals we do (we're getting ready to do our first tear-down, our first "old" house and we've started to look for land to build on), the location for those deals (we've expanded from our county into the city and into a new state as well) and how we find them (we are doing direct marketing and networking with neighbors -- we just got a house under contract because my wife knocked on a neighbor's door to say hello, and it turns out she wanted to sell).
Having to change and move out of your comfort zone isn't fun or easy, but it can be very rewarding.
I would suggest all newbies do what I refused to do for a long time -- set up multiple avenues to find and complete deals, not just the one that is easiest and most comfortable. I wish I had done that earlier...
This is a great point...
We were a one-trick pony (REOs that needed $20-30K in rehab) for the first several years in this business. Once the market started to change, we were forced to as well. We have more deals in the pipeline right now than anytime in the past few years.
But to get there, we've had to change the types of deals we do (we're getting ready to do our first tear-down, our first "old" house and we've started to look for land to build on), the location for those deals (we've expanded from our county into the city and into a new state as well) and how we find them (we are doing direct marketing and networking with neighbors -- we just got a house under contract because my wife knocked on a neighbor's door to say hello, and it turns out she wanted to sell).
Having to change and move out of your comfort zone isn't fun or easy, but it can be very rewarding.
I would suggest all newbies do what I refused to do for a long time -- set up multiple avenues to find and complete deals, not just the one that is easiest and most comfortable. I wish I had done that earlier...
J Scott, For four years, I've been the same one trick pony of the $15k to $40k rehab/flip. And it was a great run, but the future looks more uncertain
To deal with the increased competition, I've set a strategic objective to expand to multiple avenues including sheriff sales and finding local wholesalers. My challenge is finding Wholesalers doesn't seem to bear any fruit. I think in the Northeastern Ohio area wholesaling is less common. The only wholesalers I've seem appear to have homes in need of being bulldozed over with market comps in the $20k avenue. I've hunted around and left messages for the local wholesalers I found, but, oddly no one calls back. Also, other flippers I've seen from Cleveland on BP say they are predominantly MLS purchasers.
Is it possible wholesaling is just not a useful venue in certain regions? Is there another approach I should be taking to reach them?
As a Realtor, if I find a deal, I'll buy it or sell it to one of my clients so I can make 5% not 2.5% and if I don't do either, I'll find an agent in MY office who can, 2.5% commission plus a 20% referral fee. Third, if none of the above applies, present it to one of my buyers. REI people always want to grind me on my commission. Those depending on RE agents are fishing in a pond with very few fish.
Looking for deals, think in the box. HINT REOs short sales come and go, but everybody dies.
Personally, I haven't found a decent wholesaler in my area yet. Despite receiving several emails and phone calls from wannabe wholesalers every week -- none of them ever seem to find a decent deal.
J Scott and Huggy Baird I think your experience with wholesalers is typical. Lots of newbies come and go and I'm guessing that's mostly who you probably hear from. In many markets the MLS has been really competitive for some time now, so it's hard to imagine what kind of deal a wholesaler relying the MLS could get. The learning curve and marketing dollars required to reach sellers directly these days is a much higher barrier to entry than what I remember from 10 years ago. It was cheap, relatively speaking, to work the MLS and/or drive for dollars and/or mail a few letters to out-of-town owners. Now newbies, in addition to whatever courses or mentors they are paying for, are risking real dollars on the marketing.
Huggy: I don't think there is any area where what we refer to as wholesaling doesn't make sense. IMO, there are always people looking to resell with a markup, but they probably aren't calling themselves wholesalers and you might not be meeting them in your day to day. Definitely continue to keep your ears and eyes open and network with everyone.
I study and look at a lot of property and owner info for a lot of markets. I've done several virtual deals and the biggest challenge, after figuring out the local data info, is not being in proximity where I can check out the property. I've been looking into other markets where I might be able to work leads in partnership with a ready-to-go buyer on the ground. My targets, without divulging the secret recipe, are title, legal and estate issues. I've looked at several markets in Ohio, a but haven't yet found a market where the availability of the data combined with the potential number leads makes sense.
Because he has the money, and/or because he doesn't know any better, he's been buying houses off the MLS whenever his realtor calls him. He feels he's getting a good deal. Minimum 10% ROI.
And the short sale lender is reducing the price based on your home inspection findings??
I made 4 offers and three lenders agreed to the discount in lieu of repairs, $54K, $48K, $66K, the fourth didn't accept the discount. After the seller accepts the sale it takes at least 60 days to hear from the lender so we have plenty of time.
And the short sale lender is reducing the price based on your home inspection findings??
In my experience, oftentimes if you try to get a discount *AFTER* the approval has been granted, the lender will require bids from several contractors to substantiate the problems (and costs of repair) for the issues you found.
If you can provide bids to substantiate the repair costs, the lenders tend to be somewhat reasonable.
Yes three contractor bids are required. I always get three bids and submit to lenders