To flip or not to flip: market crash?

15 Replies

J Scott mentions that most people are reluctant to start investing because it's "not the right time" to buy or sell. He writes that there are only two conditions that make a successful flip and that's to buy at a low price or sell at a premium. You don't need both. Given the looming threat of a market crash, we would all be looking at buying at a premium and running the risk of selling at a low price. Needless to say, this is not the goal of a flipper. What are you all doing to brace for this dynamic? Does this affect your plan for flipping? What sort of catalysts or measurements are we using to know when to off load our flips or homes financed with short-term money? Are there any unique exit strategies that you could highlight? Cheers!

@Michael Plante

Well homes are grossly overvalued, interest rates are at an all time low while 5% of the USD was printed last month alone. Eviction moratoriums are about to end and the foreclosed market will be flooded more than likely crashing prices all around. I mean it is inevitable, is it not?

Originally posted by @Christian Tynan :

@Michael Plante

Well homes are grossly overvalued, interest rates are at an all time low while 5% of the USD was printed last month alone. Eviction moratoriums are about to end and the foreclosed market will be flooded more than likely crashing prices all around. I mean it is inevitable, is it not?

 Overvalued according to whom?



Well first, Brandon Turner, David Greene and others talk about homes being overvalued across the country almost every week as of late. Second, I can go on Zillow and Realtor and see house going for prices that are NOT justified by the going rates of rent. Meaning that only those with a significant amount of capital or leverage are buying up properties to hold and rent (because they can) or Joe and Jane Doe are spending top dollar across the country for that white picket fence and big back yard. 

Greg H., your comment gives me great confidence and urged me to look back to the numbers. My solution, when caught in a weird scenario like I mentioned above, is to hold until the market is adequate for a sale of that property (and I might be able to scalp a little payday when I refi to a conventional loan if the property is appraised high enough). Rent in the short-term.

The one predictable thing about Real Estate is that it is a cycle.  The not so predictable part is timing and somethings it is not so easy knowing what part of the cycle you are in. We have been flipping since the last bust in 2008. In our market, it is true that the margins are tighter and the deals are harder to come by so it means we are not able to do as many flips. We look at multiple outs for all of our deals. For flipping we want to make sure that it will at least breakeven after expenses as a rental. That takes out the high end flips and the big fat juicy margins I hear about, but it provides us with a comfort level. Life is all about taking risk. Doing you next real estate project is a risk. Not doing the next real estate project is a risk. You have to decide based on possible out comes which risk you prefer.  

Originally posted by @Christian Tynan :

@Michael Plante

Well homes are grossly overvalued, interest rates are at an all time low while 5% of the USD was printed last month alone. Eviction moratoriums are about to end and the foreclosed market will be flooded more than likely crashing prices all around. I mean it is inevitable, is it not?

I disagree with you 100%. Phoenix IMO is still UNDER valued. 

While you don't need both (buy low or sell at a premium), you definitely need one of the two.  Buying high and risking selling low is guaranteed to fail.

You have no idea what the market will do.  Buy something where you can do a quick, but good flip, and get it finished well ahead of the market slow down for the fall.

@Christian Tynan , to actually answer your underlying questions: as Theresa mentioned, quick flips are always a great option.  Shorter timeline, means less likely the market will shift.

Alternatively, larger projects with much larger margin also create a buffer.

Lastly, not carrying "inventory". Meaning if you are one of the lucky people who have the capital to buy more properties than you can actually actively work on at anytime. This goes back to timeline. If I buy today, but my teams are tied up for 3 months working through other projects, than there is a higher likelihood markets will shift and I won't hit ARV.

I've been in the biz since 1995, rode out 2007-2008, and was a Fannie Mae Broker for REO's.

What most people are missing is rather obvious - DEMAND will disappear at some point, and then inventory grows, and prices drop. Everyone can't buy a 500k house, ain't gonna happen.

The 2nd point - the whole "this time is different" because of no Subprime, etc, is flawed, when we were listing REO's right up until 2019, at LEAST 50% were people with good loans, who strategically defaulted.

Not subprime at all.  

They hired attorneys and lived for free, then bought in their spouses name and bailed near the end. 

Having to prove a transaction wasn't a "Buy and Bail" was actually a loan underwriting requirement for Fannie/Freddie loans at one point, it was that common. I'm saying this as a caution to those who think subprime caused everything - in reality, subprime was the catalyst (ie, COVID today) and as the equity disappeared, people defaulted in droves, as soon as it became Socially Acceptable to do so.

COVID essentially just gave everyone a free pass to default, and not be embarrassed. 

4th qtr 2021 is the concensus, among those I still talk to regularly in the Default Servicing space(I used to own a mortgage lender/servicer company, back in2007, got out with my skin but barely. Still have a lot of banking connections.)

Evictions start July 1st, buckle up and enjoy the show.  

Time to get over the PTSD of a once in a generation market crash.  The last 2 market crashes were 85 years apart. Recency bias makes people want to believe it is going to happen again. The same thing happened to people coming out of the Great Depression who hoarded cash their whole lives believing the next Great Depression was just beyond the horizon. It wasn't. 

Apologies that my opinion doesn't fit the current media and public narrative, I don't follow the Herd.

When I started in 1995, it was the bottom of the last cycle, happens every 12-14 years, previous to Subprime it was the S&L crisis

Very well documented if you do a bit of research.  

I remember my processor telling me "stated income is illegal"  when I showed her lender programs, in 1995. Because it existed prior and pooped up again around 95, though limited in scope, it grew quickly.

"

The first major housing bubble in US history occurred in 1837, coinciding with a stock market that also peaked right around the time housing prices did. Once both stock and housing prices crashed, banks got super-cautious with their lending (sound familiar?) and held on to their reserves of cash, silver, and gold.

Speaking of gold, though, the 1849 Gold Rush put more of this into circulation, which again drove up housing prices and caused yet another bubble. Railroad stocks drove the boom-bust cycle of the 1850s, but the Civil War put most economic speculation on ice for the duration.

The Reconstruction era saw yet more booming and busting, culminating in the crash of 1879. Things picked up again in the Gilded Age 90s, and then again in the Roaring 20s, which ended in the worst stock market crash since…well, ever.

Needless to say, home values were on the low side throughout the Great Depression years and didn’t pick up much until Johnny came marching home from WWII. The 1970s and 1990s saw further ups and downs, but the nation’s most notorious real estate bubble of modern times started blowing up in 2002."

Edit - it should be noted that we didn't really see a constant up and down cycle every 12-14 years, until we went off the gold standard in the 1970s. 

Great read is Milton Friedman's "Money Mischief"  which goes all the way back to Roman times for inflation and debasing of currency. 

Also - Stocks had quite a rocky ride in the 50's, 60's and 70's, all the way to the dot-com bust in 2000, which was the lead in to the real estate runup to 2007, rates were held too low for too long. Subprime was a sideshow, derivatives were the real timebomb, read Liar's Poker and The Big Short.

Originally posted by @Richard Foxx :

I've been in the biz since 1995, rode out 2007-2008, and was a Fannie Mae Broker for REO's.

What most people are missing is rather obvious - DEMAND will disappear at some point, and then inventory grows, and prices drop. Everyone can't buy a 500k house, ain't gonna happen.

The 2nd point - the whole "this time is different" because of no Subprime, etc, is flawed, when we were listing REO's right up until 2019, at LEAST 50% were people with good loans, who strategically defaulted.

Not subprime at all.  

They hired attorneys and lived for free, then bought in their spouses name and bailed near the end. 

Having to prove a transaction wasn't a "Buy and Bail" was actually a loan underwriting requirement for Fannie/Freddie loans at one point, it was that common. I'm saying this as a caution to those who think subprime caused everything - in reality, subprime was the catalyst (ie, COVID today) and as the equity disappeared, people defaulted in droves, as soon as it became Socially Acceptable to do so.

COVID essentially just gave everyone a free pass to default, and not be embarrassed. 

4th qtr 2021 is the concensus, among those I still talk to regularly in the Default Servicing space(I used to own a mortgage lender/servicer company, back in2007, got out with my skin but barely. Still have a lot of banking connections.)

Evictions start July 1st, buckle up and enjoy the show.  

It is intriguing to see your July 1st date. The forebearance homes are always in my mind.

I do like to see a correction. Unfortunately, the current market shows really strong appreciation, seems to be inflation driven.

At this moment, I think that 2022 might be another record year of appreciation.