Time to Fix and Flip… not so fast!

With 100% of my time spent with clients and running our local investment club I have a pretty good pulse on the local market and what people are doing and looking to do. The strategy that has been coming up A LOT recently is “Fix and Flip”. Specifically buying properties and fixing them to flip to End Buyers… or Retail Buyers. There are some reasons this seems attractive to newer investors, mainly the allure of a large chunk of cash when the property sells. BUT as I have seen far too many times this allure all too often becomes a mirage.

Let me say from the outset, I am not 100% opposed to this method of investing. I just don’t think this is the best time in the market cycle for it, and I don’t think anyone can come close to achieving their real estate goals relying on fixing and flipping… unless you have set a really low bar for yourself.

So let’s pull back the curtain and talk investor to investor.

Competition from investors

MANY factors seem to contribute to the absolute GLUT of investors focused on buy fix and flip. It is the strategy de jure. What once was short sales, (and wholesaling before that) has become a constant drum beat of the “book, tape and seminar” guys pushing buy fix and sell to make quick bucks. Unfortunately the only ones making quick bucks are the guys selling the mentoring. This makes it hard to find good quality deals.

Not all your “professional competition” will come from other investors either. In this area MANY contractors fix and flip properties to keep their crews working, and they can operate on a much thinner margin than you or I could ever hope to. They aren’t doing it for the profit, even though they are the owner, they are able to do it just for the rehab budget. Think about it, let’s say you pay a contractor $20k, his profit is backed into that number. He is very willing to do the deal and offer dollar for dollar less than you did for your profit. So if you were looking to make $15 grand… he is willing to pay $15,000 more than you.

Competition from end users

Events change people. You are not the same person you were 5 years ago because of the experiences of the past 5 years. WELL, what did we all collectively just go through as a nation… a recession, and a tough one at that. The scars are still very real for many people. They learned how to make do with less, shop for a bargain, and stretch a buck. So many are willing to try rehabbing their own home for themselves to build sweat equity. Now don’t get me wrong it’s not as easy as they think, they will under estimate their repairs, overestimate their abilities, way over pay for the property and in all likely hood live to regret the decision. But that’s little consolation to you now, you just wasted time looking at and analyzing a property you didn’t have a shot at getting.

Time

Our friend Gollum asked this riddle in the books Lord of the Rings long before they made a movie out of it:

This thing all things devours:
Birds, beasts, trees, flowers;
Gnaws iron, bites steel;
Grinds hard stones to meal;
Slays king, ruins town,
And beats high mountain down.

The answer to the riddle of course is: Time. And it is the enemy of your flipping deals too. We are seeing some return to a sellers’ market, but it is a little sluggish. There was a TON of inventory to burn through. Banks are still holding inventory, many city’s and municipalities have many tax liens they are working through. Every day your property sits on the market is not just interest you are paying, there are taxes, utilities, insurance, staging, and opportunity costs. That’s right, don’t forget about that last one, it could be the most expensive of all… what else COULD you have invested this money into but CANT? The only way to beat the waiting game of a evenly matched supply and demand market like we are seeing now is to lower your price… cutting into your profit. Or you could do a spectacular rehab… more on that in a moment.Financing delays are causing lots of heart burn to investors these days. Now I know the banks say they have loosened lending guidelines. But the truth is they have remained just as tight on many other conditions. So what if they are willing to be a little flexible on fico score and DTI if they still question every cent coming and going from every bank account your buyer has going back 3 months. Maybe your bank is super friendly and they only look at most of his bank accounts going back 2 months… is that really much better? I hope your borrower has documentation for every deposit, and has nothing even slightly fishy on his pay stubs or about his employment history.

Picky end users

End users of properties, the ones that don’t want to buy at a steep discount and do the work themselves, are willing to pay full retail… but often you are the one that pays in the end. In their mind they decided NOT to buy a property that needs work, and they want it to be PERFECT. And to get it to stand out you are going to have to throw in a bunch of extra finishing touches. Things that would normally be found in the next price category up. I am talking granite counter tops in starter homes, 5 head surround showers, and premium appliances. Unfortunately all this has the same effect of lowering your price… it cuts in to your profit margin.

Conclusion

Don’t get me wrong, I love real estate and I love real estate investing. This is just not the right strategy for most investors to be focusing on right now, all it will do is frustrate you and turn you into a former investor that goes around telling everyone “I tried that, It won’t work”. Don’t be that guy, invest in a way that will work.

I say, buy and hold now, buy and hold forever.