It’s been a relatively tough real estate market for rehabbers/flippers for some time now, and with the home-buyer tax credit getting ready to expire at the end of this week, it’s likely only going to get tougher.
That said, for smart rehabbers who know how to buy right, rehab right, and sell right, there is still plenty of opportunity to make money in this market. My business is proof of this — over our past 10 rehab projects, our average DOM (days-on-market) before our first offer was under 10, and our average sale price was 97% of our list price. Given that the average DOM in my area is over 100 and average sales price somewhere around 85% of original list price, that’s not too shabby.
Do I have a secret? Nope. Just common sense and the will-power to stick to doing what I know is right and not doing what I know will be harmful to my business.
With the new homeowner tax credit getting ready to expire, and with the relatively large number of buyers that have been shopping the past few months likely to go away, I thought now would be a good time to recap an article that I wrote last year, “The 8 Rules of Flipping in 2009.”
I’ve updated a couple of these rules for 2010, but for the most part, the rules are the same. If you’re a house flipper (or plan to be in the near future), here are some tips that you’ll hopefully find very useful.
- Best Condition & Best Price: It used to be that — to be successful — a house flipper needed to focus on having either the nicest house on the block or the lowest priced house on the block. With the number of houses on the market currently outnumbering the number of potential buyers by a very large margin, house flippers must now focus on having the house that is BOTH in the best condition AND the lowest priced among comparable homes.
I’m sure a lot of people who are considering this are thinking, “How can I offer the nicest house at the lowest price and still make money?” It’s a great question, and the answer is simple –- only consider fantastic deals when you’re buying. As the old adage goes, you make money when you buy. This is especially true in today’s market; if you can’t buy low enough to put the house in great condition and still sell below market, you shouldn’t be buying.
The nice thing is, now is a great time to pick up these deals. Between the glut of foreclosures that are likely to hit the market soon, the banks willing to take a loss by doing short sales, and the sellers who missed the tax credit boat and are desperate to get out from under there properties, motivated investors should have no problems finding great deals that will work as successful rehab projects.
- Know Your Buyers: I was at a Real Estate Investment group meeting last year, when an investor who focused on rental properties asked me, “How do you expect to flip any properties? I had a friend who was buying properties worth $300K and trying to sell them for under $200K, and couldn’t sell a single one!”
I’ll tell you what I told him –- in my current local market, there are very few buyers who are looking for properties over $150K. Sure, there are some here and there, but for the most part, today’s buyers are first-time home buyers looking for move-in-ready properties in the $90-130K range. Why is that? It’s because these are the only buyers who are able to both qualify a loan and come up with a down-payment. (they are getting FHA loans that only require 3.5% down).
So, it’s no surprise that this guy’s friend wasn’t able to sell his $300K houses for $200K — there just aren’t enough buyers at that price-point, regardless of how good the deals are.
Knowing your buyer base will allow you to appropriately focus your rehab and resale efforts – if the available buyers are looking for move-in-ready houses in the $90-130K range, you should be offering move-in-ready houses in the $90-130K range, nothing more and nothing less. I’m not saying the buyer base in your market is the same as it is in mine, just that you need to figure out what you buyer base is, AND FOCUS ON SELLING HOUSES TO THEM.
- Multiple Exit Strategies: Wanting to flip a house is great. Finding a house that can be successfully flipped is even better. But, in today’s market, any deal you consider should have multiple possible exit strategies — not just the possibility of a flip. And not just multiple potential exit strategies, but multiple strategies that you are convinced will work, if necessary.
For example, I like to have at least 3 of the following 5 possible exit strategies before I consider a deal:
- Wholesale to Another Investor
- Minor (or No) Rehab and Rent
- Minor Rehab and Sale to Investor
- Minor Rehab and Flip to Occupant
- Major Rehab and Flip to Occupant
If you can’t find at least two different exit strategies for a property, don’t buy it. Because in this market, there’s just too much chance that your first strategy won’t pan out, and if that happens, you want to have alternatives.
- Know Your Comps: With the market changing on a daily basis, this is no time to trust something as important as comps to unreliable sources. That means you shouldn’t be using tax appraisals (those guys don’t even go inside the house to get their estimates), you shouldn’t be using websites like Trulia and Zillow (they may be right on, but they may also be very high or very low), and you shouldn’t be trusting your real estate agent unless they actually give you the data to verify for yourself.
The only real way to find comps is to pull actual MLS (or tax record) data, and sort through it yourself. You’re looking for similar properties (pretty much same style, same # of beds and baths, same lot size, same condition) that have sold in the past 3 months within the same subdivision (or .5 mile radius). Don’t go back 6 or 12 months (the market has changed since then), don’t look at properties that are nothing like your own, and don’t look even 2 miles away (market conditions can vary drastically over even short distances).
Your agent should be able to pull all the comp data you need, but it’s YOUR responsibility to make sure the data used is applicable. Too many agents will give you data that supports a high ARV, just to get you to buy the property. Trust the data, but only if you sort through it yourself. And if you can’t find any data for your area, ask yourself why that is? Is it “out of the way?” Is it a bad neighborhood where buyers don’t want to buy if they have an alternative (and these days they do)? Or is it such a desirable neighborhood that nothing has even been listed for sale in the past year (this is a good thing)? Even lack of data is an important piece of data when it comes to comps.
- Location, Location, Location: While this has always been a key maxim in real estate investing, the difference between then and now is that today, you need properties that will get a lot of potential buyer traffic through them. This means buying in the front of subdivisions, buying on well-traveled (but not too busy) roads, and buying in areas near shopping and other amenities that draw crowds.
Many buyers these days are finding houses because they drive past them and see signs; they may not have even been on the market previously to buy, but they stop into yours and they fall in love. If you buy in locations that will only get foot-traffic if an agent brings them in, you’ll get a lot fewer potential buyers through the house, and today, it’s all a numbers game. You need to get lots of buyers to at least look at your property, and just listing on the MLS and waiting for agents to bring potential buyers though isn’t going to accomplish that goal.
- Staging: I’m a huge proponent of house staging. And I firmly believe that while staging may not get you a whole lot more money for your property in today’s market, it will certainly increase your likelihood of getting offers if your house is priced correctly. While buyers aren’t likely to increase their spending limit in this market (they don’t have to), they will most certainly be drawn to houses that they can imagine themselves living in.
Staging accomplishes this by allowing your buyers to make an emotional connection with your property — by allowing them to associate it with a home, not just a house. A house without any furniture is just a faceless property…a nicely decorated home provides a feeling of warmth, comfort and security. And not only does staging create an emotional connection, but it allows those buyers who aren’t very imaginative (read: MOST BUYERS) to get a better feel for how the house will look once they move in. In fact, if a house is staged well, it will give your potential buyers ideas for how to make their next home (this one!) even better than their last.
- Know The Rules: House flipping is a lot more complicated than it appears on TV. There are lots of rules, regulations and roadblocks that — if not heeded — will hinder your ability to make money in this business.
For example, many rehabbers don’t realize that once they purchase a property, while they can sell now sell their property to an FHA buyer within 90 days, it requires jumping through hoops and finding a mortgage broker who can get that kind of deal done. I can’t tell you how many people I’ve met who had a plan to buy a property, slap on some paint and carpet, and resell to a retail buyer in just a couple weeks, and then got caught by all the extra FHA regulation that surrounds a quick flip. So, instead of selling in a couple weeks, they end up having to hold onto the property for three months, increasing their holding costs (and tying up their cash) while they wait for the opportunity to sell to their FHA buyer. And in some cases, the buyer didn’t want to wait around and the deals fell through.
To be successful, you must know the rules — this includes buying rules, selling rules, lending rules, construction/permit rules, etc.
- Build A Strong Team: The difference between a successful real estate investor and an unsuccessful one is the team she surrounds herself with. A real estate investor is only as good as his CPA, attorney, real estate agent, inspectors, contractors, title company, etc. When it comes to pulling off all the other rules I listed, you need a strong team to be successful; if you don’t have that strong team, you can bet your competition does.
A weak team will cost you time, money and headaches that you can’t afford. All it takes is for your agent to negotiate poorly, your attorney to miss a contract loophole, your inspector to miss a structural problem or your contractor to screw up to turn a profitable flip into a big loser. A couple of those can quickly end an otherwise successful real estate career.
Photo: Feliciano Guimarães