Selling in a seller’s market is usually much easier than selling in a buyers market, but there are many important factors to consider when inventory is tight and prices are appreciating. Don’t make the mistake of thinking a seller’s market means easy money: cause it won’t go up forever. Stick by your rules, evaluate the repairs that make the most sense and pay close attention to your competition to get the most profit you can.
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It is easy for house flippers to get caught up in a seller’s market and count on appreciation to make money. Many flippers lost everything in the recent housing crisis when they thought all that was needed to make money was to buy a home. Smart flippers know money is made by getting great deals or adding value to homes, not speculating on appreciation.
The 70% rule is a great indicator for evaluating fix and flips. The rule states a flipper should only pay 70% of the ARV (after repaired value) minus any repairs needed on a flip. An example: the ARV is 200k, 30k in repairs are needed, the investor should not pay more than 110k for the property (70% of 200k = 140k-30k= 110k).
I have done over 70 fix and flips with my father over the last ten years, but I never knew about the 70% rule until I found BiggerPockets. I started looking at our numbers and realized all of our deals were very close to the 70% rule. We may go up to 75% on a few deals, but those are usually homes that are newer with very few repairs needed. Newer, nice homes usually have less surprises than the older homes in worse shape.
Many investors ask if it is okay to break the 70% rule in an appreciating market, because it is so hard to find deals. My opinion is you should not change your buying criteria, based on what others are doing. Stick to your numbers and work harder to find deals. Also, make sure your values are up to date in an appreciation market. If prices are higher than they were a month ago, the 70% rule will allow higher purchase prices since you are using a percentage, not a hard number.
One of the most important factors in flipping is selling quickly. A BiggerPockets blog post recently broke down the daily cost to hold a property. That should have opened many investors eyes on how much it costs to sit on a house. In any market it is important to sell quickly due to carrying cost and opportunity cost. It is also important for a flipper to sell quickly to avoid market fluctuations. Even if a market is appreciating now, that doesn’t mean it will appreciation forever and chances are the appreciation is not out-running your daily cost to hold that property. If an investor gets stuck at the peak of the market, it is extremely difficult to chase prices down in a declining market. There is no real time indicator for when the market turns, in most cases it takes months or even a year to tell exactly when the market changed.
We always try to price our homes slightly below market to make sure they sell quickly and we avoid any market fluctuations. When we price a home perfectly it usually receives a decent offer about three weeks after it is listed. We may end up getting offers more quickly, but for whatever reason, usually we are in that three week time period. If we don’t have the home under contract in one month we will lower the price about 5% to 7%.
Opportunity cost can cost a flipper thousands in profits. Most flippers run into money problems at some time in their business. It takes a lot of money to buy a home, repair it and sell the home. A flippers biggest obstacle, especially when starting out is finding enough funds. If you have all your funds tied up in properties that are not selling quickly, then you are missing out on new opportunities to buy and make more money. By pricing a home too high in hopes of making an extra $5,000, you may be missing out on a deal that can make you $30,000.
In a buyers market, you may have to make your flip the nicest home in the neighborhood to get it sold due to all the competition. In a seller’s market, flippers have more flexibility on how many repairs are done With less competition, homes don’t have to be perfect to sell. I’m not suggesting selling homes in fair or poor condition, but sometimes average will get the job done. If your home is the only listing on the market, it has a great chance of selling without all the fancy extras.
You have to know your market extremely well to be able to predict what repairs are needed and what are not. The best way to figure this out is to look at the sold comps and what condition they were in. If all of the competition is doing extremely nice remodels, then you may have to as well no matter what the market is doing. If the homes in a neighborhood are selling with older kitchens and baths, then you may be able to skip those expensive repairs, which take up time and money.
Appraisers have a hard time valuing properties in a rising market, because the system they work in requires them to base their value on sold homes. Appraiser are able to consider listings or a rising market when determining value. Ultimately, if the appraiser does not also have sold comps to back up a higher value they will be questioned by their client why they came in so high. Appraiser like to avoid questions and redoing appraisals, because it costs them time and money. If the appraiser cannot find sold comps to support high values in a rising market, they may come in lower than contract prices.
This is another reason not to make your home the nicest and most expensive in an area. The most expensive home in a neighborhood has a better chance of not appraising at value, because there may not be any sold comparables to support that value. If a home does not appraise at value, the buyer has to base their loan on the lower value and bring more money to closing. If that buyer doesn’t have anymore money, then the sellers will have to eat the cost or look for a new buyer.
Because appraisals can come in low in an appreciating market, it may make sense to evaluate offers differently. If you do have a house that is at the top of it’s market and there are few sold comps that will support value, consider looking at lower cash offers. Cash offers close more quickly and won’t require an appraisal. Even though a cash offer may be lower than a financed offer, you may end up with more profit on the cash offer because it closed more quickly and you don’t have to worry about a low appraisal.
Even when priced perfectly, a home may received multiple offers in an appreciating market with low inventory. This is a tricky situation on fair market sales, because the idea of “highest and best” puts off many buyers. Highest and best is when the seller gives a certain amount of time for each buyer to raise their offer or leave it the same. Most buyers have come to realize that most banks are always going to ask for highest and best on their REO properties. On fair market sales, many buyers dislike it when a seller asks for highest and best. They feel if they are the first buyer to make an offer for what the seller is asking, it should be a done deal. I see buyers withdraw their offers all the time after highest and best is called (Why, I have no idea since they could simply leave their offer the same and see what happens.)
In situations where we get multiple offers, we always let all parties know we have other offers and give a deadline for when we will review offers. We let the buyers or their agents know they are welcome to raise their offer if they like. It is basically a highest and best we are asking for, without calling it a highest and best. For some reason, this seems to scare off less buyers than officially asking for highest and best.
When things are going well in a particular Real Estate market, it usually means contractors are busy as well. The busier a contractor is, the more likely they are to make mistakes or take way too long to get a job done. It is tough to keep contractors in line when they get too busy, but frequent trips to the property to let them know you are paying attention helps. Keep in contact with them frequently on the phone as well to make sure they are on track to finish on time. If you do have a contractor who is falling behind, it may even make sense to offer them a bonus if they finish on time or early.
Make sure you are communicating with your contractors as far as your repair plans as well. We work with our contractors on a lot of properties and they get used to what we do and don’t repair. If you start changing some of the items you repair due to market conditions, make sure they know exactly what you want. We are all creatures of habit and it is easy to fall back on what we have done in the past.
Pricing Homes – Knowing if You Are in a Seller’s Market
This can be very tricky in an appreciating market, because the sold comps may be lower than what you feel market value is. There are many things to consider when coming up with a value and price for your property. This can be tricky if you do not have a Real Estate license, because you won’t have access to MLS, this is why I highly suggest getting your license.
- Sold Comps: I always look at sold comps first. They will give me an idea of what is actually selling and what the appraisers are going to look at. Try to use comps in the same neighborhood, within 10 years of age, and that have sold within 3 months. Look at how long it is taking the houses to go under contract and sell. If they are all going under contract in a week or less, that may indicate you can ask a little more than the sold comps.
- Houses for sale: Next I look at how many houses are for sale in a neighborhood and how many are under contract. Compare how many homes are for sale to how many how many have sold in the last 6 months. If there are a massive amount of sales compared to listings, then you may be able to price a little higher than the sold comps. Look at the active listings that are not under contract, these are your competition. Look at how long these properties have been on the market and how they compare to your property.
The longer you do this, the easier it gets to value a home and determine what repairs to make. Size, condition, days on market, number of sales and listings all play a huge role in value. It takes time and experience to get a grasp on the market and sometimes the only way to figure it out is trial and error. The good news is the market will tell you if you are right or not fairly quickly. If you get 7 offers on the first day, you’re too low, no offers in one month and you are too high.
Do you have any more tips to add? Leave your comments below!