Hey there BP! Any smart entrepreneur will tell you that they don’t have to be an expert at everything; they just have to surround themselves with people that are experts in their area. This applies to real estate investing of course, and today we are going to do an “interview” with one of my experts, a Realtor named Drew.
We have done many transactions with Drew for fix and flips. I have used him over and over again because he is an expert in his field and really understands what investors are looking for. He also knows the market and has sold our homes at or above asking with multiple offers, even in a down market. I have invited Drew here today because he has a unique background in data analysis that has enabled him to integrate data analytics into his real estate practice.
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Me: Welcome, Drew!
Drew: Hi, Matt. Thanks for the invitation!
Me: So let’s get to it. You have represented us on several sales of fix and flips. How does a house flipper add value?
Drew: In my opinion, it’s about convenience to the buyer and enabling them to finance the purchase. You start with a property that would typically require a cash buyer because the property could not get a Certificate of Occupancy, hence no lender would write a loan. You take a property like that and through repairs and repositioning are turning it into a mortgage ready home for an “A1” buyer.
Matt: What are some of the biggest mistakes that you see house flippers make?
Drew: I see them make two major mistakes: over-improving a property and pricing high to leave room for negotiation.
Matt: So let’s talk about over-improvements first. As a flipper we all want to create something that pops, but when is it too much?
Drew: Well, there is a law of diminishing returns in real estate. The more you improve a house, the less the odds you will recoup the cost of those improvements. There is an art to knowing if you will get your money back on an improvement. No matter what you do to a house, it’s not going to sell for $500,000 if all the houses around it are selling for $300,000.
I think many house flippers can get away with doing less to the house. If something is not working or is old, remove it, don’t replace it. If the cabinets are old, replace them with fewer cabinets. Paint with neutral colors. Go for the money makers — kitchens and baths, but don’t get crazy; just make it nice. Also, house flippers spend lots of money on pretty improvements, but don’t address the things that will trip a Certificate of Occupancy or Homeowner’s Inspection. It’s these types of things that will scare off your buyers, not the type of cabinets you used.
Matt: Ok, got it. So let’s talk about overpricing. When I flip a house, I am very proud of my product and have been known to push the price too high. You have challenged me on this, and since I started listening to you, our product has sold much faster. Tell me more about how you determine the right price for a home.
Drew: Pricing a property is NOT about how much you are going to get for it. Pricing is a tool to get showings. The more showings you get the more you will get for the property. The longer a property sits on the market, the fewer showings you will get. I consistently get over asking price for my listings and have a highest and best offer round within 45 days on market, when my clients trust the system.
For example: A property is actually worth $300K and the owner thinks it’s worth $320K so he lists at $349K to “leave room for negotiations.” After 45 days on market, a typical owner will drop the price to $325K and claim they are giving the house away. Meanwhile, the listing is going stale and losing value, so they are chasing the market down at this point. The market’s interest in the property continues to decline, and it’s time for another price drop to $300K and finally an offer comes in for $250K after 90 days on market.
Matt: So what’s the alternative and the method to get a house sold quickly for the right price?
Drew: First off, you have to price it right from the start. Be the lowest priced house in its subdivision on the market and get all the showings. Market the property for three weeks. At the end of the first three weeks, collect the feedback and count the number of showings. Ask your agent for a listing activity report and make an educated decision at the end of three weeks.
You need at least 11 showings in the first three weeks to get one low ball offer, like the $250K in the example above. You need 21 showings in the first three weeks to have a bidding war and attract an “A1” buyer to get the maximum value for your property. If you don’t get the showings or a reasonable offer, you are overpriced. Make an adjustment during week four and get your house under contract within the first 45 days on market.
Matt: How do you decide how much of a price drop you should make?
Drew: It has been my experience that lower asking prices are met with frantic buyer response, multiple bids and best and final rounds. Consumers are educated and they know a good deal when they see it, but they need to see it and price drives showings, so price it low, get the showings and attract the “A1” buyer that will value your property at its highest.
Don’t get emotional about a price drop. You just need to drop it into a lower price bracket and attract new buyers. If you do an incremental price drop ($5K to $10K), all you are doing is showing the same pool of buyers you are desperate. I have a proprietary formula that uses data analytics to prescribe the “right” price reduction. Keep in mind that with today’s interest rates at ~4%, you need to drop $25K to move down $5K in Gross Income and $50K to affect the result set of major RE search engines. You can price below market value, and the market brings it back up. Trust the market.
And let me make a key point here: Never drop more than once because it’s a signal that something is wrong with the house or the seller’s situation. Drop it once if you must, and make it deep to produce a bidding war and let the market drive the value.
Matt: You talk a lot about value. Can you elaborate on that?
Drew: Yes, I’m not talking about getting the highest selling price. I’m talking about maximizing profit and factoring in the time value of money, which includes carrying costs and repair demands and actually getting to the closing table. All buyers are not created equal, so you need to attract a motivated “A1” buyer. “A1” buyers are happy to have gotten the opportunity to buy your home, so they don’t suffer from buyer’s remorse, and they make only reasonable repair demands and attorney review goes smoothly.
Matt: What do you mean by an “A1” buyer, and how can we attract them?
Drew: Ok, so not all buyers are created equal. Some buyers will come along and cause problems for you. These problems will show up as a delayed closing, lots of repair demands, and they may even back out of the deal half way through. “A1” buyers are the opposite. An “A1” buyer is someone who currently owns a home, has it up for sale, and it’s already under contract with a scheduled closing date, typical within “45 days.”
This situation creates two things that benefit you. The first is cash from the sale of their house, typically enough to qualify for the best interest rate in the market, which means more buying power. The second is a tight timeline to close — they have their house under contract and don’t want to be homeless. As you know, in NJ, buyers can back out easily, not sellers.
The way you attract an “A1” buyer is by having a well-priced product with no evident problems. “A1” buyers aren’t picky; they don’t have the time to be picky. They just want a quality house with no problems in move in condition. If you can create a product like that and price it well, you have a good chance of attracting an “A1” buyer.
Matt: Thanks for your time, Drew. To wrap it up, can you give me some key points that the house flippers reading this need to know to be successful?
Drew: It was a pleasure. Here are some things to keep in mind:
- Showings are controlled by asking price.
- The actual price a property sells for is controlled by the market, not the asking price.
- Nobody controls the market.
- Location is fixed (60% of the value of the property).
- Size is basically fixed (30% of the value of the property).
- Seller controls (10% of the value of the property) smell, condition, upgrades, and staging.
- Most of the financing factors in the buyers equation are fixed, such as their income, credit score and down payment.
- Attract those “A1” buyers, such as parents with children in the school system who want to get into or stay in the school system are highly motivated, especially if their house is sold.
So BP, I hope that was of value. I’ve learned a lot from Drew and others like him that I rely on to help me in my business!
So what did you learn? Any other tips that you fix and flippers have learned out there?
Let me know what you think!