Reprint of Ezine Article: Flipping Houses in a Down Market

Flipping Houses in a Down Real Estate Market

The last couple of years in the real estate market were so hot that anyone could make money whether they knew what they were doing or not. With the current down market, a lot of the folks who were boasting of their real estate prowess are no longer visible. The investors who have either been around for a while or who are not in real estate for the quick buck are still in the game, finding deals and making money. Good money.

One of the keys to making money in a down market is knowing what caused the down market in the first place. If you know what is slowing down sales in your area, you can come up with creative ways to solve both sellers’ and buyers’ problems.

There are several components that contribute to a down market. Your area may have one, two or all of these factors or you may have a unique situation that is affecting your market. Some common components of down markets are:

Too many houses on the market
Houses prices over-inflated due to past hot market
Higher interest rates which limits the number of buyers
Economic turmoil in an area
Media projecting continued down market/bubble burst

The first factor, too many houses on the market, works in the investor’s favor. It is indeed a buyer’s market right now. Too much supply means that sellers have to come down in price, offer extra inducements or have their house in such an outstanding condition that it stands head and shoulders above houses in the same price range.

Too many houses on the market means you have a lot of choices and can afford to be picky about the deals you choose to make. Sellers who truly need to sell their houses (as opposed to those who saw the high prices their neighbors’ houses fetched and put their house on the market “just to see” what it would bring) are feeling the squeeze and are much more willing to deal.

The recent red-hot market led to house prices rising at unheard of rates – in some areas housing prices went up 30% or more in one year. The prices were driven by a real estate buying frenzy. Eventually prices got too high and buyers were no longer willing to part with that much money. Once demand drops, supply starts to increase. When supply increases, prices drop until the demand for the product returns. Housing prices needed to “correct” and, depending on what area of the country you live in, that could mean they need to drop or at least level off. In many areas of the country, prices have dropped, somewhere between 3% - 10%, sometimes more. Buyers are waiting for prices to stabilize before they put their money back into real estate.

Higher interest rates apply pressure on the market in a couple of ways. Because people buy based on what they can afford for a monthly payment, a higher interest rate means that they have to buy a less expensive house than they may have gotten when interest rates were low. Higher rates also knock some buyers completely out of the buying equation – they can’t afford the monthly payments on a decent house so they don’t buy at all. Fewer buyers means less demand which creates more supply.

The increase in interest rates is also severely affecting those people who bought their homes a couple of years ago with an adjustable rate mortgage. Their mortgage payments are going up and, since most people are living paycheck to paycheck, the extra money that now must go to the mortgage is creating a squeeze on their wallet.

Back in the eighties, when interest rates routinely were between 12% and 18%, there was a huge increase in total owner financing of properties or owners taking back a private second mortgage for people. Sellers were happy to get 8% - 12% on their money and buyers routinely paid it. Higher interest rates can lead to owner financing becoming more accepted again.

Economic turmoil in an area is probably the biggest problem that a flipper will face. If an area is going downhill, if the job market is weak and crime is on the rise, people are not going to buy houses in that area. Plain and simple. My advice? Look for a better area. People don’t buy their personal homes in bad areas. Sometimes investors will have properties in bad areas, but this is a poor choice for a target market. You want to flip houses in nicer neighborhoods because it increases your ability to find a buyer. Why limit yourself in an already tough market? Don’t mess with it.

One other factor that has contributed to the down market is the media sensationalizing the real estate bubble and projecting a collapse. Now that the bubble has burst, the headlines really have nothing to scream about. “Housing Prices Still Down.” “Housing Prices Level Off.” Eventually they are going to have to say, “Home Sales Improving.” Once the drama is out of the equation, they go on to the next big thing.

There are two parts to the flipping equation that you have to consider in a down market. The first part of the equation is buying right. You have to be able to strike a deal either with a great price or great terms or both in order to have a property that another investor will want. The good news is that sellers are now more willing to deal.

Most investors look to acquire a property at 65% loan to after repaired value. That means that if a house is worth $100,000 fixed up, they want to pay a maximum of $65,000 for it. Better yet if the repair costs are minimal. If the place needs $20,000 in rehab, an investor won’t pay $65,000 for it. They may pay $50,000 for it. Know your investors’ parameters.

Some buy and hold guys will pay up to 80% LTV, especially if it is a nice house in a nice neighborhood that doesn’t need work. The key here is that the property will have to cashflow. That means that the rent that can be charged will have to cover mortgage payments, maintenance, possibly any other costs associated with the property (such as a water bill in a multi-family unit) and leave $100 or more a month as a profit to the investor.

The second part of the equation is getting good terms from the seller. Many investors will buy a property at a price that is close to market value if they can get great terms. That means little or no money down and getting some form of owner financing on the property, whether it is a wrap mortgage, lease option or taking the property subject to the existing mortgage.

The key is to make sure there is money on the table for the investor that you flip to. The birddogs and wholesalers who make the most money are the ones who keep their fees reasonable and sell volume. Gouging your investors is a sure-fire way to kill your wholesaling or birddog business.

So, who do you flip to in a down market?

Your best bet is a Buy and Hold Investor. These people are in real estate for the long run and they are more flexible as far as loan to value ratios go. They like terms on a property, especially if they can get a property without having to go get a mortgage in their name.

Fix and Flip Investors need a better deal than the buy and holders. That is because they are going to have to put money into the rehab and they will have holding costs while they fix and again while the house is on the market. Their expenses are just higher. These are the people who are looking to get the house with rehab money rolled in at 65% LTV or better.

You still may be able to make a deal on a house that won’t cashflow or that you can’t buy at a great discount. You will need to get great terms, such as owner financing, a lease option or contract for deed or take the house subject to the existing mortgage. The buyer you are looking for is outside the investment community; you are looking for a Civilian End User. These are people who have cash to put down and actual verifiable income, but their credit may be dinged or they may not have worked on their job long enough to satisfy a lender. When you get a house on great terms, you can turn around and put a slightly higher price tag on it and offer it with owner financing terms. Take a sizeable down payment to put money in your pocket, wrap the mortgage payment so that you make sure the mortgage gets paid, and sell it on lease option or Contract for Deed terms. A year or two in the house can help your buyer build credit so they can refinance out of the terms. Or, you may not want them to refinance out if you are making good money on the spread between what you are paying for the property monthly and what they are paying you monthly.

So where do you find your buyers? The first thing you need to do is build your investor list. I recommend going to local real estate investor meetings, watch the players and get to know the people. Many times people will stand up and say they are looking for certain types of properties. Depending on the meeting, you may be able to introduce yourself to the group as a wholesaler or birddog and ask people to contact you with their wish list. A great resource to find a meeting near you is www.nationalreia.com Click on “Groups” then click on your state on the map.

Another way to find investors is to contact mortgage loan officers and ask If they deal with investors. Real estate agents aren’t likely to give up their clients to you, but mortgage brokers will love you for finding properties for their investors to buy. The more properties an investor buys, the more mortgages they will have to fund.

The easiest way to find investors is to call all the “We Buy Houses” people. You will see the signs by the side of the road, on their cars, sometimes on their shirts. Some advertise in the Sunday classifieds under Real Estate Wanted. These people are always looking for good deals.
Building your civilian buyers’ list is a little tougher. If you have a property for sale, a sign out front that offers owner financing will attract people. When they call or come by to look at the property, ask them specifically what they are looking for and how soon they have to move. Tell them, “If this property doesn’t suit your needs, I usually have other houses available within a week or two.” Get their contact information.

Another way to build your Civilian Buyers’ List is to place an ad in the classifieds that leaves the details of the particular house very vague or you can say you have several houses. Always include the phrase “Owner Financing” in your ad. Buyers are very attracted to that, even if they have pre-qualified for a loan. As people call in, find out what they are looking for and get their contact information. If you have a house to show them, great. If you don’t, tell them you will have something soon. The main thing is to get the contact information.

You will need a tracking system for your buyers as well as your sellers. I use Prospectizer™ which gives me a website as well as a contact management system. If you are just starting out, you may want to use index cards and a shoe box. The main thing is to have all your leads organized in one spot so that when you get a call back from someone, you are not fumbling around trying to figure out who they are, where there property is and what they want.
Even with the current down market, there is plenty of opportunity for both the long-term buy and hold investor and the flipper. Today’s market presents one of the best buying occasions that investors have seen. If you know your market, you can find the deals and flip them to house hungry investors.

Barbara Grassey
http://www.therealestatebirddog.com http://www.realestatebirddog.blogspot.com

Wall St. Journal Article

Investor Joe Petrella sent this link over to me. He spotted a great article in the Wall St. Journal on the decline in the rate of home price increases.

The article talks about the slow down in home price increases nationally and tells you what areas have falling markets and what areas are still climbing in price. A must for every investor.

http://www.realestatejournal.com/buysell/markettrends/20061204-nutting.html

Let us know what you think and what is going on in your real estate market.

Barbara

Free Webinar -- Automate Your Real Estate Investing

I don’t know about you, but I cannot count the times I have written down a hot lead for a property on a scrap of paper or scribbled it down in a notebook, only to find it months later when that lead is old, cold and no longer gold.

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If you have been thinking about a website for your business or if you know you are losing track of deals and prospects, then you owe it to yourself to register for this

UPCOMING WEBINAR: Tuesday, December 12th 8:00PM - 9:30PM

For more information about the webinar please visit: http://www.prospectizer.com and enter Promotion ID: 357

(Read on to find out what that promotion code can do for you!)

This training is open to all real estate investors! You do not have to be a Prospectizer™ client to attend.

In today’s day and age, a website gives you credibility. But getting a website up and running, knowing what elements you need to have an effective website and what to do with it once it is up, are some of the questions real estate investors face. Here is your chance to find out how you can successfully leverage the internet to make your real estate business more efficient and to put more money in your pocket.

Do you have a website for your real estate business? And does it collect leads for you?
The developer of the Prospectizer™, Dan Stojadinovich, will conduct a one and a half hour webinar on how to use websites to systematize your business. Dan shows you
How to easily change the copy (your marketing message)
How to write effective copy
How best to promote your properties
How to build your buyers list
How to mass email your list

Have you mastered all these skills? Or do you have any questions that have not yet been answered? If so, Dan is providing webinar training where your questions will be answered, and best of all, you will NOT HAVE TO PAY FOR IT! Yes, normally these types of technology experts charge $150 per hour, but at this event it's totally free. Even if you are not a Prospectizer™ client, just learning one or two new marketing ideas can help tweak the efficiency of your business.

Register Now: http://www.prospectizer.com and enter Promotion ID: 357

Here are some of cool things Dan will teach you in addition to the standard topics:

- Dan will show you how to stake a claim to your very own high end real estate domain name so you have a great web domain name for your web site. Don’t listen to the people who tell you all the good domain names have been taken. Dan shows you a cool way to grab great domain names!

- How to change copy on your web site without ever playing phone tag with your computer geeks. Tired of having to pay every time you want to make a change to your website? Never pay a dime again for the rest of your life! Dan shows you how to make changes on your website instantaneously and pay NOTHING! - How about adding a new page to your web site? Just click a button, we will show you how! Once you see it, you won’t believe how easy it is!

- How to present your properties on the web site so they look professional. - How to build your buyers list- How to follow up with your prospectsAnd much, much more! If you ever had questions about the real estate web sites and technology then this training is for you. Make sure you tell your friends about it. Please feel free to forward this link to them.

http://www.prospectizer.com and enter Promotion ID: 357

Now, why is that Promotion ID so important to you? I have negotiated a 10% discount off the price of Prospectizer™ for my friends. If you take a look at Prospectizer™ and decide it is the system for you, use that Promotion ID to get 10% off the price.

If your real estate investing is ready for that next step, join us for the webinar on the 12th. You will be glad you did!

Here’s to your success!

Barbara
www.therealestatebirddog

Factors Contributing to the Down Real Estate Market

Hi,

This is a reprint of an article that I recently published. I would love to get your thoughts and opinions on what is causing the down market and what investors can do to work around these factors.

Factors Contributing to the Down Real Estate Market

Anyone who doesn’t realize that much of the United States is in a down real estate market right now has either been living in a cave or been in a coma. You could join with all the real estate investors, agents, mortgage brokers and other supporting characters who are involved in the real estate transaction in a collective moan of pain. But you would do better to understand what contributed to the current market downturn in order to find ways to make money in this market.
The buying opportunities in this market are huge and self-evident. We are in a buyers’ market. The problem for most investors is that they are afraid of getting stuck in a property, either not being able to sell or ending up upside down because of a drop in price or both.
There are several components that contribute to a down market and knowing what those components are can help you to find a way around them. Some common components of down markets are:
Too many houses on the market
Higher interest rates which limits the number of buyers
House prices over-inflated due to past hot market
Economic turmoil in an area
Media projecting continued down market/bubble burst

Let’s tackle them one by one.
Too many houses on the market.
Too many houses on the market can be caused by either having too many people jumping on the bandwagon at the end of a hot market or it could be caused by an actual slowdown in sales. In today’s market in Tampa, FL, for example, houses are selling at about the same rate that they were selling last year at this time. However, because Tampa had such a hot market, people were motivated by the outrageous prices that they saw other people getting for their houses and everyone decided that this was the time to sell. Unfortunately, most “civilians” missed the hot market and got in too late. They put top of the market prices on their homes and have watched the houses sit on the market for three, six, even up to nine months. Unfortunately, over the past nine months, prices have corrected in the Tampa Bay market (and many other areas of the country) and have declined by an average of 10%. Sellers have been slow to lower their prices to meet with this new reality. Buyers are waiting for the other shoe to drop.
A symptom of a glut of houses on the market is an increased length of time that a house takes to sell. Why? There are more houses to buy than there are buyers to buy them. Simple supply and demand. When the supply is large, demand drops. Prices drop after demand drops. When prices drop, demand usually goes up. We are not yet at the slack tide point where prices bottom out and before demand goes up. Right now, prices are still dropping. It will be many more months before demand goes up again.
The interesting thing about the length of time on market is how quickly investors have forgotten what a normal market looks like. Three years ago, 90 days on the market was the average for home sales in the Tampa area. We are back to that point again today. Check with your local Board of Realtors to see what the average length of time on market is today compared to three or four years ago. The down market you are experiencing may be more of a return to a normal market when you look at the numbers.
Unfortunately, what we are about to see is a second wave of houses coming on the market due to foreclosure. There are many factors that are causing the foreclosure rate to double, even quadruple in some areas: rising taxes and insurance, adjustable rates rising, gas prices, even credit card minimum payments. We will talk about rising taxes and insurance rates in more detail, but don’t discount the drastic effect of rising gasoline prices and increased credit card minimum payments have had on homeowners.
The U.S. is a paycheck to paycheck society. A year ago, most families were one or two paychecks away from financial disaster. Many made up the shortfall by using credit cards and made the minimum monthly payment. When credit card companies increased the minimum payment, in some cases doubling the minimum due, people were not able to make the payment. Missing a payment or being late on a payment resulted in the credit card issuers upping the interest rate on the cards. If someone is having difficulty making a minimum payment on a card with a 10% interest rate, they certainly are not going to be able to make the minimum payment on a card that has risen to 19% or higher.
The effect of gasoline price increases is transparent at the pump. A tank that used to cost $20 to fill up now costs $40 or more. If you are filling your tank just once a week, that extra $80 a month is causing a pinch. Since most U.S. families are two-car households, there is now an extra $160 going out the door per month. That is close to $2,000 a year. Less apparent is the increase in the cost of consumer goods across the boards. Think about how goods are shipped in the U.S. The cost of trucking goods, from groceries to building supplies to clothing, has gone up due to rising gasoline prices. And that cost is passed on to the consumer.
People who used to live paycheck to paycheck are now one to two paychecks behind. If you want proof, go to an Amscot or any paycheck advance place and see the working people lined up.
Higher Interest Rates Limit the Number of Buyers.
One of the contributing factors to our recent hot market was low interest rates. People who could never before afford a house were becoming homeowners, creating a whole new pool of buyers. Lower interest rates also meant that people could buy more house for their money because people buy based on the monthly payment. For example, a $225,000 mortgage at 8.5% interest would have a principle and interest payment of $1,717.82 The same mortgage at 5.5% interest comes in with a monthly payment of $1,271.67, a difference of almost $450. When people can buy more house for their money, the median house price tends to rise.
Conversely, when interest rates go up, monthly payments go up and many people have to buy a lower priced home or are priced out of the market. Higher interest rates lead to fewer buyers which leads to less demand. Which leads to a glut of houses on the market.

Houses Over-Priced Due to Past Hot Market
Buyers are waiting for prices to stabilize. The recent hot market inflated prices and in some cases over-inflated prices. Demand was high and prices went up with the demand. In some markets prices have held, but in many markets, prices are declining (or correcting depending on who you talk to) and buyers are reluctant and rightly so, to buy in a falling market. No one wants to pay $350,000 for a house only to have an identical house in the same neighborhood sell the next month for $320,000. It is one thing to buy a house for $125,000, hold it and watch the value shoot to $275,000 in two years then have it fall back to $240,000. Even with the decline, you had a huge upside growth and the loss is an opportunity cost; it is on paper. Buying a house and seeing the price drop and stay below what you paid for it is an actual loss. The people who are buying right now are people who have to buy a house (they have been transferred to an area, they sold their house and need another, etc.) or people who have found a deal far enough below market to ensure that the decline in prices won’t affect them. Everyone else is sitting. And watching. And waiting.

Economic Turmoil in an Area.
The recent run up of house prices across the country resulted in a corresponding run up of property taxes. Property taxes are based on the assessed value of the house. In order to keep taxes from going up, the local taxing authority would have to reduce the millage rate. Not a likely scenario. The millage rate (also known as the tax rate) is a figure applied to the value of your property to calculate your property tax liability. One “mill” represents one dollar of tax per thousand dollars of taxable property value.
For example, if the millage rate is .008557 for each dollar of value, multiply the millage rate by 1000 to get the price per $1,000 or simply move the rate three decimal places to the right. Millage rates are usually rounded off to two decimal places so if the millage rate is 8.56 and your house’s taxable value (not its actual value) is $100,000, your property taxes would be $856.
Now, if you originally had a taxable value of $100,000 on your house and due to rising market prices its taxable value went up to $200,000, your property taxes would double to $1,712. That is an extra $71 a month. Not a hardship to most people. But realize that many people are on a fixed income or are living paycheck to paycheck. That extra $71 this year may be an extra $80 next year and an extra $100 the next year. If people’s incomes aren’t rising to cover the additional costs (and cost of living increases have been averaging around 3% – many companies have not been giving raises at all), then a cash crunch develops.
In some locations, another contributing factor to economic turmoil is an increase in insurance rates. Insurers have taken huge hits in recent years and are passing their costs on to consumers. Because insurance is required by lenders, homeowners are not able to opt out from this expense. While most homeowners are not increasing their insurance coverage to correspond with the rise in property value, the rates themselves have increased. The same amount of coverage costs more.
In addition, many people rushed to get cash out refinances to pay off consumer debt, buy “toys” or send their kids to college. The larger mortgage required higher insurance coverage. Now they are facing higher mortgage, tax and insurance payments.
In some areas, the job market has stagnated or even fallen off. Large corporations have announced layoffs of employees (think US automakers Ford and GM, for example). Outsourcing is another major factor in what is now a transitional job market. While unemployment rates have been trending downward indicating a net increase of jobs in the United States, jobs are not being created equally throughout the fifty states or even equally within areas of a state. And, the jobs that are being created are not necessarily higher paying jobs. A GM line worker who was making $52,000 a year plus benefits is not going to easily find a position that will pay him that much, particularly if he doesn’t have a college degree and transferable skills. He will be lucky to find a position at half or two-thirds of his former salary.
A poor job market, which may either be lack of jobs available or a market with a low pay scale inhibits the amount of buyers as well as limits the median price of homes. If the average working family in an area makes a combined income of $45,000, traditionally the house they can afford will be in the range of $112,500 to (if they can get a really low interest rate mortgage) $150,000. Average house prices can’t rise too high or there will be no one that can qualify to buy them.
An area with weak economic viability gives way to increased crime, poorer quality schools, rundown neighborhoods and declining home values.
Median household income across the United States, when inflation is factored in, has dropped in 45 states. Of the four states that have had an increase in income, the highest was Rhode Island with an increase of 4.4% followed by Wyoming with a 4.1% increase in median income. Montana and North Dakota followed with increases of 1.6% and 1.2% respectively. Even though people are making the same amount of money or even a little more than they did a few years ago, their buying power has decreased.

Media Projecting Continued Down Market/Bubble Burst
Blaming the media for a downwardly spiraling market is very much a “shoot the messenger” scenario. But continuous speculation on when the housing price bubble was going to burst caused an expectation in people’s minds that became a reality. The bubble didn’t have to burst. Housing prices could have gone up and stabilized. But forecasting impending doom is a much better attention-getter than forecasting the status quo. And most media outlets are businesses that have to show a profit at the end of the year.
Even though we realize that the media is biased (and we support the specific media that validates our biases), we still give the media credit as a disinterested third party that is just reporting the facts. Just as history is written by the victors, the slant on the information that is reported serves the media outlets’ purposes. While most are not manipulating the news with a Machiavellian glee, headlines or news teases are somewhat sensationalized to bring in readers or viewers. How many times has a headline caught your attention and when you read the article you find that the headline had very little to do with the facts of the story? The problem is that many people don’t bother to read much more than the headline and first paragraph, or they hear the news story teaser but don’t watch the actual report. Hearing or seeing the same information repeatedly eventually turns what may have been merely a theory into fact in your brain. The repetition alone creates credibility in our minds.
Knowing what caused the current market in your area can help you to determine how to locate houses, negotiate with sellers (paying off credit card balances or trading them for a house in a good school district for example) and finding creative ways to sell your property when everyone else can’t even get people to view their properties. Stay tuned to find out how to buy and flip houses in a down market.

Pete Fortunato’s Paper Course

Friday and Saturday, December 8th and 9th, Pete Fortunato will be giving his Paper Course in Tampa, FL. If you want to do creative real estate, you need to be in this seminar. Pete doesn’t sell books and tapes; he makes his money doing real estate deals. THERE IS NO ONE BETTER when it comes to creative real estate. Learn how to create transactions, create notes, negotiate transactions, and so much more. This seminar is jam-packed with information that works in the real world. To register, go to http://www.peterfortunato.com .

Welcome To Super Charged Real Estate

Welcome.

This blog is a resource for real estate investors, newbies and old pros. It is a forum for questions, comments about market trends, experiences good and bad, and creative ideas for every facet of the real estate market.

Whether you are looking to buy your first house or your thousandth house, I hope you will find this spot informative and fun.

Thanks for visiting!

Barbara