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
