To Flip or Not To Flip

That is the question. 

On today’s show we’re Talking about one of the strategies that are working in today's changing market conditions.

Many markets are experiencing historically low inventories. We've gone through a period of reduced market activity, and this has resulted in shorter days on market, multiple offers and higher prices.

These are traditionally the perfect market conditions for buy-fix-sell projects. That is assuming you can make the numbers work. You need to buy at low enough a price, maintain the improvements within the budget, and most importantly make sure that the improvements will be accepted by the home buying community.

The worst situation is the one where you perform a substandard improvement. It’s not good enough to meet market demand, and it’s too new for a buyer to rip it out and replace it.

But understand, while the market conditions are looking favorable for flips, the market conditions could change quickly. If you’re going to do a flip, who is your ideal customer?

Some of the traditional sources of demand like immigration have been severely curtailed this year.

Despite the hot market conditions, there are signs of softness. We know there is a large backlog of properties in forbearance. Currently there are 4.3M distressed properties in forbearance in the US. There are also a large number of properties with tenants in default. Unless the government steps in to forgive these loans, we will eventually see an increased number of distressed properties coming on the market. When that happens, the market conditions for selling a slip could change quickly.

On the other hand, we could see a return to normal market conditions, a resumption of immigration, and another round of government assistance to protect property owners from foreclosure. There’s no point in providing help in the short term, and then allowing those properties to fall into foreclosure six months later. That investment in bailout funds would have been wasted.

We remain in a low interest rate environment and demand for housing is expected to remain strong, as long as the employment market regains strength. Low interest rates are driving demand for homes.

So let’s say you’ve decided that the market risk is acceptable. The next question is what kind of property to flip?

Much of the price increase in the market has been in the bottom 2/3 of the market. Buyers fear getting priced out of the market. So much of the increase has been at the bottom of the market. At the top of the market, with homes priced above $1M we have seen much less movement in price. Some would say that the more expensive homes have seen close to zero price increase. The result is price compression. The price per square foot for the larger more expensive homes is in fact much less than the price per square foot for the smaller entry level homes.

The key to a renovation project in this market is to make sure you get the property renovation done quickly. If a renovation is going to take more than 30 days, I would not take the risk. A flip project that is on a 6 month timeline would be incredibly risky in today’s fluid environment.

I would also make sure that when you structure your deal you maintain lots of margin. That means you can’t pay too much for borrowed money. You need to be aggressive on sourcing well priced materials, and you need to negotiate with your subcontractors and clearly define the scope of work so you contain the cost of the renovations.

You want to be assured that you’re selling into a segment of the market where there is still an extreme shortage.