When the housing market declined a few years ago, many builders and investors left the market, either by choice or by consequence. But as with the current recovery, low inventory and pent up demand continues, builders and investors slowly returned. Flippers, whose goals were to renovate and quickly sell homes have returned and made famous by the numerous television series of the past decade. Many of us may have probably seen an episode or two with an individual flipping a homes for tens of thousands in a week or two. But reality is vastly different…
It’s a new market, new rules and new players. Those who have survived the downturn and are back have learned the hard rules – the housing crash of 2006-2011 wiped out more than $7 trillion in household wealth across the nation (Federal Reserve). Not every property is “flip worthy.” Not every home will generate income. It may not generate huge crowds at the open house nor be sold within the first few days.
Even with fewer players, the market is still very competitive.
Location is not just about city or neighborhood. With numerous external factors to consider and changing lifestyles of the buying demographic investors will have to carefully plan out target areas.
With many people telecommuting being close to work now means accessibility to coffee shops, internet cafes, printing/copying services and even public transportation. This has opened up areas outside of high density, high priced central locations.
With buyers looking to stay their home for a longer period of time, things such as schools, parks, neighborhoods are vital for buyers.
Financing has changed for both buyers and sellers. As a flipper, properties purchased may have restrictions, making all cash acquisitions more favorable. If financing is required, look for larger down payments as the norm – banks will likely no longer leverage off of other assets unless there is significant equity; this is to prevent borrowers becoming too leveraged as many were in the years prior.
Construction loans are also more difficult to obtain than during the housing boom. In some cases, cost of materials and labor is paid for paid for out of pocket or financed separately. However, note that some lenders may require review of construction plans and finances prior to closing if financing the purchase of a property that is stated to be uninhabitable (vital functions of a home missing or not working, such as plumbing, heating, etc).
Some lenders may have a 90-day rule – prohibiting the seller to sell if owned for less than 90 days.
Expect buyers looking to purchase your finished product to have financing difficulties too, especially with the appraisal if the market is dominated with short sales and foreclosures and there are few comparables to go by. Properties will not sell as quickly as they once did, raising the overall cost of the project as taxes, utilities and other related costs are paid for in the interim.
Analyzing costs will be extremely important. Typically, the same type of renovations will be required for many properties: new paint, flooring, cabinets, etc which will give a rough estimate on construction costs. Stick to finishes that dominate the market. Going over and beyond the market norm will increases costs and your asking price for the finished product, potentially generating longer market times.
Buyers have become more selective. With the years of exposure to TV rehabbing programming, deals from out of work contractors and a perception of endless inventory many buyers think there are deals to be made everywhere. Hire professionals to add a professional touch to your project. Interior designers can help advise on colors, materials, finishes and layout. One of the bigger mistakes I saw from the housing boom would be developers who did not carefully plan colors or finishes. This was epitomized when I was in a new loft development in and saw a developer arguing with prospective buyers about colors, finishes and layout – the kitchen counters, backsplash and cabinet colors all looked like leftovers from previous projects.
Stagers can help set the functions, potential use and give perspective to a home. Ironically, an empty home actually feels smaller to many. A stage goes well beyond sticking a couch and table in a room. Perspective, line of sight, dimensions and mood are all things thought about to bring out a rooms strengths.
Brokers can help advise to market conditions, areas of interest as both a buyer and seller and help get the finished product sold. As a buyer, a broker can advise to potential selling ranges of a finished product and market activity. As a seller, it will be up to the broker to help get your product sold in a timely manner, minimizing costs.
Architects can help maximize best use of a property. Though the extent of work involved from an architect will be dependent on the type of project (sometimes only cosmetic renovations are being done). During the boom, many developers were using “standard floor plans” for their developments. These units started becoming referred to as “cookie-cutter” units due to their similarity to many other units, without any unique features or characteristics. Many buyers want something that isn’t cookie-cutter.
When putting a team together, many investors and flippers try to discount or remove the costs of professional services involved. Would you discount your fees as the “builder” if you were rehabbing the home for a customer? Are you taking a smaller profit, or looking to maintain/increase your profit? Would you use cheaper materials to lower overall costs instead?
I have seen builders try play all the roles above during the housing boom, and even with the increased demand and market activity, not all homes sold. Many developers who were unable to sell their homes were part of the first wave when the market downturn occurred. The developer I used in the example above who argued with prospective buyers had more than 50% of their project unsold when the market downturn occurred. The developer did not have a professional team in place and faced many difficulties including understanding the primary buyer demographic for the neighborhood.
Profiting from a flip is not as easy as “cost of home + cost of construction < sold price of home.” There are numerous soft costs involved from closing costs, permits, document fees and taxes. Consulting with your attorney and broker can help address the related costs.
Individuals looking at the current market are staring at a current market that in many ways resemble the market of the boom – low inventory, high demand. Not everything is flippable. Not everything will be profitable. This is a new market, with new rules.
