The Great Recession was a candy store for investors. Flipping gurus packed convention halls with people convinced that they can make a fortune using their system that cost upwards of $10,000. There were tremendous opportunities for those who had faith that the market would rebound. Fast forward from 2008 to 2018, the market did come back.
As a real estate coach once told me, “Stocks and bonds can spike or disappear. Real estate can go up and down, but it’s always there. That’s why they call it real.”
Housing inventory right now is very tight, there is a shortage of traditional sales, even less of distressed homes. Total distressed homes sold in Hennepin County in 2017 was 663, compared to over 5000 traditional sales. RealtyTrac shows that only 1 in 3411 homes is distressed in Minnesota. Across the country some areas are still having trouble, like New Jersey where 1 in 740 are in foreclosure. But, for most of Minnesota foreclosures are back to pre-recession levels. Problem #1 for flippers is lack of inventory.
Last week I showed a foreclosed property that was on the market for 1 day. As we went into in the basement I noticed ice on the floor, and heard water dripping. A pipe burst and water was splattering all over the floor. At below freezing weather that’s an emergency. I left an SOS message for the agent. The house was in rough condition before the water problem, but my client wanted to make an offer. He was excited, I wasn’t. It needs windows, roof, new boiler, kitchen, flooring, bathroom rehab, the dollar signs were swirling in my head. It was in multiple offers, my client offered well over asking, but didn’t win. Sellers want cash for a property that isn’t habitable; functioning heat and hot water. It had neither. During the recession we would have negotiated the price down, not now. Multiple offers are the norm. We’re all surprised if a home lingers on the market.
The #2 problem is rising costs. Lumber just jumped 30% in price, and tradespeople are in short supply. If your carpenter is in the middle of job and gets a better offer, he can walk. Lack of a skilled labor force is holding down new construction, and rehabbing.
The disaster areas around the country are affecting normal supply and demand. Statistics show that 6 months – 1 year after a disaster that home sales spike by 11%. Many damaged homes aren’t salvageable, and people need a new place to live. Materials and labor are funneled to areas in need, and prices go up.
The 3rd challenge is that buyers with FHA loans expect that a seller is obligated to pay their 3% in closing costs. Lenders let them believe that they can get up to 6% back from the seller. That’s not the case. Seller contribution is always negotiable, no one is obligated to pay a buyer’s costs. More than a 3% contribution from the seller skews appraisal values. In 2017, 25% of transactions had appraisal issues. Calculating the cost of acquisition, holding, and sales of a home is almost always underestimated. Seasoned flippers have learned only by going through the fire what it is really going to cost. There is an ongoing learning curve, and changing markets. The best time to flip homes is when there is a supply of cheap homes in need of upgrading. Is Flipping completely dead? No, but it’s on a respirator. Home prices continue to climb, inventory is low, and profit margins have shrunk. Real estate is always expensive short term. FLIPPER’S brother REHABBER is doing better buying and holding. That time gives an investor time to recover costs and see enough increase in price to see a real profit.