“It’s not what you sell it for, it’s what you buy it for”
We’ve all heard the news by now. Real estate prices dip 13% year over year in Phoenix. Is it really possible for a real estate investor to make money flipping properties any more? The answer is Yes, without a doubt. It is still possible. But your support team has to be sharper than ever. Every person on the team must deliver on time and on budget.
Let’s look at an example of this. Say you bought a house at auction June 1st for $70,000. You’ve calculated that you’ll need to invest $25,00 into the house for upgrades to bring it up to market standard. Your money man is asking for a 12% return (if only) on the initial $70,000. You calculate that the repairs will take 60 days and you can start marketing the property with your eye towards that 91 day mark when you are outside the HUD 90 day flip rule. You sell the house on Day 91 with a 45 day escrow. Your closing date is now October 15th.
You’ve determined that the current market value for this house is $115,000 and that you will have to pay 10% in realtor commissions and buyer/seller closing costs. After your carrying costs and investor payback you end up netting $4,989. Not a home run but if you have 8 in production at a time that’s a good living.
Now, let’s look at what happened last year. Prices dropped 13% year over year. That $115,000 became $113,000. But wait, the first lender dropped the ball and the buyer could not qualify. You had to resell the home at the now current market value of $112,000 and could not close until the end of December. Your developer profit just went from $4,989 down to $416, a 93% drop. In fact, I saw several last year where I was the second lender in on the deal and the developer had to pay out of their pocket to close. That’s not good for anybody.
Let’s look forward. How do you mitigate your risk and maximize your profit? Economists are predicting another 5% drop in 2011. That number should not worry you. Remember, that is the median retail price. With bank owned inventories rising this year it’s a sure bet that wholesale prices will decline even further. But, let’s say you still have to pay $70,000 for this house and your realtor’s market analysis comes in at $115,000. Not to worry. First, you have to be ready to pull the trigger on the repairs the day you buy the house. Get the contractor started right away. Next, put the house back on the market as soon as you can – within 30 days. You may have some major construction going on when the first buyer takes a look but the buyer’s realtor can help them visualize the finished product. Have your description of materials ready and even color brochures of appliances, cabinets, etc. for them to look at.
Do not write a contract though until all of the major work is completed. The ten-day inspection period starts and you don’t want anything holding up the process or create a situation where multiple resinpections have to be ordered. Most importantly though, find a lender that will not make you wait 91 days to write the contract. U.S. Bank allows for property flips that are sold in less than 91 days on contracts with FHA financing. The only caveat is that the bank will have to order their own home inspection right up front and you will be required to address all HUD “health and safety” items on the home inspection. You are most likely doing this already any way.
Now you sell the house on day 45, write a 45 day escrow and close by day 90. You’re probably safe on the appraised value as the comps used on the appraisal tend to be lagging 30 – 90 days. You’ve just turned a profit of $5,952. Not bad. Especially if you have several in production at one time.
Now, back to the beginning quote. Don’t buy that house for $70,000. Wholesale prices dropped. Every $1.00 in savings on the purchase price adds $1.05 to profit. “It’s not what you sell it for….”
Contact Daniel Duckworth at his office at 480-538-5682 or cell phone at 602-526-1283 or by e-mail at firstname.lastname@example.org