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For real estate investors, particularly those who specialize in property flips, the last 18 months have been a tricky time. As one professional in the industry put it, “We all think of HDTV as the reality of the flip. This is a whole different play.”
The Federal Reserve’s blunt-tool policy of raising interest rates started the long, slow process of pushing down prices. Retail homebuyers have pulled back during the uncertain, transitionary period, and sellers, afraid of taking a hit on their property’s value, are holding off on marketing their homes.
Most short-term investors, be it stocks or real estate, thrive on volatility. When the market hovers and the only thing moving up is the cost of money, this is the most difficult scenario for making a flip project pay off.
“None of it’s easy,” said Conrad Grimm, a broker with Aurumys, a real estate services firm. “The hardest part is finding the deal. Once you have the deal, the rest falls into place.”
Wholesalers are brokerage firms that specialize in finding properties selling at below market prices, often in need of significant work, and selling them to investors. Grimm and his partners started Aurumys about two years ago after spending several years with New Western, a nationwide wholesale firm.
“It’s about as hard as it’s ever been to find something good, because there are so many wholesalers,” Grimm said. “Unless you get a direct-to-seller lead, you’ll have multiple people after it. We’re getting a lot of off-market stuff and not just driving up an MLS price.”
The best pricing usually comes from properties that haven’t been listed by a broker on the multiple listing services, but these require a lot of time and energy to find. Some wholesale firms farm the MLS, getting properties under contract with promises of a quick close. During the inspection period, they pitch the deal to a network of investors. If they find a buyer, the investor puts up a large, non-refundable earnest money deposit and the title company holds a double closing where the property transfers to the wholesaler, then immediately to the investor, leaving the wholesaler with no money out of pocket.
Professional investors and brokers point out that this kind of thing usually only works with less-experienced flip buyers or when the market is on a steep rise and prices climb every day. Another source, besides wholesale and mainstream MLS listings, are foreclosure properties. During the recession, there were hundreds, even thousands of foreclosures going to auction throughout Colorado every week, creating a cottage industry of small investors and REITs snapping up properties at pennies on the dollar at the Public Trustee’s office. These days tighter lending requirements and better market forces mean the prices at auction are often higher than the retail market rate.
There’s a lot of really good options for distressed properties so they don’t’ go to auction,” said Tucker Brock with Land Title. “Wholesalers have really stepped up their game, so by the time (property owners) get an NED, they’ve been hit up by a dozen wholesalers. The Notice of Election and Demand (NED) is the first public notice that a mortgage is in danger of foreclosure, and investors at all levels check the public trustees’ lists every day for property owners who might be willing to sell at a discount to get out of a mortgage they can’t afford. In today’s market that is rare.
“By the time we see them at auction, it’s a sign someone has put their head in the sand,” Brock said.
Covid was the latest jolt to the market that created flip opportunities. At the end of the Covid period, lots of newcomers to real estate investing saw an opportunity in the skyrocketing prices and cheap money. Pros and novices alike were shielded from mistakes like job creep or overspending on repairs. Now the quick money buzz that led to higher demand is history and the hangovers are slow to pass.
“Margins are a lot tighter for flippers,” Brock added. “I think a lot of people expect to make money on the first flip when the first flip is an education process. Hopefully their education isn’t too expensive.”
Professional investors point out that looking at comparable sales, or comps, is misleading. This is looking at the past and is the kind of thing that trips up novice investors. Investing in a falling market takes a crystal ball approach and a willingness to ride out the decline. This requires more creativity and financial flexibility. Buyers who purchase with cash or expensive hard-money loans may need to convert their investment to a regular mortgage, or be willing to absorb the mounting interest. Even seasoned pros who deal with larger syndicated investors are struggling to find opportunities.
“We crushed it in 2021 and 2022, and now it’s stay alive till ’25,” said Teal Nip Hagan, principal employing broker at Kaufman Hagan, a commercial real estate brokerage. “Everyone is just hanging in. We need market factors to come around to make development pencil out again.”
Hagan started her real estate career hustling up wholesale projects for smaller investors and developers making the most of in-fill projects. Real estate flipping is difficult to scale as each deal is different; from the neighborhood, to remodeling needs, to the source of money, there’s little uniformity, so most investors are individuals, either contractors with a bit of cash, and crews who can quickly turn around projects, or licensed brokers with a close eye on the market.
Hagan now focuses on a larger version of the flip market dubbed “value-add.” She works with multi-family projects, sometimes hundreds of units, that are in various stages of repair. Money for any one deal often comes from multiple sources: personal funds, individual investors and loans all piled together. Buyers make improvements to the more run-down units as leases expire, sometimes using rental income to cover the costs. The added value creates a turn-key rental for resale, or a performing investment to hold.
“In my impression, the flip market is alongside the larger market, and that market is 10- to 20-pecent off in pricing from sellers’ needs and buyers’ limitations on money they can borrow,” Hagan said, describing a delta that needs to be bridged before we see sales volume returning.
“It’s all tied back to the lending market … debt doesn’t make a lot of sense right now.” The latest Fed report in May seems to indicate that more hovering is ahead, while “stay alive till ’25 may remain the flipper mantra.
Steve Titus is a licensed broker and a licensed general contractor with more than 25 years of experience in the industry. He can be reached at [email protected].
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This article was originally published by a coloradobiz.com . Read the Original article here. .