Investors across the country are finding their fix and flip investment strategies harder to implement. The distressed properties are still out there. The problem is the influx of buy and hold investors who are willing to pay higher prices for these distressed properties. These new investors to the party are cutting in to the profit margins of the fix and flip market and in some cases eliminating them all together.
I have a real estate investor client who buys, fixes and resells single family homes. He has been regularly buying twenty to thirty foreclosure auctions every month for the past two years. However, over the past three months he has averaged closer to ten properties every month and has been continuously outbid on many desirable properties. He also has had to pay more for the properties he has bought. It's forced him to look at other avenues for buying and reselling distressed homes.
The reason is the buy and hold investor is not concerned with making a quick profit on a property so he is willing to pay closer to current market values for these properties. His goal is to buy the property at a price he can rent it out for and develop a positive cash flow. With rental prices continuing to rise across the county this allows these investors to pay more for properties and still maintain a solid rate of return. Their goal is to generate cash slowly and are betting on an overall real estate market recovery over the next three to five years. When that occurs they will be able to sell these assets at a significant gain and cash out then.
The same is happening in the short sale market. The combination of lenders demanding more money for their inventory combined with investors willing to pay more for that same inventory has caused the profit margins for fix and flip investors who have made their living over the past several years buying and reselling short sales to significantly decreasbe, almost to the point of actually costing the investor more than the property is worth after repaired value.
There is also no shortage of real estate guru's who have switched their course materials available to new investors from fix and flip to fix and hold.
Recently BiggerPockets.com, one of the larger real estate investor sites and forums on the web, held a REI Summit in Denver Colorado. Sponsors from Phoenix to Indianapolis to Atlanta were there offering turn-key investment properties for sale with excellent returns. Also, the New York Times published an article this month about large investors buying homes by the thousands and renting them out because the returns are higher than treasury securities or stock dividends.
So what does all this mean to the fix and flip investor? The short answer is much more work and networking to find deals. Direct mail marketing, phone calls, email campaigns and even door knocking on For Sale By Owner homes are going to come back in fashion. The problem is many investors are new to the fix and flip market and have been spoiled by the easy access to properties. They don't have the experience in buying and selling when a market is moving up or peaking so these techniques seem like way too much work in their eyes.
In order to survive, investors are going to need to get out of their comfort zones and start using some of the older tried and true methods of finding deals. You may also need to start investing in properties that are selling at a different price point than they've been using or possibly even look at other markets where the fix and hold investors are not as abundant.
Daniel Doran is a 20+ year veteran in the real estate industry. He is a previous owner of a law firm, mortgage and title company. Daniel has also written several books on mortgage modification, short sales and real estate investing. He currently specializes in Commercial Finance and Real Estate Development and is a graduate of Manhattanville College and Brooklyn Law School. You can contact Dan at Buildings By Owner.
The point you make about wholesaling properties to another investor is very true. Because of the increase in buy and hold investors and the higher prices being paid for distressed homes there is barely enough of a profit margin for one investor, never mind two.
Dan you make some great points. The issue here is that the pricing fundamentals are changing, and that change is being driven by the lack of returns on other investments.
The fact is that investors must shift strategy to keep pace with changes in fundamentals. The buy and hold investors are doing just that. The fix and flip crowd can still make money but with prices edging higher, the flip has to be to a retail owner occupant buyer rather than another investor to maintain a larger profit margin. But the handwriting is on the wall, buy and hold is hotter than ever with today's low prices and large inventories of unsold homes.
Hi June. I work the South Florida market and the lease-option sale is very strong here as well. Rental prices have been going up every month which make it a more attractive option and, as you stated, the investor has a large, non-refundable down payment as security. I have seen the scenario where the lessee makes significant upgrades to the property and then when the time comes can't complete the closing and now the investor has received the added benefit of a free remodel.
Thanks for your comments.
The Investor stratagies of Buying-holding-renting works particularly well in my area of Table Rock Lake Missouri. There is always room for more rentals here - for several reasons which may be another comment in the future. Another tack they are using is buying, holding and selling contract-for-deed for those who cannot, yet, qualify for a bank loan. Investors still have the security, have income from the property and many times the buyer will go ahead with re-furbishing or remodeling.