Much has been said recently about the "implosion" of the real estate market. It seems every time you turn around there is a new article or news pundit spouting about the increasing weakness of the real estate market. Certainly in many cases this assessment is correct. Many areas across the market saw rapid increases in home prices just a few years ago and are now as a result are seeing rapid depreciation. But these areas are the exception instead of the norm.
What are Investors to Do?
Many investors across the nation are trying to determine if its time to stop flipping houses for a living. In the Richmond area we are actually experiencing a healthy market. We've seen an increase in inventories and Days-on-Market times, and certainly foreclosures are on the rise. But there are buyers in this market looking for homes.
The trick we as investors need to figure out- is how do we attract those buyers.
Changing Perceptions of Value
Over the past few years it was easy to make money in Real Estate. The hardest thing we as investors needed to do was produce a widget(in this case a house) that consumers wanted to buy. Consumers were willing to spend more because credit terms were making it easier and cheaper to buy more. Consumers wanted bigger houses with better amenities.
During that time- we were meeting customer demands by doing a better rehab job than our competition. Ceramic tile and granite became mainstays in houses even in the $100,000's. We were able to attract top dollar by providing better amenities.
But now- consumers value perceptions are changing. Less Expensive is better. Price is much more of a concern. So we are now changing our rehab strategy. We're creating high quality rehabs but using less expensive materials. By doing this we're able to provide a house cheaper than the competition.
Over the past few years all segments of the market were experiencing increases in sales. Flippers were selling houses all over the price spectrum. Today- we are seeing more segmentation in our market. Houses below $200,000...those most attractive to first time homebuyers are still selling. The next segment...$200,000 to $700,000 are pretty much stagnant. And high-end houses over $700,000 are still experiencing a steady market.
Is Flipping Still Viable?
Yes. Smart flippers know that to succeed, we must adjust our strategy to meet the demands of our consumers. Here's a list of objectives we feel are important for anyone flipping houses in this market:
1. Focus on first time homebuyers. Stick with the $200,000 and under segment.
2. Continue to offer high quality rehabs, but don't over renovate. Consumers are more cost-conscience than ever. Make your end product as inexpensive as possible while still maintaining an acceptable profit.
3. Focus on areas you know. The more familiar you are with an area the better you can estimate renovation costs and resell patterns.
4. Have multiple exit strategies. Before buying a rehab project- think about what happens if the end product doesnt sell immediately. Can you sit by for a few months while your profit erodes? Be prepared to refinance the property and accept a lease option tenant. By selling using a lease option- you can get immediate income to cover your mortgage(and freeing up your cash) and you can typically get a higher price for your home.
5. Rentals are still big sellers. This is one of the best markets in decades to buy rental properties. Capitalize on this by rehabbing houses that can be marketed to landlords.