I talk to a lot of investors who flipped houses around 2008 to 2012. They said it was easy to flip back then, because there were so many foreclosures and great deals. After 2012 the market started to recover and the amount of foreclosures drastically decreased. If you listen to these investors, you may get the impression that you can only flip houses, when there are a lot of foreclosures. I have 11 flips in progress in Colorado, which is one of the hottest markets in the country. We have hardly any foreclosures, short sales or distressed properties, but I can still flip homes and make money doing it. You can definitely flip houses in a hot market, but you can also get in trouble flipping in a hot market. You have to make sure you are not overpaying for homes, hoping that market prices will continue to increase.
Do the fundamentals of flipping change in a hot market?
I have strict guidelines I adhere to when I flip homes. I need to have a certain amount of profit potential on each flip, relative to how much the flip costs and the cash I will have invested into it. Over the years, the profit potential I need has not changed much at all. If it is a hot market or down market, I will pay more or less for homes based on what they are currently worth. However, I do not cut my margins too thin, to beat out other buyers in a market that has a lot of competition.
When I look at a flip, I have always written down all the costs I would have in the property to see what my profit would be. For example:
Purchase price: $100,000
Carrying costs: $3,000
Loan costs: $2,000
Selling costs: $8,000
Break even point: $146,000
I would have to sell the house for about $175,000 to $180,000 for my to be happy with this deal. I base the price I would sell it for on what I think it is worth right now. I am not assuming the price will go up, but I have enough profit built-in that I would be okay if the market went down. Prices may be increasing in the current market, but I still want the same profit potential and built-in safety net if the market changes. The 70 percent rule is also another tool I use to determine how much to pay for a flip.
What happens if you pay too much for a fix and flip?
There are investors who will pay more for a flip, assuming the market will continue to increase. Many times the investor will end up okay, because the market does rise. I have seen investors in my area pay what I thought was way too much for a flip, only to make money because market values increased by 10 percent in 6 months. However, counting on market appreciation does not always work out well. Before the housing crisis hit about ten years ago, there were thousands of investors flipping homes, hoping for appreciation. In some cases, they were not even buying good deals, they were simply buying okay deals and waiting for prices to go up. Prices cannot go up forever, and many investors went bankrupt because the market changed.
I flipped houses through the housing crisis, but we never bet on appreciation. We made money before, during and after the housing crisis on flips, because we assumed we would sell houses at current market value and had enough profit built-in for the unknowns. We may not have made as much money as other investors who were buying everything when prices were going up, but we also did not go bankrupt when prices went down.
For more information on flipping houses, including how I average over $30,000 profit on each flip, check out my bestselling book Fix and Flip Your Way to Financial Freedom on Amazon. It is available as a paperback or eBook.
How do you find deals to flip in a hot market?
I think way too many investors are caught up on buying foreclosures or short sales, thinking that is the only way to get a good deal. I have bought many foreclosures over the years, but I do not limit myself to only distressed properties. Some investors I talk to set up searches for only foreclosures, or only short sales, and they are missing a lot of opportunities.
Here is how I bought my last five flips:
- 4/28/2016 MLS deal that was not a foreclosure or short sale
- 4/6/2016 MLS deal that was not a foreclosure or short sale
- 3/18/2016 MLS deal that was an estate
- 3/18/2016 MLS deal that was an estate
- 3/1/2016 Wholesale deal that was not on MLS
None of the flips I bought were distressed at all. No one was in foreclosure or behind on their payments as far as I know. I also see many investors who buy strictly from the foreclosure auctions. We used to buy from there as well, but prices that investors would pay shot up at those auctions, and I have not even attended one for close to a year.
There are deals in every market, if you know where to look. I have to buy many houses that need work, but that is part of flipping houses. Being an agent is a huge advantage to getting deals and being able to act very fast helps as well.
How can a hot market hurt flippers?
There are some problems with a hot market and flipping houses. In my market, housing prices have increased 50 to 100 percent in the last 4 years. Even though I can still find great deals, houses are more expensive. With the financing I use, I have to put money down on some deals and pay for the repairs with my own cash. The more expensive a house is, the more money I have into it, and the less properties I can buy. I can still find houses to flip for under $100,000 in my market, although it is rare. I can find many homes that are under $200,000 to flip. While houses are more expensive here, they are outrageously expensive.
For investors in more expensive markets it is much tougher to flip. If you are in San Francisco or New York City, you may have to pay $500,000 to buy any house. Buying a $500,000 flip usually takes a lot of cash, experience or partners to make the deal work. It can be very tough to get started in a market with high prices. The repairs are usually more, because the buyers expect more. Financing can be tougher, because banks are taking a bigger risk. If you are having problems gaining ground in an expensive market, you may consider flipping in a different location.
It is possible to flip in any market and at any price range. It is easier to flip in certain markets due to price points, and there may be more deals available in certain market cycles, but that does not mean you cannot flip. You have to be searching for deals multiple ways and be open to different markets. I am working with a couple of different investors in my coaching programs to help them find a market to flip in. I am also putting together a fix and flip video training program that should be ready in the next week or two. To go with that program I will be creating a flipping calculator to help you figure what you should pay for a flip and what all the costs will be. Look out for those two new items coming online soon.