There are many people who feel most of the United States is currently in a real estate bubble. Housing prices have increased in most parts of the country and housing is becoming unaffordable in some parts of the country. I am located in Colorado with one of the hottest markets in the country, and I have 13 flips I am currently working on. It may seem risky to have so many flips in a hot market, but I have been flipping for 15 years and flipped through a housing bubble in the past with no issues. I have always been very careful not to get caught up in a buying frenzy just because prices are increasing. I also think the current market is much different from the last housing bubble that caused a huge crash. What can you do to protect yourself from disaster when flipping?
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What caused the last housing bubble?
I have heard from real estate experts all over the country that we are in a housing bubble. I agree with some of their reasoning, but for the most part I think we are in a completely different place than ten years ago when prices were rising and no one had a care in the world about real estate. Here were some of the factors that caused the last housing bubble and outrageous prices:
- Loose lending guidelines: Banks were lending to anyone with a pulse. The lenders were getting paid based on how many loans they could do. The banks were not checking on how great these loans were because they were blinded by the money coming in.
- Crazy loan programs: Not only were banks lending money to just about anyone, but the loan programs they offered were insane. There were 120 percent loan to value loans, Zero down investor loans, 6 month ARM loans, interest only loans, and many more.
- Lending fraud: There were many builders who teamed up with agents, appraisers and lenders to defraud the public. I saw multiple subdivisions in my area pop up where the houses were selling for twice as much as they were worth. The appraiser was created a fraudulent appraisal to justify the price. The lender was offering a 6 month ARM with a crazy low starting payment. The agent would find immigrants who did not understand the process of buying a home and getting a loan. After 6 months the payments would more than double, and the house would go into foreclosure. Luckily many of the lenders, builders, agents and appraisers lost their licences, were fined and some went to jail.
These factors and a few more caused huge demand from buyers. Anyone could buy a house or refinance their current house and pull money out. There were no worries, because the housing market would always go up. During this time many flippers were buying houses that were mediocre deals, but could make money because they market was going up so fast, they just had to wait for appreciation.
How is the current real estate market different from the last housing bubble?
The current real estate market is much different from ten years ago. The lending guidelines are completely different and buyer demand is not what is pushing prices up. In fact, I think that last housing bubble caused the current market increase, because so many things were changed in the industry. Here is what I see in today’s market:
- Strict lending guidelines: Yes FHA and other lenders are offering low down payment loans, and lending to people with under a 600 credit score. That is still nowhere close to what they were doing ten years ago. It is much tougher to get a loan today, especially for investors.
- No more builder fraud: I don’t know how much the builder fraud contributed to the housing bubble before, but it has disappeared for the most part. Appraisers are regulated more, lenders are regulated more, and people went to jail.
- Low inventory: There are very few homes to buy in most areas of the country. This was caused by the previous housing bubble. After the bubble no one built any new homes because the market was so bad and people could buy foreclosures. When the market recovered, builders were still hesitant, because so many went bankrupt and it is much tougher to get financing. It is estimated Denver needs 67,000 new homes to meet current demand. The homes they are building are high-end, or multifamily because they tend to make the most money for builders, however the demand is for lower end single family homes.
While housing prices have increased in the last few years, they are still not as high in many places as they were before the housing crash. Prices are not being pushed up by an artificial demand, but by low supply. While I think housing prices could level off or decrease some, I do not see a crash coming.
How did fix and flippers go bankrupt during the last housing crisis?
Many people jumped on the housing bubble ten years ago. Prices were skyrocketing and it seemed like they would go up forever. People became real estate investors and it seemed like easy money. Buy a house, rent it out for a year, sell it for 30 percent more than you bought it for. Or buy a flip, make a few repairs, and sell it for 30 percent more than you bought it for in a couple of months. The problem with this strategy was that many houses were bought with no exit strategy if housing prices did not continue to skyrocket. When prices leveled off and started to drop, the investors were not making money on the rent and could not sell the homes for enough money because they didn’t get very good deals when they bought them.
How did flippers survive the housing crisis?
Not every real estate investor went broke during the housing crisis. I flipped houses through the market down turn as did many other investors. Many investors owned rental properties when the crash occurred and the survived just fine. The problem with the housing bubble was it made it easy for people to make money who didn’t know what they were doing. You did not have to get an awesome deal, you did not have to work hard to find financing, and you could sell houses easily without doing any work. Most of the real estate investors who went broker were not seasoned investors or they got greedy. Here is what will keep a flipper safe in hot or cold markets:
- Always buy houses based on the current market prices, and do not assume they will go up.
- Always build in extra costs for repairs and assume the flip will take longer than you think.
- Work hard to find great contractors and keep tabs on them.
- Do not sit on your flips, sell them quickly and move on.
This article is about flipping, but landlords survived using good investment tactics as well. Buy for cash flow, get great deals, manage them well, and don’t put yourself in a position where you have to sell in a down market. You can flip in a hot market and buy rentals in a hot market. You just have to be very careful how you do it, and do not get caught up in a buying frenzy because it seems like prices will never go down.
I know many investors who are selling all their houses and waiting for the next crash. They have been waiting for quite a while, and I do not know if that crash is going to come anytime soon. I think you can flip in any market, as long as you stick to the fundamentals. I think it is tougher to buy rentals in high-priced areas because the cash flow is harder to find. I will keep flipping houses, but I still buy with plenty of room for profit and try to sell as quick as possible to avoid market fluctuation.
For more information on how I flip 10 to 20 houses a year, and average over $30,000 in profit on each flip with financing, check out: Fix and Flip Your Way to Financial Freedom. The book is available as a paperback and eBook on Amazon.