How do you flip houses in a buyers’ market?
There are pros and cons of every phase of the real estate market. Right now, forecasts and data suggest we are entering a new buyers’ market. It has been a sellers’ market in most of the country for several years. That’s changing according to Zillow, which says prices are already peaking in major metros like San Francisco, and has even called Dallas a ‘Buyers’ Market’, even though it may still have some more room for growth. So, how can real estate investors effectively navigate the new dynamics of the American property market?
What is a Buyers’ Market?
A buyers’ market is a market which works in favor of buyers. They have the upper hand, versus property sellers. This is typically seen when there is more inventory in the market, and sellers have to compete more fiercely among each other to get noticed and attract offers. It also happens when there are fewer buyers, or at least qualified buyers, and as sellers get nervous and scared that they aren’t getting the action they expected. Many may have a big wakeup call over the next 6 t o12 months.
Why the Shift Now?
Many may find this new shift surprising. After all, the Trump election win appeared to inject a lot of confidence and action into the investment market. At the beginning of the year we did see new records set for home sales, and builders have been busy in expectation of continued home shopping activity. However, we also have rising interest rates, and a tight conventional mortgage lending market. Perhaps most notably, property prices have just gotten so high. It’s true that there may still be some markets where foreclosure activity is increasing, and house values are below previous peaks. Yet, in some areas house prices are double what they were just a few years ago, and are up around 70% since 2008. Rents have become artificially inflated in some parts of the country, and unrealistic sellers are putting extreme price tags on properties, with little correlation to comps. Yet, wages for most jobs really haven’t risen that much.
Recognize the Benefits
A buyers’ market can pack a lot of benefits for real estate investors. The media buzz can help attract other investors to flip houses to. Most obviously though is that we see more motivated sellers, and buyers gain more negotiating power. This can make a big difference when it comes to negotiating earnest money deposits, contract contingencies, seller financing terms, closing dates, reimbursements for repairs, and contact extensions.
This is an opportune time for investors to scale their activity. To do that effectively and profitably, and take full advantage, without setting yourself up for disaster later on; load up on private money funding, and end cash buyers, as well as marketing and great team members. Make sure you have clear and smooth systems for handling higher volumes of deals.
Make More Offers
The best way to take advantage of this market is to get out there and make offers. Make lots of offers. Full time investors should be making multiple offers a day.
The most obvious play here is to dig into the motivated sellers which are or have recently been listed on the market. Target expired listings, canceled, listings, and withdrawn listings from the MLS. There can be hundreds of these deals, even in small cities. They are often sellers who haven’t been able to sell or are tired of their Realtors not producing results. Also look at active listings with long days on the market. They may be ignored by other buyers and sellers could be eager to cut a deal. Look at listings with price reductions. Zillow reports this can be as much as 16% of active listings in some cities.
There can be competition for the above types of deals due to ease of identifying and contacting them. To find more value look for off market lists of motivated sellers where you have even more negotiating power.
At the same time, make sure your team is working to build up your reputation as a trusted and capable local home buyer, so that people turn to you first, before listing on the MLS.
Finally, factor potential market changes into your model. If the market keeps on shifting in this direction we could see declining prices. Smart house flippers will work to shorten rehab times, and consider reverse wholesaling, so they are in, out, and paid, fast.