Market Conditions

Flipping homes is popular once again. It took about eight years after the Great Recession that started in 2006 for home prices to rebound to the levels seen before the recession. Then, by 2016, in many areas, home prices started to rapidly increase.

The increases in home prices caused more flipping activity due to the potential profits. CNN reports the average gross profit on a flipped home sold during the past three years was about 50%.

In 2017, one real estate speculator took nearly one million dollars ($985,00) in cash and bought a home in an “as-is” condition, sight-unseen. That is what Mr. Lin He did, hoping to make some easy profit.

The Math

Flipping properties successfully is math with a bit of luck mixed in. Mr. He had good luck with his purchase in that it was in Malibu, California. He bought the home at a price well below its market value. The home was a foreclosure that listed for sale at $1.39 million. There were no buyers at that price, so the home went up for auction in 2017. Mr. He was the high bidder at $985,000.

That price was irresistible. Simple math meant that there was about $400,000 in potential profits between the purchase price and the value of the home, once the home was back in a nice condition.

Mr. He was very happy to buy the home for that low price. Then, he went to visit the property.

The Mess

The house was a disaster. The previous owner, who lost the house to the bank, was obviously angry about the foreclosure and intentionally broke as much as possible. The condition of this home, made the most-wrecked fixer-upper look like a palace compared to the mess bought by Mr. He.

After he saw the home in person, Mr. He admits the home was in even worse condition than he expected. On top of that, there was an extended delay caused by the local building department, which took six months to issue the building permit needed for the construction. Then, renovations cost $300,000 and the comprehensive remodeling work went on for three full months after it started.

The Result

In early 2019, the home was ready and beautifully prepared for sale with expert staging. It listed with a very successful real estate agent in the Malibu area who marketed the property well as a featured listing.

The listing price was $1.97 million, which was double the price paid by Mr. He to buy the home. In less than three weeks, it sold for the full listing price, giving Mr. He about $400,000 in gross profits after the renovation expenses.

Mr. He was very lucky that the home prices rose so quickly that he got the $400,000 profit he thought was in the deal when he bought the home, even though he had to invest $300,000 in the renovation work.

Summary

With 50% average gross returns potentially possible, flipping is attractive to many; however, as Mr. He says, “It is not as easy as it looks on television.”

If you are interested in investing in a property to flip, be sure to consult with your trusted home mortgage professional to discuss financing options.

A hot market in real estate is identified by a few things, which include higher prices, lower amounts of unsold inventory, and desirable neighborhoods. Neighborhoods can increase in value because of having an excellent location, high-paying jobs, quality schools, and a variety of attractive amenities.

Hot Markets Are After The Fact

Properties in a hot market may sell faster, for higher prices, and without needing to be in perfect condition or staged for sale. Real estate investors do not necessarily benefit from learning about a hot market unless they already own property in that market area.

It is nice to be an owner with a property for sale in a hot market. However, more success may come from identifying a market as potentially valuable before it becomes a hot market.

Hot Market Trends Before The Fact

Gentrification is a pattern that may start out slowly and then build until a market goes from cold to hot. With gentrification, renovation of rundown neighborhoods attracts new, wealthier residents. Many cities encourage the gentrification of deteriorating urban areas.

Streets with abandoned storefronts may convert into pedestrian-only shopping promenades. Old wharf warehouses may turn into a riverfront boardwalk. Artist types may move into a bad neighborhood because of the low rent and then turn it into an eclectic, hip area with art galleries, coffee shops, boutiques, and street murals.

One way to benefit from gentrification possibilities is to follow the long-term development plans of a community and be an early investor in those plans. Invest in property just on the outskirts of a planned gentrification zone.

Be careful to note any physical barricades, such as a wide street, which may stop gentrification from progressing further. A wide street may prevent gentrification from moving across it to the rundown area on the other side.

A similar pattern shows up when investing in real estate that is on the outskirts of a growing area or adjacent to a desirable neighborhood. Over time, if the growth continues, these outlying areas may become a nicely profitable investment for those who are patient.

Getting Out Of A Hot Market At The Right Time

It is important to know when to sell properties in a hot market and move on to find a different one. Continuing to re-invest in a hot market may ultimately disappoint when there is a market correction to the downside. Try to avoid this if possible.

Market indicators to watch include:

• Year-over-year increases in listing prices compared to historical figures for the same area.
• The percentage of listings showing a price reduction.
• The average time a property is listed before being sold.
• A comparison between the listing price and the sales price for sold properties.

Conclusion

Studying market growth and guessing the direction of growth helps identify a potentially strong market before it gets hot.

It is time to sell and move on, if the listing prices are not increasing each year or if price reductions are increasing. Other strong indicators that a market is cooling down are when the average listing time is increasing and the average difference between the listing price and sale price is widening.

If you’re in the market for a new home or interested in refinancing your current property, be sure to set up a consult with your trusted home mortgage professional.