It may seem counterintuitive to invest in real estate when the housing market is in its darkest hour. But in fact, it may prove to be the most optimal time for such a venture.
According to RealtyTrac, a seller of mortgage default data, the foreclosure rate reached its highest level in 50 years in 2007, and rose to even higher numbers in 2008. Real estate investors are finding bargains everywhere, particularly in formerly hot housing markets such as Florida, Nevada and California.
Angie Hicks, founder of Angieslist.com, a compendium of consumer-service reviews, says a Fall 2008 informal poll of list members found that of those who had purchased a home in foreclosure, 29 percent of respondents had done so within the last six months. Of those, 95 percent said their purchases were profitable.
Do your research
"The key ... is doing your research and knowing what you're getting into," says Hicks. "Know the area you're buying, the market, how the price compares to the neighborhood."
The horizon is flush with opportunity for those with the money and know-how to snap up a bargain and flip it, but to make it pay you first must understand how the rules of the game have changed.
Stick with familiar territory. Charlotte, N.C., resident Emma Allen, CEO of Emma Allen Enterprises and an experienced flipper, says there's lots of inventory on the market.
"The prices that were recently so outrageous are down again, so those with capital or access to credit will find it's a very good time to pick up bargains in the marketplace," says Allen, who finds those bargains mostly in neighborhoods where she would like to live. Areas undergoing urban renewal present good investment opportunities.
Check your capital
It seems elementary, but in the recent past many flippers found themselves in trouble because they had not correctly calculated the amount of money it takes to finish a flip and market it. Allen says investors should figure out how much money they'll need right upfront, and not just the purchase price. It translates to being realistic about renovation costs and the hidden expense of carrying costs that gets so many in trouble.
"You may have carrying costs on the books longer than you think," Allen says. "The days of the 60-day flip are gone." Carrying costs, or house payments you must make until you sell the property, can subtract thousands from the bottom line. And even though you are technically chipping away at the debt incurred when you purchased the property, the interest you're paying at the top of the flip probably won't be earned back in the sale. Those payments come right out of your potential profit.
Financing your flip
What about financing in general? While it's certainly more difficult to obtain a bank loan, it still can be done. But having a stash of cash is still important. Veteran Southern California flipper and interior designer Nicole Sassaman advises would-be flippers looking for a loan to "be sure to have 25 percent down and 18 months of reserves in the bank."
Cut your costs creatively. Flipping in an economy that's not terribly user-friendly takes guts and creativity. Home flipper and Internet entrepreneur Scott Patterson says he increases his chances for success by breaking as many rules as possible, including making aggressive "low-ball offers" on potential flips.
"(I) offered $80,000 on a house I would have offered $100,000 (on) a year earlier," Patterson says. His strategy worked and he sold the renovated home for a tidy $160,000 a few months later.
Patterson also hopes to cut the middleman by obtaining his real estate license, letting him pocket the commission he would normally pay to sell his flips. He actively seeks capital via Internet and e-mail lists, marrying projects to the right investors.
"The stock market tanking has more people thinking that real estate is looking good right now," Patterson says.
Consider it a long-term investment. Real estate consultant and mortgage broker Todd Huettner of Huettner Capital says changing markets have forced his clients to alter their business practices. Huettner says that while a quick flip is possible, investors should be prepared to hold the property for several years as a rental.
Carole Moore, Orlando Sentinel
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