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Entry Level Homes Still the Best Bet for Flippers

While many investors are enticed by the larger potential profits of high-end real estate, statistics continue to show that your best bet is to stay in the entry-level price points sought after by first time homebuyers.  More experienced investors might find success from time to time in the luxury space, but when analyzed on a percentage basis, high end homes rarely return the profit margins found in “work-force” housing or entry-level properties that fall at or below the median home price in your area.  Recent news regarding inventories on entry level homes brings this point into much better focus.

Recent data reveals that there are currently 10.4% fewer entry level homes on the market today than there were at this time one year ago, and those inventory constraints are driving prices up even higher on homes in these price ranges.  While recent price appreciation has been in a healthy 5-6% per annum range, the MAJORITY of that appreciation has come in the 1st time home buyer range.  Homes in the “move-up” and luxury price ranges have been rising at a 2-3% clip in most areas, while their entry level counterparts have been jumping at rates near 10% per year.

New investors will find that their is significantly less competition in the luxury market, but it can also be fraught with risk for even the most experienced flippers.  If a real estate rehabber doesn’t have at least 10 deals under his or her belt, it’s advisable that they continue to stay in the 1st time home buyer range to continue to build confidence and much needed capital before taking on more expensive projects.  The “get rich slowly” method might not be as exciting, or land investors a show on HGTV or DIY network, but those who read the book, “The Tortoise & the Hare” will find that the same character wins every time.

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Rehabbing with Baby Boomers in Mind

*Don’t feel like reading?  Check out the video above for the entire “In the News” section from one of our recent PIG meetings, and stay up to date on what’s happening in the world of creative real estate investing.”  Hungry to learn more?  Then sign up now for our email list at www.pigfreegift.com.  

As an entire generation of home buyers begin to hit their retirement years and start looking to downsize, it’s important for real estate investors and home flippers to stay up to date with what this massive block of home purchasers is looking for in a home.  The National Association of Home Builders recently did a survey to find out what attributes and amenities were important to this demographic, and this is what they found out:

63% of baby boomers desire single story, single family homes.  They don’t want to be in a  multi-family community with neighbors on either side of them, and they definitely don’t want anything with stairs due to the increased potential for falling, or the possibility they may be in a wheelchair in their latter years.

63% of baby boomers want a formal living room.  Sometimes in the frenzy to “modernize” a house, or make it more contemporary, rehabbers look to “open up” spaces to resemble newer construction.  However, if you’re in an area or a neighborhood with a lot of elderly buyers, you would never want to sacrifice a formal living room in order to open up a space, as it will eliminate a large part of your buyer pool.

93% of all baby boomers want to be in the suburbs or a rural area, away from the hustle and bustle of the city center.  And lastly, only 13% of baby boomers are willing to pay extra for “green” or environmental features, so don’t waste your money on them if you’re targeting retirees in your market.

Do you have any experience rehabbing and selling to baby boomers?  Do your experiences match up to the above survey?  Let us know your thoughts in the comment section below!

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{ASK THE PIG} – Valuing Diseconomies in Real Estate?

ASK THE PIG – “How Do You Value Diseconomies?”

A diseconomy in real estate is a condition unrelated to the property itself that can negatively affect its value.  An example of this might be an area that was recently flooded (even if the subject property was not), a home that backs up to a cemetery or trailer park, or a property that is situated near a power transformer.

Determining the after repair value of a home with a diseconomy comes back down to the basics of comparable sales data, however not in the way that it’s traditionally used.  Because there may not be sales on similar homes in the area with the exact same diseconomy, it may take a little more research and a few more calculations to get to an educated guess on your subject property’s value.

For example, I recently had a PIG member contact me for a deal review/ARV on a home that backed up to a cemetery.  On this particular road, there were only about 10-12 homes that also backed up to the cemetery, and so finding a comparable sale in the last 6-12 months for a traditional CMA was going to be difficult.  So, to determine the after repair value on your subject property, you would need to calculate the percentage difference that a home historically sells for compared to a home that’s not against the cemetery.

To make this calculation, you would take the 2 most recent sales, whenever they took place…let’s say 2005 & 2009.  Most investors know that these 2 years will produce drastically different SALES PRICES due to the market boom in 2005, however the effect of the cemetery can still be accurately calculated.  For the 2005 sale, you would find 3 other similar homes in the neighborhood that SOLD IN 2005, and compare their sales price to the one backed up to the cemetery.  Then you would do the same for the home in 2009, and typically these numbers will be similar.  You would then run comps in the neighborhood in the past 6-12 months, and deduct the percentage historically associated with the homes near the cemetery.

However, if at any time you don’t feel like you can get a good comfort level on how the diseconomy will affect the value, I would strongly recommend you PASS on the deal.  There are plenty of investment opportunities out there, and so there’s no reason to take a gamble and lose money when it’s not necessary.  This is especially true for those of you who are beginners, as you will most likely have less of a safety net, and need your 1st few deals to be home runs.

Have a question for “Ask the PIG”?  Send it in to us at professionalinvestorsguild@gmail.com.  Want access to dozens of hours of teaching, fix & flip walk throughs, and live Q&A sessions from anywhere in the world?  Then join the Professional Investors Guild today…click here for more info!

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“What is FHA’s 90 Day Anti-Flip Rule?” – ASK THE PIG [VIDEO]

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Question: What is FHA’s 90 Day Anti-Flip Rule?

For a number of years now, FHA has enforced a 90 day anti-flipping rule which prevents an investor from reselling a home to a buyer using FHA financing until that have owned the property for at least 90 days.  While some investors might think this is a moot point, since most renovation properties take at least 90 days to rehab and sell, that is certainly not always the case.  There have been numerous occasions in which I have purchased and resold in less than 90 days, because the property was a very LIGHT rehab, or need nearly no renovation whatsoever.  

While most deals do involve BOTH a distressed property AND a distressed seller, that is not always the case, and some times the property will need very little to no work.  Just last year, I purchased a home in Pensacola for $50,000 and resold it THE NEXT DAY for $79,900 after spending just $400 to trim the bushes, mulch the beds, and stage the home.  Thankfully I had a cash buyer, but had it been someone using FHA financing, I would have had a LONG wait before I could close and realize my profits.

This “anti-flipping” rule wasn’t as big of an obstacle for investors in the past, as FHA financing was a very small part of the overall mortgage market.  However, when the market crashed and banks were reeling, government insured loans through FHA began to take on a much larger share of the market and so it became a bigger issue for those who were looking to flipping to buyers in less than 90 days.

Thankfully, someone at FHA had a massive “A-HA!” moment back in 2010, and they issued a waiver of the anti-flipping rule.  They understood that investors were a huge BENEFIT to the overall real estate market, and that their role of buying distressed home, fixing, and re-selling to strong buyers was a stabilizing force in the market the would help expedite the recovery.  Unfortunately, many of the lenders who were issuing these loans were skittish and uncomfortable with the new rule after numerous threats of “buy-backs”, penalties, and fines from the government regulatory agencies, and so they added what are known as “overlays” to the FHA guidelines.  So, they effectively ignored the anti-flipping waiver, and continued to require sellers to be on title for 90 days, sometimes not even allowing a CONTRACT to be written until the 91st day.

Sadly, this social awareness of the necessity of investors in the marketplace, and their benefit as a force to help recycle old dilapidated real estate into good, quality, affordable housing has disappeared from the minds of the powers that be at FHA.  As a result, the decided not to extend the anti-flipping waiver last year, and investors became evil once again on January 1st of 2015, and now have to be punished with an extra long wait to re-sell if they happen to buy a good deal.  

So, what’s the lesson to be learned for active real estate investors?  

Number 1 – Multiple offer situations – If you receive multiple offers on a house, you may want to take extra care to review all of the TERMS of the deal, including the type of FINANCING.  Though one offer might be higher in purchase price, if it’s an FHA offer that requires you to wait an extra 30-60 days before you can sell, you may end up netting less money due to increased holding costs such as debt service, utilities, insurance, property taxes, etc.

Number 2 – Review Sales Data BEFORE Purchasing or Marketing – As I mentioned in our recent meeting entitled “The Gatekeepers”, Realtors have access to data on the MLS that can you provide you with which types of financing are more popular in a certain area, whether cash, conventional, FHA, or VA.  If an area is heavy with FHA buyers, you may decide to market to a different area, or at least be aware of it going in to the project so you can estimate your holding costs accordingly. 

What’s your experience with FHA buyers and/or the 90 day anti-flipping rule?  Let me know your thoughts below!

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“Why there are No Deals on the MLS” – ASK the P.I.G. [VIDEO]

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QUESTION: Can you find deals to flip on the Multiple Listing Service (MLS)?

The simple answer to this question, one that I receive all the time, is NO, you can’t find deals to flip on the MLS.  Whenever I post something on my website or Facebook about the lack of deals on the MLS, I always get some goober who wants to tell about his massive success story from an MLS property, but the fact is that deals RARELY are found on MLS.  Yes, I have also purchased a very profitable deal on the MLS….1 house in 12 years.  And so, if I relied on that deal source for my real estate investing, I would have been out of business a LONG time ago.

If your definition of a “deal” is a rental property that has a 10-11% cap rate, then of course, you can pick those up by the handfuls on the MLS.  However, you will have a very difficult time finding deals you can rehab or wholesale, like most “active” investors are looking for, on a public website with inordinate amounts of web traffic.  New investors always follow the path of least resistance, and so when they want to find houses, they go to the MLS…because that’s where they’ve been told to go find houses for sale.  But the deals that fit the standard 65-70% rule that most investors use, must be found OFF the radar, the hidden gems that no one else knows about.  And the reasons are simple:

1.) Competition – It only stands to reason that if you have a lot of people (the millions of people with access to the MLS) looking at a few properties (how many houses are priced even close to what an investor would need to buy it at), that the price of those homes will be driven up to the point that MOST investors will be priced out of the market.  It’s a basic rule of supply and demand.  I just experienced this same phenomenon when I listed an old refrigerator on Craigslist.  I listed it LOW ($50) because I just wanted it out of my garage, but I receive SO MANY phone calls, that I ended up selling for $75…and could have gotten more!   There was just ONE cheap refrigerator, with a LOT of people interested, and so I had the luxury of raising my price.  Had I gone 10 days without a call, and someone called and offered me $25, I would have taken it without a hesitation.

2.) Realtor Pricing Strategies – Realtors are trained to get top dollar for their client’s houses in the shortest amount of time.  So, when they do their research to determine the listing price for a home, they are not researching what price will create a stampede of bargain-hunting, bottom-feeding, low-ball-offering investors.  It’s their fiduciary responsibility to that seller to price the property at highest price that is realistically attainable in the open market.

3.) Bank Loss Mitigation Strategies – As most of you know from your experience with banks, they are not an investors friend, unless it’s an investor in their company who is looking for a good return on their stock purchase.  Real estate investors will always find themselves beating their head against a wall in trying to get a “deal” from a bank-owned REO listing.  After eating as much as $25,000-$50,000 in the foreclosure process, the bank is now out to get as much as humanly possible for their new acquisition, and to mitigate their loss as much as possible.  They will typically have an AS-IS BPO or appraisal done, list it at the full current market price with a high-octane Realtor, and then WAIT…as long as they have to in order to receive top dollar.  They are NOT emotional and they are NOT in a hurry.  They are much more likely to make small, systematic price reductions than to consider a low-ball offer by you.

4.) MLS sellers are TYPICALLY not motivated – Of course, that’s not always the case, because on a rare occasion I will make lowball offers on the MLS, and have found some sellers who are extremely motivated and will consider lower offers.  However, in general, most motivated (or desperate) sellers will try other ways to sell their home before they have to go through the process of listing with a Realtor.  Those who have met with an agent, and signed a contract to list, are usually a little more patient and looking at trying to maximize their profits on what is typically their most valuable asset.

You might be asking yourself, then how in the world do we find these “deals” that you are always talking about flipping?  Well, that my friend might be for another blog post.  If you are a member of the Professional Investors Guild, go back and watch the “Guerilla Marketing” videos in the archives, as well as the “Treasure Trove of Motivated Seller Leads” bonus video for tips and tricks to generating a deluge of motivated seller leads.

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