Looking for a Quick Profit?
In the past decade or so, buying a “fixer-upper,” updating it a bit and then selling it for a nice profit attracted seasoned real estate investors and newbies alike. Everyone wanted a piece of the quick-profit pie. And why not? Television shows make it look easy and fast – something anyone with a little bit of knowledge and a few resources could do.
Before you go house hunting, however, let’s look at a few contributing factors that led to the house flipping craze.
The number one predictor of residential real estate success is the current housing market. According to U.S. News & World Report, the housing market was ripe for investors back in 2012, when the market was flooded with foreclosed homes. The previous years saw housing prices skyrocket and after the recession, the housing market plummeted. This made it relatively easy for investors to scoop up these homes at rock-bottom prices, a key for turning a profit with a flip.
Today, however, the market is quite different. CNN recently reporting the housing market is only inching along, thanks to “a slowdown in new construction and a short supply of existing homes for sale that have pushed housing prices so high that would-be buyers are either finding themselves in bidding wars or sitting on the sidelines.”
Rising interest rates are mostly to blame for the slowing housing market. Freddie Mac said the surge in mortgage rates in the first half of 2018 reduced affordability and while rates have leveled off since, they are expected to begin trending upwards again in 2019. Home prices are expected to increase 6 percent, with the growth rate moderating to 4.9 percent next year. In a nutshell, there are not only fewer houses on the market, but those on the market are not coming cheap. That doesn’t bode well for investors looking to buy low and sell high.
The Changing Game
In the past, smart investors purchased investment properties at auctions, nearly ensuring they were getting a heck of a bargain. They would drop several thousand dollars on new kitchen counters, new flooring and a few other updates and then sell the home for a tidy profit only a few months later. Those days seem to have come and gone, however. According to the U.S. News & World Report article, in the second quarter of 2018, only 32 percent of home flips were purchased as a foreclosure or bank-owned sale. In 2010, these types of homes encompassed more than 68 percent of all purchases.
The lure of flip houses has been too strong for big companies and major players to leave it to individual investors. Now, investors have to be smarter, faster and play the game. “You not only have to be able to find the right house with an owner who is interested in selling, but you also need the financial means to be able to get through the actual work and marketing stages before you can see a payout,” the article says.
The longer the investor holds on to the property and the more work that has to be put into the house, the lower the investor’s ROI. Once investors get the hang of it, it does become easier. The key is to know where money can be saved and how to leverage efficiencies wherever they can be found.
Investor’s Guide to FSBO
Because investors are in the house flipping market to gain as much profit as possible, many choose to sell their investments themselves. While for sale by owner (FSBO) does require more work from the investor than it would if a real estate agent was at the helm, FSBO can add as much as 3 percent to profit margin.
While the numbers vary, the average return on investment for a flip house is anywhere from 10-20 percent. If a real estate agent sells the home for the investor, however, the ROI drops by six percent because the investor pays both their own agent as much as three percent and the buyer’s agent another three percent. Now, profit margins are a bit slimmer – only 6-14 percent.
The U.S. Bureau of the Census reports the average sales price of houses sold in the United States is $390,200. If the average ROI is 10-20 percent and an investor sells his or her property at the average price, their $39,020-$78,040 profit drops to $27,314-$66,334. That’s leaving $11,706 on the table and that all goes to the seller’s agent. This doesn’t include another $11,706 that will go to the buyer’s agent.
For many investors, they believe keeping that $11,706 is worth the effort to sell the property themselves. But there’s a better way than straight out FSBO. It’s a hybrid approach that gives investors a leg up on flippers who use a full-service real estate agent to sell their properties and the investors who FSBO all by themselves.
FSBO, without any outside support, can be daunting, particularly if an investor has multiple properties. Fixing up a home to sell takes enough time. Selling it only adds to the burden. Some believe it’s either go at it alone the FSBO route or pay three percent to an agent. Thankfully, there’s another option.
There are discount and flat-fee brokers who will sell a property at a discounted rate, but the investor is still spending around two percent to an agent. If the home sells quickly, that two percent is a hefty price to pay when the house virtually sold itself.
In a pay-per-day model, the investor pays a low daily rate only while the property is on the market until closing. If the home sells quickly, the investor pays only a couple hundred bucks. What comes with that pricing model? Plenty.
In this modern approach to home selling, the investor is selling their house by owner but with a whole lot of extra support to speed the process and reduce the amount of labor that goes into it. For instance, for the daily rate, the investor gets MLS access, a must for anyone selling property. With MLS access comes syndicated postings on other popular real estate sites, such as Zillow, Trulia and realtor.com.
They also get agent support. No, the agent isn’t working to sell the property, but they are there to field questions. Professional photos and marketing brochures, a yard sign and lockbox, market data to help properly price the home, and social media sharing are all included in the per-day pricing. Should an investor need more help, they can pay around $1,000 to gain access to a dedicated agent who is there every step of the way.
This flexible model not only ensures investors can make more return on their investments but gives them the time to do other things, such as their full-time job or flipping more houses. It’s the “just right” level of support many investors are wanting.
Investors shouldn’t be discouraged at the house flip slow-down. The market will continually ebb and flow. FSBO for investors can be easier and faster when they can strike a balance between profit and support. It doesn’t have to be all or nothing. The hybrid pay-per-day approach may be the secret weapon investors can use to make house flipping a serious profit center, even in a down market.
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