Archive for April, 2010

A more active kind of real estate investment: Fixing and flipping distressed homes for fun and profit.

Handyman Mark Deermer and I have been planning for this for a while: We’re going to ride the Phoenix real estate market back up by fixing and flipping some of the (many, many) distressed homes we work with. We’ve fixed up quite a few homes for buy-and-hold investors, and this is the logical next step in our praxis.

As with buying rental homes, it’s a matter of property selection before anything else. The right home, in turn-key condition, will sell at a substantial premium over its distress-sale price. By buying the right MLS-listed and court-house-steps properties, we can net out significant returns after all expenses.

Buying right is everything, of course. If we overpay on the way in, we’ll have trouble extricating ourselves on the way out. We’re doing this now because the market in Greater Phoenix has reached a point where the math works fairly consistently. Houses that will flip profitably are still not common, but we’re to the point where they’re one among hundreds, rather than one among thousands.

The second step in the process is handling the refurbishing wisely and well — and quickly. Our goal is to get our properties back on the market within four days of taking possession of them. And we won’t be doing wish-and-a-promise fix-ups. Every house we do will have all new interior paint, all new flooring, all new window treatments and all new kitchen appliances. We want to give our buyers that model-home feeling — because they’ll pay more for homes that are white-glove clean and move-in ready.

And the third step is marketing, a process we get better at with every passing day. The homes we’ll be flipping will be completely refurbished, but they will also be staged for sale, with the kind of tasteful decorator touches that make people feel at home. We’ll build a marketing web site for each home, showing off what we’ve done with before and after pictures, and documenting the remodeling — both to defend the sales price and to assist the appraiser in seeing our justification for the sales price.

We’ll be pricing aggressively to the market, as well, thus to turn the money over more quickly. Our goal is to go from sold to sold in two months or less — with each investor’s money turning over six or more times a year.

Do you have stars in your eyes? The profit per home will not be huge. But because the money is turning over so rapidly, the annualized return-on-investment could be very substantial.

Why am I writing this? Because we need money to make this work. I’m going to be the marketing partner in the partnerships we’re putting together. Mark is going to be the work partner. What we need are finance partners.

The kind of houses we’re going to be working with are going to require around $100,000 in capital each. That will pay the acquisition costs plus the cost of refurbishing the home. Everything else — closing costs and unpaid liens — can be paid out of the resale proceeds at Close of Escrow. But each Limited Liability Corporation we put together is going to want $100,000 in seed capital. This can come from one or more finance partners, and the seed capital will be restored to the LLC after each house is sold, before any profits are disbursed.

Here’s the way to figure this: Even if the investor’s ROI is only 5% per flip, if we can turn that money over six times in a year, that’s a 30% annualized return. That’s good money by anyone’s standards — and the returns only stand to improve when the Phoenix real estate market finally gets back to an upward trajectory.

But what about down markets? God help us, it could happen. But this is why we’re working to sell the properties so quickly — and at aggressive prices — to get our money in and out before we can lose too much to declining values.

I’m not blowing smoke up anyone’s nose. We’ve been working on this problem for a year-and-a-half, all to make the numbers work. I’ll be documenting out projects here, so you can see what we’re up to.

Meanwhile, if you want to get in on this opportunity, speak up. We’re going to put together up to twenty of these partnerships, flipping as many as ten homes a month. This is a lot more aggressive than buy-and-hold investing — and a lot more risky, of course. But we’re offering the potential for truly astounding annualized returns. If you want to get involved in real estate on the supply side, here’s your chance.

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What’s the real estate price trend for bread-and-butter homes in Metropolitan Phoenix? Prices are up and down — but mostly flat…

That chart illustrates sales prices for the past 13 months, as reflected in BloodhoundRealty’s Market Basket of Homes. What we’re looking at are suburban stucco and tile tract homes, the houses that drive the fat middle of the bell curve in the Metropolitan Phoenix real estate market.

That line looks awful spiky doesn’t it? That’s just the drama of charting software. What you’re really seeing is a market that is essentially flat. Prices go up. Price come back down. A home that would have sold for $122,000 in March of 2009 will have sold in March of 2010 for — wait for it — $121,000.

That’s right. For the past year, the Arizona Republic and half the faculty at ASU has been bellowing that the market has turned. It has. Slightly downward. And now that the home buyer tax credit is about to expire, it seem plausible that the near term trend will be still further downward.

Prices will probably decline gradually, mind you, and investors have clearly thrown a floor under our market. I would be surprised to see dramatic drops in values, but the segment of the chart documenting events from August through December of 2009 illustrates the impact of the tax credit. Without it, I expect this chart to grow even flatter in the months ahead.

Means what? Jump. Interest rates are still low, and cash is still king. Inventories will grow — nudging prices downward — and the quality of the available homes is gradually getting better. If you have the means to buy a home in Phoenix now, this may be the perfect storm. If we’re at the bottom, we’re going to be here for a while. But if you can afford to wait out the market, you can buy a whole lot of home for your money.

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For rental home investors in metropolitan Phoenix, the perfect storm is almost upon us.

I have a lot of investor clients, folks who want to buy rental homes in greater Phoenix — to buy and hold them as long-term investments. Early last fall and again late this spring I have advised many of them to sit tight, to wait the market out.

What are we waiting for?

The final lapsing of the first-time home-buyers’ tax credit. We can be quietly delighted for all the nice folks who were able to get into houses because of the tax credit. But it remains that those sweet people were driving up home prices, making it difficult for investors to latch onto better-quality rental homes.

All that changes this week. The tax credit lapses on April 30th, so we should start to see a significant increase in available properties. Still better, it will be easier to negotiate deals with sellers, and prices should be more attractive.

The first round of the tax credit, last summer and fall, had a much more profound impact on the real estate market. For the kind of stucco and tile suburban homes I like to buy for investors, prices last fall looked like this:

September 2009: +3.15%
October 2009: +2.14%
November 2009: +2.22%
December 2009: -8.03%

That’s a $10,371 drop in average sales prices from November to December. Demand from first-timers has been lighter in this second installment of the tax-credit, but inventories of the homes I’m most interested in for investors have declined by 20% from the start of the year. More significantly, it’s the choice homes that are being cherry-picked, the ones that need the least work to make them rent-ready.

All of which means that we are on the cusp of a perfect storm for real estate investors: Good homes at very attractive prices. Money is still every cheap, if you need a mortgage, and rents are holding firm. There is no appreciation in sight, of course, but positive cash flow is easy from the first tenant.

I’ve written a guide about how out-of-state investors can make good money investing in Phoenix-area rental homes. If you want to discuss this in detail, you can phone me – Greg Swann – at 602-740-7531 or shoot me an email.

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Rental home investment possibility in Goodyear, Arizona: 15814 West Papago Street, Goodyear, AZ 85338

Short sale, very aggressively priced against the comps. The downside is that it might need more work than it’s worth.

Needs window treatments, paint, landscaping, repairs.

For more details, click here.

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Channel 15 News: “Arizona real estate being snapped up by Canadian buyers?”

Further notice on Canadian real estate investors buying real property in Metropolitan Phoenix, this time from Channel 15, ABC-TV News in Phoenix:

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Rental home investment possibility in Goodyear, Arizona: 15262 West Taylor Street, Goodyear, AZ 85338

A short sale offered at a deep discount on the comps. No telling if that price will sail with the bank, but there’s no commitment until the lender gives full approval.

Nice overall, needs carpet, paint, landscaping.

For more details, click here.

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Got Loonies? Barrack Obama is the best American president Canadian real estate investors have ever seen!

The Canadian Loonie is trading at parity with the once-robust American dollar.

If you’re a Canadian real estate investor interested in buying rental homes in Metropolitan Phoenix, it would be hard to pick a better time to make your move.

Depending on your point of view, the Barrack Obama administration has been either great or lousy for Americans. But there is no doubt that Obamas’s “creative” management of the American economy has been a huge benefit to Canadians and other foreign investors.

Even if you’re buying with dollars, don’t let that stop you. Bargains abound, and the prospects for the greater Phoenix real estate market are sunny — not to pun. I shop every day for premium value in potential rental homes in the Phoenix metropolitan area. If you would like to explore your opportunities, shoot me an email or give me a call at 602-740-7531.

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Rental home investment possibility in Goodyear, Arizona: 15246 West Jefferson Street, Goodyear, AZ 85338

It’s offered as a short sale, but, for now, lender-owned homes are a tough get: Too much competition from first-time home-buyers looking for that $8,000 tax credit.

Nice overall, a lot of tile but needs some carpet, paint can just be touched up in many places, some new paint needed, needs landscaping. No range, no fridge.

For more details, click here.

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Rental home investment possibility in Goodyear, Arizona: 15241 West Monroe Street, Goodyear, AZ 85338

It’s a short sale, but that makes it eminently doable for cash investors.

Good shape overall. Needs carpet, paint, landscaping.

For more details, click here.

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