There is a lot of interesting events taking place in the foreclosure real estate market, at least in Southern California.
Right now, there is an obvious and blatant lack of inventory. We’ve been hearing “multiple offers” now for months now, but yesterday we heard a new record….52 offers on a 3/2 in Desert Hot Springs!…holy cow!
Now, yes, I know, “it’s coming, it’s coming, just wait, another massive wave is on its way”….and I do believe there will be another surge at some point. However, there are some peculiar behaviors on the part of the lenders that control whether or not the foreclosure sales go through. A very large percentage of the foreclosure sales that are being put on delay are happening on the lender’s own accord, NOT because it is mandated by the moratorium…why?
Sean O’ Toole, creator/founder of ForeclosureRadar, has a fascinating observation, ”
“While many complain that lenders are foreclosing too aggressively, and others claim a wave of foreclosures sales is imminent, the data actually shows that lenders are doing everything possible to delay foreclosure…The reality is that we have very few homeowners being foreclosured on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage”.
I wish I had an answer for you that was not conjecture. It could be that the lenders are being very cautious that they are not construed of running afoul of new legislation. Maybe it’s because they are waiting to see what plays out? I don’t know, but what I do know is that there are many areas where a quality house (with equity) that is available for sale does not exist.
So, the important part is what does this mean to investors and wholesalers, and what should the strategy be right now?
…Well, here’s the thing, when inventory is this scarce,
IT COULD NOT BE BETTER for retail flipping!
Yes, you can get deals. But because there are so many multiple offer situations, it’s almost like we are all bidding at the trustee sales, so you need to put the deck in your favor AS MUCH AS POSSIBLE. The rules of offer making have changed. You have to be able to read a little bit between the lines.
I am going to give you a list of strategies that we have used to still come up with some great flip deals. We currently have 3 fix up projects…2 of which are in escrow, 1 is almost finished and will probably be sold the minute we are done.
But first, a few more comments on what’s happening so the tips make more sense.
First of all, just like in all of 2005, 2006, and 2007 the market was LOWER than the common perception, right now I suggest to you that the market is actually HIGHER than the common perception…why?
Let’s look at the dynamics of how this works with an example:
Rewind to 2006- you are about to sell your house, and you know your neighbor’s house sold for $325,000 just 5 short months ago (and of course your neighbors just have no taste in paint color or landscaping so surely yours will sell higher). So you put your house up for sale for $340,000….nothing. Nada. Zip. Not even a nibble.
So, of course you are stubborn because you are sure it’s a fluke. So you decide to drop it to $329,000….again, silence.
This continues until 8 months later you are at $265,000 and still nothing!!…remember, the most common method for evaluating property is “running comps”, i.e. looking at what has previously sold. Well, because there ARE NO NEW SALES, because everyone is refusing to drop their prices enough, we base prices on the last available comps, which in this example is $325,000. Well, it’s not even selling for $265,000 which is an indication that prices have taken a tremendous hit, but it’s impossible to know where to place the market because it’s all guesswork until we start getting actual “Solds” again.
Sellers had to keep dropping prices until finally the buyers started to come back in.
In January 2008, volume picked back up and has been exploding ever since, gobbling up inventory. This combined with the moratoriums and holding back of new foreclosures has creating a severe scarcity situation.
New homes that come on the market are experiencing bidding wars. Properties that are listed for, say, $135,000 are closing at $150,000, just as an arbitrary example. What can we imply here? You got it, prices are going UP at the low end and the driving force is scarcity!
Here is another point, just as before, there is becoming a lack of brand new “Solds”, not because no one is buying, but because there is NOTHING TO BUY!
I’ve seen this in a few neighborhoods now, namely Fontana. Can you see how this is just like the example except in reverse? I really think that if we had some more inventory, prices would actually reflect the pent up demand and would demonstrate these price increases, but
…until you have actual “Solds”, you can’t PROVE prices are higher. USE THIS UNCERTAINTY TO YOUR ADVANTAGE.
What does this mean to us as investors? It means that flipping is fun again because if you can get your hands on a deal (which is the trick now), it will sell, and sell fast! Of course, it is harder to get a deal, but it’s not impossible. There may be bidding situations, but some investors are not reading the trends and are actually being too conservative.
Here is a real world example. On one of our wholesale flips, our investor buyer was getting gun shy because of the existence of some low “Sold” comps. However, we demonstrated a “bird’s eye” view, and pulled up EVERYTHING in a 3/4 quarter mile radius. There were 25 “Solds”, 19 “Pending Sales”, and only 2 on the market!! And guess what? We called the agent on one of those properties and….you guessed it, 10 offers and it was about to go pending. We didn’t bother checking the other active listings because you can pretty much deduce that it was the same situation.
When our investor “read between the lines”, he couldn’t close on it fast enough, and he will undoubtedly make a nice, fast profit on that deal because it will sell instantaneously when he sticks it back on market (again, because it will be the ONLY thing money can buy).
***A word of caution*** How long will this drought last? I think it’s impossible to say…and yes, it is possible that if you take too long to get your property rehabbed inventory will come out and torpedo your deal…I said “it’s possible”, but I wouldn’t overly worry about it too much at this stage…
There is SO much pent up demand, especially for clean and fresh houses, I believe that we will have a little bit of a warning period, BUT DON’T GET TOO COCKY…don’t mess around, get your flip cleaned up and on the market quickly. Take advantage of the market while the iron is hot- move FAST.
Bottom line, we will get a little bit of a warning because excess inventory will be bought right away as it hits, and it just might even help your case by providing higher comps that will help your appraisal! ….but like I said, if you see inventory coming and you still have the entire fix up job to do….GET BUSY, you’ll be okay.
Next, do NOT over improve your house! If you have the only clean house in the area available for purchase, there is NO reason to go overboard. This is in stark contrast to a few years ago where the market was FLUSH with inventory, and you really had to give your buyer a big reason to choose your deal….not so much anymore, at least at the time of this post.
Another even more important and paramount reason not to over improve is APPRAISALS. Excuse my Latin, but appraisals are horseshit right now.. If you are actively trying to flip a house or you are an active Realtor, then you likely have encountered this scenario….eg. 5 people want to buy your house for $225,000. It’s beautiful, head and shoulders above anything on the market. There are 5 comps in the area that are completely trashed and sold for $160,000 – $170,000….(and sold in 7 days nonetheless), you guessed it, appraisal on your property, EVEN THOUGH THE MARKET IS BEGGING TO BUY IT for $225,000, gets appraised for $190,000, making it difficult to sell your house with financing.
The market is in a precarious situation- just as it is hard to find supporting comps on the upside because there is simply not enough solds, a new asinine House Bill has put the fear of God into licensed appraisers regarding coming out too high so it has made it even tougher….we are ARTIFICIALLY stunting the market’s growth! This is a fiasco in light of our economy and how much we would benefit if we could let the damn market recover. Yet that is another story for later.
…(more on this House Bill later, my post is already too long)
Now, I realize that the appraisal issue appears to contradict what I said about flipping being a piece of cake. Well, it’s a hindrance and makes life more challenging for flippers (along with the 90 day anti-flip rule), however, these houses ARE getting sold, sometimes it just takes going through a few buyers.
The benefit of scarcity is that all the buyers get concentrated on your property, including the cash, and conventional (those with 20% to put down) buyers. So don’t pass on a great deal for being in fear of not being able to sell….if you can get your hands on a property where there is nothing available, you WILL be able to sell it.
….Study comps, study comps, study comps
Okay, so that’s enough ranting for today- let me get to some “Bottom Line” tips for you that we are seeing work for our investors/wholesalers.
1. Actives are MORE IMPORTANT than “Solds”. Study comps from a bird’s eye view….low sold comps are not so bad IF they have very low days on market (less than 2 weeks) and there is no inventory sitting on the market unsold. If something IS sitting there NOT selling you MUST investigate..check property history, ignore it if it is a short sale, and don’t hesitate to call the broker and ask questions.
This is where you can get an upper hand b/c most investors haven’t figured it out. You always want your flip to be the best value on the market, and that’s pretty easy when it’s the ONLY house on the market.
2. Screen out the active short sales…they can make actives look very low, when they are artificial numbers that rarely have anything to do with the real market.
3. Look at the trend…days on market, unsold inventory…if you see days on market shrinking over the past two months, inventory shrinking. These are all signs that you have a very HOT area on your hands.
**Very important** you need to look at property history. For example, let’s arbitrarily say a property will show 190 days or more on the market and looks like a horrible comp. When you look at property history, however, it may tell a different story, it could appear to be sitting on the market with no one interested when in reality:
a) it fell out of escrow multiple times, and in reality has gone into escrow within days before falling out
b) it’s a short sale that JUST got approved (after being on the market for 180 days!)
c) it experienced a drastic price reduction (it was on the market for $210,000 or higher for 180 days, then it got dropped to $175,000 and sold in 10!)...this is the stuff that will mislead the less savvy investors and cause them to be overly conservative-
…KNOW the REAL story! …’ya gotta dig, but it can pay handsomely
3. Relationships!! – Don’t even think about sending in an offer to a broker without calling him or her!..Sometimes a great conversation can literally put your offer right at the top! Close one with a broker and they may just bring you one before it gets listed!
4. Although this is tougher to do for my wholesalers out there, increase your deposit amounts, and shorten your escrow periods in your offers as much as possible. If you are a cash buyer, you have a big upper hand. If you can team up with a cash buyer it definitely helps.
5. Take MASSIVE before pictures and save every receipt. Make it look as horrible as possible in your before pictures. Get a statement if possible from a contractor or appraiser saying how horrible it is. This is so that when you go to resale it and you put on your boxing gloves with appraiser (and you will), you will be fully armed with documentation of your improvements.
I literally decided as I wrote this post that this would be a great time to do a webinar on how to read comps and make offers in this market. Join us and learn how to outbid the competition on these REOs that pretty much ALL have multiple offers now.
Join us Thursday June 25th online at 7PM Pacific time for an online presentation on how to get an unfair advantage by reading “in between the lines”…Be Happy and Prosper!
JOIN HERE, REGISTER BELOW: