As the i-buyers turn off their automatic sales pages and shut down their algorithms (for now) and the vast majority of the country embraces the concept of “shelter-in-place,” flippers are just itching to get out there and make the most of today’s incredibly weird coronavirus economy. However, the economy and the real estate investing world has changed. Investors who want to flip successfully in today’s market must make some immediate adjustments for the coronavirus outbreak.
1: Be on the lookout for willing and able lenders.
The good news for fix-and-flip investors is that the lenders they probably work with already – private and hard-money lenders – are likely still in the business of lending because they are able to set their own loan terms and are not wholly reliant on traditional methods of underwriting. However, even private lenders are reporting that they are requiring much lower loan-to-value (LTV)s to accommodate potential swings in the housing market.
For example, at the beginning of March, one lender in the southeast reported they would still lend at an 80/20 LTV, meaning that if a flipper could come up with 20 percent of the appraised value of the home, the lender would fund the other 80 percent. Of course, there were a few other caveats! Less than a month later, and that same lender was willing to lend only 60 percent of the appraised value and requiring flippers to get the other 40 percent elsewhere. They said the reason was they did not feel like they could trust the after-repair value estimates anymore because it was difficult to get into the homes to do a real, in-person appraisal, and the ongoing COVID-19 pandemic was creating so much uncertainty in the market they feared that less-experienced flippers would have a hard time selling properties on thinner margins. To that lender, the best way to protect themselves and their capital was to lower their LTV.
2: Factor in the need for “touchless showings”
Some states and cities have completely banned physical property showings. Many homebuyers are not interested in entering a property that may not have been fully “COVID-19-proofed,” and Fannie and Freddie have actually released guidelines for appraisals that accommodate professionals who would rather not enter a property when creating an assessment.
All of these precautions are fine, but investors must not make the mistake of thinking for one moment that they will not affect a bank’s willingness to lend to an owner-occupant or your ability to market your property. If you are not already familiar with the “virtual showing,” attend a few to get a clear idea of what works and what doesn’t. Consult a legal advisor to find out what your liability might be if you do a virtual showing that a buyer feels did not fully show the scope of the home’s positive and negative attributes and they decide this after they make an offer or even close. You need to know what you should do and how you should adjust your showing and staging practices to address this present-day concern for both yourself and your buyers.
3: Establish multiple, viable exit strategy options.
This might not feel like a new practice for experienced fix-and-flip investors, but every investor should reevaluate their exit options for every deal before acquiring the property. Why? Because things are changing. If the old exit strategy was “fire-sale the property for fast liquidation,” then that strategy is probably still an option, but quite likely not at the old price points. For example, if you used to assume that you would have to undercut retail price on a flip by 25 percent to move a property in 72 hours, that is quite likely no longer the case. In today’s environment, you might need to make it down by 40 percent or more, depending on the market.
Furthermore, your property may not appeal to buyers until it has been empty for a longer period of time than you are expecting. Even before many states began to recommend virtual open houses and showings, buyers were hesitant to walk around in a home that had been part of an open house in recent days or that had a lot of foot traffic come through it. This extends to new homes once construction is complete, although some developers say buyer concern is less when they are looking at new homes than when they are pre-existing properties. Of course, those developers may be a little bit biased toward new homes.
Take a Hint from i-Buyers, but Don’t Give Up on Real Estate
Back during the month of March, a lot of i-Buyers like Zillow and Knock hit the headlines in a big, negative way for exercising the options in their contracts with sellers to opt out of buying properties at the last minute in the event that something earth-shattering happened in the housing market or to the economy. The COVID-19 outbreak certainly met the criteria, and Zillow in particular took a hit in terms of popularity with homeowners when it backed out of transactions in which the homeowners had already moved out and even moved into other accommodations, offering only about $4,000 or the cost of listing with a local agent as compensation for the last-minute withdrawal. (Note that this was actually more than Zillow Offers was obligated by contract to offer, just to keep things clear here.)
Real estate investors who have been involved in fix-and-flipping in the past or who want to get involved at a time during which many expert investors agree could be ideal for acquiring properties at a discount and helping homeowners who suddenly need to sell in the bargain should take a deep breath before diving into the unknown waters of today’s market. Should an investor simply discount the possibility of flipping today in light of market uncertainties? Of course not! However, it is important to consider why powerful buying forces like Zillow Offers have stopped buying.
The answer is just one word: uncertainty. Because the market is so unpredictable, i-Buyers, which are relatively new entities in the market, are taking “a moment” to breath. They are looking carefully to evaluate their future options. In some cases, like in the case of Redfin, they are redirecting the energy they had dedicated to i-buying to other areas of their business or considering working with other types of buyers in the future.
You should be doing all of this as well.
For many fix-and-flip investors who realize that today’s market holds massive opportunities for their businesses, it may be the best option to identify a larger investment firm that is active in an attractive market for flipping and invest capital with that company instead of trying to “go solo” in today’s tricky economy. A larger firm with “boots-on-the-ground” has the advantage of financial flexibility but retains the more intimate knowledge that active investors have in spades over institutional buyers.
Investors should not let worry about the future prevent them from leveraging the incredible – and likely relatively brief – period of opportunity available in today’s real estate market. In fact, real estate investors will certainly be a driving force for economic recovery in the wake of COVID-19 just as they have been in nearly every other economic crisis since the turn of the 20th century. Every real estate investor reading should be proud of your role now and in our future recovery.