It goes without saying that the most important focus during these turbulent times is on the physical health and safety of family and friends. However, the main question Delarosa Lending Group has been fielding from flippers, mortgage brokers and our investors is; Should I be concerned about the market and my financial health and should I be investing in the real estate market?
CNBC had hedge fund manager Bill Ackman on who was downright depressing about the prospects for our economy and yet, Sandy Weil, Former chairman of Citibank was both optimistic and bullish. For those of us over the age of 40, Shocks to the economic system a la 2007-2009s Great Recession, the S&L crisis of the late 1980s and 1990s and the events of 9/11 are some of the more memorable events that destabilized our domestic economy. As with all calamities and hardships in general, the overused cliché; “this too shall pass” is appropriate.
But what do we do during this “this too shall pass” period? If you are a flipper here are 4 things you need to think about and how you can be proactive to recover financially from the COVID-19 pandemic:
1. LOW INTEREST RATES: Just when you thought rates couldn’t go any lower, they went lower and will likely remain at historical lows through the November presidential election, if not longer. Great news for businesses using lines of credit and debt to operate and grow their businesses. Terrific for homebuyers. Great news for flippers selling to homebuyers.
Just be aware, the Market may be at a standstill for next 60-90 days as people stay put as much as possible. We may also see bank delays in closing within 60 days as they are being overwhelmed with requests to refinance existing loans.
2. HOUSING INVENTORY. The national housing supply is extremely tight and near record lows. For-sale homes declined by 15% in February year over year and is now at the lowest level since 2012. While the scarcity of inventory does not bode well for home flippers, we believe that the competition for the homes for sale will recede for the next 30-60 days. The element of fear and the unknown going forward will keep many potential investors on the sidelines. With less competition for the current homes on the market, it is possible that you will be able to acquire inventory with anywhere from a 5%-10% haircut from motivated sellers. This is a big benefit to a home flipper’s bottom line. Tight supply also means home flippers should be able to unload finished product relatively quickly once the smoke clears. There may be some initial discomfort waiting out this period when buyers are staying home, but by prime selling season (before September 1st), people will be bursting for change and many may suddenly be looking for a larger home as we will more than likely be seeing a baby boom in December, January and February!
3. MATERIALS. With at least 30% of home building material inputs coming from China, in the short run, there will probably be a run-up in the cost of housing materials. Shipments from China may be delayed for 90 days, causing the short-term material shortage.
While material costs will likely go up anywhere from 10-25% for same work done prior to onset of the virus. Flippers should be able to offset some of the material price increases by purchasing homes at a discount. If you can hold out for a few months on work, it is also possible that as travel and social distancing restrictions lift and people get back to work, retailers like Home Depot may offer deep discounts on certain materials to make up for earlier losses.
4. INVESTORS. Will homebuyers be back? Will there be a slowdown in the homebuying market? In the near term probably yes as market instability, travel restrictions and a general feeling of unrest might delay certain buyers from looking for homes. However, those historically low mortgage interest rates will most certainly be the carrot to keep the housing market chugging along. There will be plenty of potential buyers, especially in the $200k-$350k market. Those most greatly impacted by job loss issues as a result of the virus are more likely to be hourly workers who are long term renters and not looking to become homeowners.
The short answer is business as usual. Fear always breeds opportunity, and there is a lot of fear with the unknown. Many investors may take a wait and see attitude for the next month or two and nervous sellers will be dropping prices to get rid of inventory. This is a huge opportunity to buy product that can hopefully be put on the market by the end of spring or early summer.
SO WHAT CAN YOU DO NOW? Whether you have inventory or have cash ready to go now is a great time to put a strategy on paper.
If you have inventory whether it is 1 house or 10: Look at your inventory and financial assets. The big question is: Can you hold it for a year and if you do is it still a good opportunity? Don’t forget to calculate your holding costs; Taxes, utilities, mortgage. Once you look at your Renovation, Closing and Holding costs ask yourself this question: Is it still profitable?
ARE THEY PROFITABLE? Great! Hang in there and look for our next podcast and blog on being proactive and continuing to build your business in the downtime.
ARE THEY NOT PROFITABLE? Is it worth unloading at a discount and having cash as other opportunities evolve? As we said before, there is a lot of opportunity out there now.
If you have cash. Look for opportunities. Take a drive. Look at different neighborhoods. What price range can you sit with a property for at least a year from renovation to closing? Email us and we can send you a calculator so that you can start to have solid numbers when you look at different properties.
So put your strategy together, be patient, look for opportunity and stay focused on the endgame.
Evan Shweky, Esq is a Managing Partner at Delarosa Lending Group LLC, a hard money lending firm. He is a real estate attorney, spent a decade on Wall Street as a trader and is an owner operator of a portfolio of multi-family apartments. He is also the host of the Real Estate Investment Podcast; Swipe Left for Success.
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